Last updated on March 14th, 2023 at 05:13 pm
Title 12 – Banks and Banking–Volume 4
CHAPTER II – FEDERAL RESERVE SYSTEM (CONTINUED)
SUBCHAPTER A – BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM (CONTINUED)
PART 230 [RESERVED]
PART 231 – NETTING ELIGIBILITY FOR FINANCIAL INSTITUTION (REGULATION EE)
§ 231.1 Authority, purpose, and scope.
(a) Authority. This part (Regulation EE; 12 CFR part 231) is issued by the Board of Governors of the Federal Reserve System under the authority of sections 402(1)(B) and 402(9) of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4402(1)(B) and 4402(9)).
(b) Purpose and scope. The purpose of the Act and this part is to enhance efficiency and reduce systemic risk in the financial markets. This part expands the Act’s definition of “financial institution” to allow more financial market participants to avail themselves of the netting provisions set forth in sections 401-407 of the Act (12 U.S.C. 4401-4407). This part does not affect the status of those financial institutions specifically defined in the Act.
§ 231.2 Definitions.
As used in this part, unless the context requires otherwise:
(a) Act means the Federal Deposit Insurance Corporation Improvement Act of 1991 (Pub. L. 102-242, 105 Stat. 2236), as amended.
(b) Affiliate, with respect to a person, means any other person that controls, is controlled by, or is under common control with the person.
(c) Bridge institution means a legal entity that has been established by a governmental authority to take over, transfer, or continue operating critical functions and viable operations of an entity in resolution. A bridge institution could include a bridge depository institution or a bridge financial company organized by the Federal Deposit Insurance Corporation in accordance with 12 U.S.C. 1821(n) or 5390(h), respectively, or a similar entity organized under foreign law.
(d) Financial contract means a qualified financial contract as defined in section 11(e)(8)(D) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)(D)), as amended, except that a forward contract includes a contract with a maturity date two days or less after the date the contract is entered into (i.e., a “spot” contract).
(e) Financial market means a market for a financial contract.
(f) Gross mark-to-market positions in one or more financial contracts means the sum of the absolute values of positions in those contracts, adjusted to reflect the market values of those positions in accordance with the methods used by the parties to each contract to value the contract.
(g) Person means any legal entity, foreign or domestic, including a corporation, unincorporated company, partnership, government unit or instrumentality, trust, natural person, or any other entity or organization.
§ 231.3 Qualification as a financial institution.
(a) A person qualifies as a financial institution for purposes of sections 401-407 of the Act if it represents, orally or in writing, that it will engage in financial contracts as a counterparty on both sides of one or more financial markets and either –
(1) Had one or more financial contracts of a total gross dollar value of at least $1 billion in notional principal amount outstanding at such time or on any day during the previous 15-month period with counterparties that are not its affiliates; or
(2) Had total gross mark-to-market positions of at least $100 million (aggregated across counterparties) in one or more financial contracts at such time or on any day during the previous 15-month period with counterparties that are not its affiliates.
(b) After two or more persons consolidate, such as through a merger or acquisition, the surviving person meets the quantitative thresholds under paragraphs (a)(1) and (a)(2) if, on the same, single calendar day during the previous 15-month period, the aggregate financial contracts of the consolidated persons would have met such quantitative thresholds.
(c) If a person qualifies as a financial institution under paragraph (a) of this section, that person will be considered a financial institution for the purposes of any contract entered into during the period it qualifies, even if the person subsequently fails to qualify.
(d) If a person qualifies as a financial institution under paragraph (a) of this section on March 7, 1994, that person will be considered a financial institution for the purposes of any outstanding contract entered into prior to March 7, 1994.
(e) A person qualifies as a financial institution for purposes of sections 401-407 of the Act if it is –
(1) A swap dealer or major swap participant registered with the Commodity Futures Trading Commission pursuant to section 4s of the Commodity Exchange Act (7 U.S.C. 6s);
(2) A security-based swap dealer or major security-based swap participant registered with the U.S. Securities and Exchange Commission pursuant to section 15F of the Securities Exchange Act of 1934 (15 U.S.C. 78o-10);
(3) A derivatives clearing organization registered with the Commodity Futures Trading Commission pursuant to section 5b(a) of the Commodity Exchange Act (7 U.S.C. 7a-1(a)) or a derivatives clearing organization that the Commodity Futures Trading Commission has exempted from registration by rule or order pursuant to section 5b(h) of the Commodity Exchange Act (7 U.S.C. 7a-1(h));
(4) A clearing agency registered with the U.S. Securities and Exchange Commission pursuant to section 17A(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1(b)) or a clearing agency that the U.S. Securities and Exchange Commission has exempted from registration by rule or order pursuant to section 17A(k) of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1(k));
(5) A financial market utility that the Financial Stability Oversight Council has designated as, or as likely to become, systemically important pursuant to 12 U.S.C. 5463;
(6) A qualifying central counterparty under 12 CFR 217.2;
(7) A nonbank financial company that the Financial Stability Oversight Council has determined shall be supervised by the Board and subject to prudential standards, pursuant to 12 U.S.C. 5323;
(8) A foreign bank as defined in section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101), including a foreign bridge bank;
(9) A bridge institution established for the purpose of resolving a financial institution;
(10) A Federal Reserve Bank or a foreign central bank; or
(11) The Bank for International Settlements.
PART 232 – OBTAINING AND USING MEDICAL INFORMATION IN CONNECTION WITH CREDIT (REGULATION FF)
§ 232.1 Scope, general prohibition and definitions.
(a) Scope. This part applies to creditors, as defined in paragraph (c)(3) of this section, except for creditors that are subject to §§ 41.30, 222.30, 334.30, 571.30, or 717.30.
(b) In general. A creditor may not obtain or use medical information pertaining to a consumer in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit, except as provided in this section.
(c) Definitions. (1) Consumer means an individual.
(2) Credit has the same meaning as in section 702 of the Equal Credit Opportunity Act, 15 U.S.C. 1691a.
(3) Creditor has the same meaning as in section 702 of the Equal Credit Opportunity Act, 15 U.S.C. 1691a.
(4) Eligibility, or continued eligibility, for credit means the consumer’s qualification or fitness to receive, or continue to receive, credit, including the terms on which credit is offered. The term does not include:
(i) Any determination of the consumer’s qualification or fitness for employment, insurance (other than a credit insurance product), or other non-credit products or services;
(ii) Authorizing, processing, or documenting a payment or transaction on behalf of the consumer in a manner that does not involve a determination of the consumer’s eligibility, or continued eligibility, for credit; or
(iii) Maintaining or servicing the consumer’s account in a manner that does not involve a determination of the consumer’s eligibility, or continued eligibility, for credit.
(5) Medical information means:
(i) Information or data, whether oral or recorded, in any form or medium, created by or derived from a health care provider or the consumer, that relates to –
(A) The past, present, or future physical, mental, or behavioral health or condition of an individual;
(B) The provision of health care to an individual; or
(C) The payment for the provision of health care to an individual.
(ii) The term does not include:
(A) The age or gender of a consumer;
(B) Demographic information about the consumer, including a consumer’s residence address or e-mail address;
(C) Any other information about a consumer that does not relate to the physical, mental, or behavioral health or condition of a consumer, including the existence or value of any insurance policy; or
(D) Information that does not identify a specific consumer.
(6) Person means any individual, partnership, corporation, trust, estate cooperative, association, government or governmental subdivision or agency, or other entity.
§ 232.2 Rule of construction for obtaining and using unsolicited medical information.
(a) In general. A creditor does not obtain medical information in violation of the prohibition if it receives medical information pertaining to a consumer in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit without specifically requesting medical information.
(b) Use of unsolicited medical information. A creditor that receives unsolicited medical information in the manner described in paragraph (a) of this section may use that information in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit to the extent the creditor can rely on at least one of the exceptions in § 232.3 or § 232.4.
(c) Examples. A creditor does not obtain medical information in violation of the prohibition if, for example:
(1) In response to a general question regarding a consumer’s debts or expenses, the creditor receives information that the consumer owes a debt to a hospital.
(2) In a conversation with the creditor’s loan officer, the consumer informs the creditor that the consumer has a particular medical condition.
(3) In connection with a consumer’s application for an extension of credit, the creditor requests a consumer report from a consumer reporting agency and receives medical information in the consumer report furnished by the agency even though the creditor did not specifically request medical information from the consumer reporting agency.
§ 232.3 Financial information exception for obtaining and using medical information.
(a) In general. A creditor may obtain and use medical information pertaining to a consumer in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit so long as:
(1) The information is the type of information routinely used in making credit eligibility determinations, such as information relating to debts, expenses, income, benefits, assets, collateral, or the purpose of the loan, including the use of proceeds;
(2) The creditor uses the medical information in a manner and to an extent that is no less favorable than it would use comparable information that is not medical information in a credit transaction; and
(3) The creditor does not take the consumer’s physical, mental, or behavioral health, condition or history, type of treatment, or prognosis into account as part of any such determination.
(b) Examples – (1) Examples of the types of information routinely used in making credit eligibility determinations. Paragraph (a)(1) of this section permits a creditor, for example, to obtain and use information about:
(i) The dollar amount, repayment terms, repayment history, and similar information regarding medical debts to calculate, measure, or verify the repayment ability of the consumer, the use of proceeds, or the terms for granting credit;
(ii) The value, condition, and lien status of a medical device that may serve as collateral to secure a loan;
(iii) The dollar amount and continued eligibility for disability income, workers’ compensation income, or other benefits related to health or a medical condition that is relied on as a source of repayment; or
(iv) The identity of creditors to whom outstanding medical debts are owed in connection with an application for credit, including but not limited to, a transaction involving the consolidation of medical debts.
(2) Examples of uses of medical information consistent with the exception. (i) A consumer includes on an application for credit information about two $20,000 debts. One debt is to a hospital; the other debt is to a retailer. The creditor contacts the hospital and the retailer to verify the amount and payment status of the debts. The creditor learns that both debts are more than 90 days past due. Any two debts of this size that are more than 90 days past due would disqualify the consumer under the creditor’s established underwriting criteria. The creditor denies the application on the basis that the consumer has a poor repayment history on outstanding debts. The creditor has used medical information in a manner and to an extent no less favorable than it would use comparable non-medical information.
(ii) A consumer indicates on an application for a $200,000 mortgage loan that she receives $15,000 in long-term disability income each year from her former employer and has no other income. Annual income of $15,000, regardless of source, would not be sufficient to support the requested amount of credit. The creditor denies the application on the basis that the projected debt-to-income ratio of the consumer does not meet the creditor’s underwriting criteria. The creditor has used medical information in a manner and to an extent that is no less favorable than it would use comparable non-medical information.
(iii) A consumer includes on an application for a $10,000 home equity loan that he has a $50,000 debt to a medical facility that specializes in treating a potentially terminal disease. The creditor contacts the medical facility to verify the debt and obtain the repayment history and current status of the loan. The creditor learns that the debt is current. The applicant meets the income and other requirements of the creditor’s underwriting guidelines. The creditor grants the application. The creditor has used medical information in accordance with the exception.
(3) Examples of uses of medical information inconsistent with the exception. (i) A consumer applies for $25,000 of credit and includes on the application information about a $50,000 debt to a hospital. The creditor contacts the hospital to verify the amount and payment status of the debt, and learns that the debt is current and that the consumer has no delinquencies in her repayment history. If the existing debt were instead owed to a retail department store, the creditor would approve the application and extend credit based on the amount and repayment history of the outstanding debt. The creditor, however, denies the application because the consumer is indebted to a hospital. The creditor has used medical information, here the identity of the medical creditor, in a manner and to an extent that is less favorable than it would use comparable non-medical information.
(ii) A consumer meets with a loan officer of a creditor to apply for a mortgage loan. While filling out the loan application, the consumer informs the loan officer orally that she has a potentially terminal disease. The consumer meets the creditor’s established requirements for the requested mortgage loan. The loan officer recommends to the credit committee that the consumer be denied credit because the consumer has that disease. The credit committee follows the loan officer’s recommendation and denies the application because the consumer has a potentially terminal disease. The creditor has used medical information in a manner inconsistent with the exception by taking into account the consumer’s physical, mental, or behavioral health, condition, or history, type of treatment, or prognosis as part of a determination of eligibility or continued eligibility for credit.
(iii) A consumer who has an apparent medical condition, such as a consumer who uses a wheelchair or an oxygen tank, meets with a loan officer to apply for a home equity loan. The consumer meets the creditor’s established requirements for the requested home equity loan and the creditor typically does not require consumers to obtain a debt cancellation contract, debt suspension agreement, or credit insurance product in connection with such loans. However, based on the consumer’s apparent medical condition, the loan officer recommends to the credit committee that credit be extended to the consumer only if the consumer obtains a debt cancellation contract, debt suspension agreement, or credit insurance product from a nonaffiliated third party. The credit committee agrees with the loan officer’s recommendation. The loan officer informs the consumer that the consumer must obtain a debt cancellation contract, debt suspension agreement, or credit insurance product from a nonaffiliated third party to qualify for the loan. The consumer obtains one of these products and the creditor approves the loan. The creditor has used medical information in a manner inconsistent with the exception by taking into account the consumer’s physical, mental, or behavioral health, condition, or history, type of treatment, or prognosis in setting conditions on the consumer’s eligibility for credit.
§ 232.4 Specific exceptions for obtaining and using medical information.
(a) In general. A creditor may obtain and use medical information pertaining to a consumer in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit:
(1) To determine whether the use of a power of attorney or legal representative that is triggered by a medical condition or event is necessary and appropriate or whether the consumer has the legal capacity to contract when a person seeks to exercise a power of attorney or act as legal representative for a consumer based on an asserted medical condition or event;
(2) To comply with applicable requirements of local, state, or Federal laws;
(3) To determine, at the consumer’s request, whether the consumer qualifies for a legally permissible special credit program or credit-related assistance program that is –
(i) Designed to meet the special needs of consumers with medical conditions; and
(ii) Established and administered pursuant to a written plan that –
(A) Identifies the class of persons that the program is designed to benefit; and
(B) Sets forth the procedures and standards for extending credit or providing other credit-related assistance under the program;
(4) To the extent necessary for purposes of fraud prevention or detection;
(5) In the case of credit for the purpose of financing medical products or services, to determine and verify the medical purpose of a loan and the use of proceeds;
(6) Consistent with safe and sound practices, if the consumer or the consumer’s legal representative specifically requests that the creditor use medical information in determining the consumer’s eligibility, or continued eligibility, for credit, to accommodate the consumer’s particular circumstances, and such request is documented by the creditor;
(7) Consistent with safe and sound practices, to determine whether the provisions of a forbearance practice or program that is triggered by a medical condition or event apply to a consumer;
(8) To determine the consumer’s eligibility for, the triggering of, or the reactivation of a debt cancellation contract or debt suspension agreement if a medical condition or event is a triggering event for the provision of benefits under the contract or agreement; or
(9) To determine the consumer’s eligibility for, the triggering of, or the reactivation of a credit insurance product if a medical condition or event is a triggering event for the provision of benefits under the product.
(b) Example of determining eligibility for a special credit program or credit assistance program. A not-for-profit organization establishes a credit assistance program pursuant to a written plan that is designed to assist disabled veterans in purchasing homes by subsidizing the down payment for the home purchase mortgage loans of qualifying veterans. The organization works through mortgage lenders and requires mortgage lenders to obtain medical information about the disability of any consumer that seeks to qualify for the program, use that information to verify the consumer’s eligibility for the program, and forward that information to the organization. A consumer who is a veteran applies to a creditor for a home purchase mortgage loan. The creditor informs the consumer about the credit assistance program for disabled veterans and the consumer seeks to qualify for the program. Assuming that the program complies with all applicable law, including applicable fair lending laws, the creditor may obtain and use medical information about the medical condition and disability, if any, of the consumer to determine whether the consumer qualifies for the credit assistance program.
(c) Examples of verifying the medical purpose of the loan or the use of proceeds. (1) If a consumer applies for $10,000 of credit for the purpose of financing vision correction surgery, the creditor may verify with the surgeon that the procedure will be performed. If the surgeon reports that surgery will not be performed on the consumer, the creditor may use that medical information to deny the consumer’s application for credit, because the loan would not be used for the stated purpose.
(2) If a consumer applies for $10,000 of credit for the purpose of financing cosmetic surgery, the creditor may confirm the cost of the procedure with the surgeon. If the surgeon reports that the cost of the procedure is $5,000, the creditor may use that medical information to offer the consumer only $5,000 of credit.
(3) A creditor has an established medical loan program for financing particular elective surgical procedures. The creditor receives a loan application from a consumer requesting $10,000 of credit under the established loan program for an elective surgical procedure. The consumer indicates on the application that the purpose of the loan is to finance an elective surgical procedure not eligible for funding under the guidelines of the established loan program. The creditor may deny the consumer’s application because the purpose of the loan is not for a particular procedure funded by the established loan program.
(d) Examples of obtaining and using medical information at the request of the consumer. (1) If a consumer applies for a loan and specifically requests that the creditor consider the consumer’s medical disability at the relevant time as an explanation for adverse payment history information in his credit report, the creditor may consider such medical information in evaluating the consumer’s willingness and ability to repay the requested loan to accommodate the consumer’s particular circumstances, consistent with safe and sound practices. The creditor may also decline to consider such medical information to accommodate the consumer, but may evaluate the consumer’s application in accordance with its otherwise applicable underwriting criteria. The creditor may not deny the consumer’s application or otherwise treat the consumer less favorably because the consumer specifically requested a medical accommodation, if the creditor would have extended the credit or treated the consumer more favorably under the creditor’s otherwise applicable underwriting criteria.
(2) If a consumer applies for a loan by telephone and explains that his income has been and will continue to be interrupted on account of a medical condition and that he expects to repay the loan liquidating assets, the creditor may, but is not required to, evaluate the application using the sale of assets as the primary source of repayment, consistent with safe and sound practices, provided that the creditor documents the consumer’s request by recording the oral conversation or making a notation of the request in the consumer’s file.
(3) If a consumer applies for a loan and the application form provides a space where the consumer may provide any other information or special circumstances, whether medical or non-medical, that the consumer would like the creditor to consider in evaluating the consumer’s application, the creditor may use medical information provided by the consumer in that space on that application to accommodate the consumer’s application for credit, consistent with safe and sound practices, or may disregard that information.
(4) If a consumer specifically requests that the creditor use medical information in determining the consumer’s eligibility, or continued eligibility, for credit and provides the creditor with medical information for that purpose, and the creditor determines that it needs additional information regarding the consumer’s circumstances, the creditor may request, obtain, and use additional medical information about the consumer as necessary to verify the information provided by the consumer or to determine whether to make an accommodation for the consumer. The consumer may decline to provide additional information, withdraw the request for an accommodation, and have the application considered under the creditor’s otherwise applicable underwriting criteria.
(5) If a consumer completes and signs a credit application that is not for medical purpose credit and the application contains boilerplate language that routinely requests medical information from the consumer or that indicates that by applying for credit the consumer authorizes or consents to the creditor obtaining and using medical information in connection with a determination of the consumer’s eligibility, or continued eligibility, for credit, the consumer has not specifically requested that the creditor obtain and use medical information to accommodate the consumer’s particular circumstances.
(e) Example of a forbearance practice or program. After an appropriate safety and soundness review, a creditor institutes a program that allows consumers who are or will be hospitalized to defer payments as needed for up to three months, without penalty, if the credit account has been open for more than one year and has not previously been in default, and the consumer provides confirming documentation at an appropriate time. A consumer is hospitalized and does not pay her bill for a particular month. This consumer has had a credit account with the creditor for more than one year and has not previously been in default. The creditor attempts to contact the consumer and speaks with the consumer’s adult child, who is not the consumer’s legal representative. The adult child informs the creditor that the consumer is hospitalized and is unable to pay the bill at that time. The creditor defers payments for up to three months, without penalty, for the hospitalized consumer and sends the consumer a letter confirming this practice and the date on which the next payment will be due. The creditor has obtained and used medical information to determine whether the provisions of a medically-triggered forbearance practice or program apply to a consumer.
PART 233 – PROHIBITION ON FUNDING OF UNLAWFUL INTERNET GAMBLING (REGULATION GG)
§ 233.1 Authority, purpose, collection of information, and incorporation by reference.
(a) Authority. This part is issued jointly by the Board of Governors of the Federal Reserve System (Board) and the Secretary of the Department of the Treasury (Treasury) under section 802 of the Unlawful Internet Gambling Enforcement Act of 2006 (Act) (enacted as title VIII of the Security and Accountability For Every Port Act of 2006, Pub. L. No. 109-347, 120 Stat. 1884, and codified at 31 U.S.C. 5361-5367). The Act states that none of its provisions shall be construed as altering, limiting, or extending any Federal or State law or Tribal-State compact prohibiting, permitting, or regulating gambling within the United States. See 31 U.S.C. 5361(b). In addition, the Act states that its provisions are not intended to change which activities related to horseracing may or may not be allowed under Federal law, are not intended to change the existing relationship between the Interstate Horseracing Act of 1978 (IHA) (15 U.S.C. 3001 et seq.) and other Federal statutes in effect on October 13, 2006, the date of the Act’s enactment, and are not intended to resolve any existing disagreements over how to interpret the relationship between the IHA and other Federal statutes. See 31 U.S.C. 5362(10)(D)(iii). This part is intended to be consistent with these provisions.
(b) Purpose. The purpose of this part is to issue implementing regulations as required by the Act. The part sets out necessary definitions, designates payment systems subject to the requirements of this part, exempts certain participants in designated payment systems from certain requirements of this part, provides nonexclusive examples of policies and procedures reasonably designed to identify and block, or otherwise prevent and prohibit, restricted transactions, and sets out the Federal entities that have exclusive regulatory enforcement authority with respect to the designated payments systems and non-exempt participants therein.
(c) Collection of information. The Office of Management and Budget (OMB) has approved the collection of information requirements in this part for the Department of the Treasury and assigned OMB control number 1505-0204. The Board has approved the collection of information requirements in this part under the authority delegated to the Board by OMB, and assigned OMB control number 7100-0317.
(d) Incorporation by reference – relevant definitions from ACH rules. (1) This part incorporates by reference the relevant definitions of ACH terms as published in the “2008 ACH Rules: A Complete Guide to Rules & Regulations Governing the ACH Network” (the “ACH Rules”). The Director of the Federal Register approves this incorporation by reference in accordance with 5 U.S.C. 552(a) and 1 CFR part 51. Copies of the “2008 ACH Rules” are available from the National Automated Clearing House Association, Suite 100, 13450 Sunrise Valley Drive, Herndon, Virginia 20171, http://nacha.org, (703) 561-1100. Copies also are available for public inspection at the Department of Treasury Library, Room 1428, Main Treasury Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220, and the National Archives and Records Administration (NARA). Before visiting the Treasury library, you must call (202) 622-0990 for an appointment. For information on the availability of this material at NARA, call (202) 741-6030, or go to: http://www.archives.gov/federal_register/code_of_federal_regulations/ibr_locations.html 20002.
(2) Any amendment to definitions of the relevant ACH terms in the ACH Rules shall not apply to this part unless the Treasury and the Board jointly accept such amendment by publishing notice of acceptance of the amendment to this part in the
§ 233.2 Definitions.
The following definitions apply solely for purposes of this part:
(a) Actual knowledge with respect to a transaction or commercial customer means when a particular fact with respect to that transaction or commercial customer is known by or brought to the attention of:
(1) An individual in the organization responsible for the organization’s compliance function with respect to that transaction or commercial customer; or
(2) An officer of the organization.
(b) Automated clearing house system or ACH system means a funds transfer system, primarily governed by the ACH Rules, which provides for the clearing and settlement of batched electronic entries for participating financial institutions. When referring to ACH systems, the terms in this regulation (such as “originating depository financial institution,” “operator,” “originating gateway operator,” “receiving depository financial institution,” “receiving gateway operator,” and “third-party sender”) are defined as those terms are defined in the ACH Rules.
(c) Bet or wager:
(1) Means the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game subject to chance, upon an agreement or understanding that the person or another person will receive something of value in the event of a certain outcome;
(2) Includes the purchase of a chance or opportunity to win a lottery or other prize (which opportunity to win is predominantly subject to chance);
(3) Includes any scheme of a type described in 28 U.S.C. 3702;
(4) Includes any instructions or information pertaining to the establishment or movement of funds by the bettor or customer in, to, or from an account with the business of betting or wagering (which does not include the activities of a financial transaction provider, or any interactive computer service or telecommunications service); and
(5) Does not include –
(i) Any activity governed by the securities laws (as that term is defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) for the purchase or sale of securities (as that term is defined in section 3(a)(10) of that act (15 U.S.C. 78c(a)(10));
(ii) Any transaction conducted on or subject to the rules of a registered entity or exempt board of trade under the Commodity Exchange Act (7 U.S.C. 1 et seq.);
(iii) Any over-the-counter derivative instrument;
(iv) Any other transaction that –
(A) Is excluded or exempt from regulation under the Commodity Exchange Act (7 U.S.C. 1 et seq.); or
(B) Is exempt from State gaming or bucket shop laws under section 12(e) of the Commodity Exchange Act (7 U.S.C. 16(e)) or section 28(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78bb(a));
(v) Any contract of indemnity or guarantee;
(vi) Any contract for insurance;
(vii) Any deposit or other transaction with an insured depository institution;
(viii) Participation in any game or contest in which participants do not stake or risk anything of value other than –
(A) Personal efforts of the participants in playing the game or contest or obtaining access to the Internet; or
(B) Points or credits that the sponsor of the game or contest provides to participants free of charge and that can be used or redeemed only for participation in games or contests offered by the sponsor; or
(ix) Participation in any fantasy or simulation sports game or educational game or contest in which (if the game or contest involves a team or teams) no fantasy or simulation sports team is based on the current membership of an actual team that is a member of an amateur or professional sports organization (as those terms are defined in 28 U.S.C. 3701) and that meets the following conditions:
(A) All prizes and awards offered to winning participants are established and made known to the participants in advance of the game or contest and their value is not determined by the number of participants or the amount of any fees paid by those participants.
(B) All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events.
(C) No winning outcome is based –
(1) On the score, point-spread, or any performance or performances of any single real-world team or any combination of such teams, or
(2) Solely on any single performance of an individual athlete in any single real-world sporting or other event.
(d) Block means to reject a particular transaction before or during processing, but it does not require freezing or otherwise prohibiting subsequent transfers or transactions regarding the proceeds or account.
(e) Card issuer means any person who issues a credit card, debit card, pre-paid card, or stored value card, or the agent of such person with respect to such card.
(f) Card system means a system for authorizing, clearing and settling transactions in which credit cards, debit cards, pre-paid cards, or stored value cards (such cards being issued or authorized by the operator of the system), are used to purchase goods or services or to obtain a cash advance. The term includes systems both in which the merchant acquirer, card issuer, and system operator are separate entities and in which more than one of these roles are performed by the same entity.
(g) Check clearing house means an association of banks or other payors that regularly exchange checks for collection or return.
(h) Check collection system means an interbank system for collecting, presenting, returning, and settling for checks or intrabank system for settling for checks deposited in and drawn on the same bank. When referring to check collection systems, the terms in this regulation (such as “paying bank,” “collecting bank,” “depositary bank,” “returning bank,” and “check”) are defined as those terms are defined in 12 CFR 229.2. For purposes of this part, “check” also includes an electronic representation of a check that a bank agrees to handle as a check.
(i) Commercial customer means a person that is not a consumer and that contracts with a non-exempt participant in a designated payment system to receive, or otherwise accesses, payment transaction services through that non-exempt participant.
(j) Consumer means a natural person.
(k) Designated payment system means a system listed in § 233.3.
(l) Electronic fund transfer has the same meaning given the term in section 903 of the Electronic Fund Transfer Act (15 U.S.C. 1693a), except that such term includes transfers that would otherwise be excluded under section 903(6)(E) of that act (15 U.S.C. 1693a(6)(E)), and includes any funds transfer covered by Article 4A of the Uniform Commercial Code, as in effect in any State.
(m) Financial institution means a State or national bank, a State or Federal savings and loan association, a mutual savings bank, a State or Federal credit union, or any other person that, directly or indirectly, holds an account belonging to a consumer. The term does not include a casino, sports book, or other business at or through which bets or wagers may be placed or received.
(n) Financial transaction provider means a creditor, credit card issuer, financial institution, operator of a terminal at which an electronic fund transfer may be initiated, money transmitting business, or international, national, regional, or local payment network utilized to effect a credit transaction, electronic fund transfer, stored value product transaction, or money transmitting service, or a participant in such network, or other participant in a designated payment system.
(o) Foreign banking office means:
(1) Any non-U.S. office of a financial institution; and
(2) Any non-U.S. office of a foreign bank as described in 12 U.S.C. 3101(7).
(p) Interactive computer service means any information service, system, or access software provider that provides or enables computer access by multiple users to a computer server, including specifically a service or system that provides access to the Internet and such systems operated or services offered by libraries or educational institutions.
(q) Internet means the international computer network of interoperable packet switched data networks.
(r) Internet gambling business means the business of placing, receiving or otherwise knowingly transmitting a bet or wager by any means which involves the use, at least in part, of the Internet, but does not include the performance of the customary activities of a financial transaction provider, or any interactive computer service or telecommunications service.
(s) Intrastate transaction means placing, receiving, or otherwise transmitting a bet or wager where –
(1) The bet or wager is initiated and received or otherwise made exclusively within a single State;
(2) The bet or wager and the method by which the bet or wager is initiated and received or otherwise made is expressly authorized by and placed in accordance with the laws of such State, and the State law or regulations include –
(i) Age and location verification requirements reasonably designed to block access to minors and persons located out of such State; and
(ii) Appropriate data security standards to prevent unauthorized access by any person whose age and current location has not been verified in accordance with such State’s law or regulations; and
(3) The bet or wager does not violate any provision of –
(i) The Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et seq.);
(ii) 28 U.S.C. chapter 178 (professional and amateur sports protection);
(iii) The Gambling Devices Transportation Act (15 U.S.C. 1171 et seq.); or
(iv) The Indian Gaming Regulatory Act (25 U.S.C. 2701 et seq.).
(t) Intratribal transaction means placing, receiving or otherwise transmitting a bet or wager where –
(1) The bet or wager is initiated and received or otherwise made exclusively –
(i) Within the Indian lands of a single Indian tribe (as such terms are defined under the Indian Gaming Regulatory Act (25 U.S.C. 2703)); or
(ii) Between the Indian lands of two or more Indian tribes to the extent that intertribal gaming is authorized by the Indian Gaming Regulatory Act (25 U.S.C. 2701 et seq.);
(2) The bet or wager and the method by which the bet or wager is initiated and received or otherwise made is expressly authorized by and complies with the requirements of –
(i) The applicable tribal ordinance or resolution approved by the Chairman of the National Indian Gaming Commission; and
(ii) With respect to class III gaming, the applicable Tribal-State compact;
(3) The applicable tribal ordinance or resolution or Tribal-State compact includes –
(i) Age and location verification requirements reasonably designed to block access to minors and persons located out of the applicable Tribal lands; and
(ii) Appropriate data security standards to prevent unauthorized access by any person whose age and current location has not been verified in accordance with the applicable tribal ordinance or resolution or Tribal-State Compact; and
(4) The bet or wager does not violate any provision of –
(i) The Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et seq.);
(ii) 28 U.S.C. chapter 178 (professional and amateur sports protection);
(iii) The Gambling Devices Transportation Act (15 U.S.C. 1171 et seq.); or
(iv) The Indian Gaming Regulatory Act (25 U.S.C. 2701 et seq.).
(u) Money transmitting business has the meaning given the term in 31 U.S.C. 5330(d)(1) (determined without regard to any regulations prescribed by the Secretary of the Treasury thereunder).
(v) Operator of a designated payment system means an entity that provides centralized clearing and delivery services between participants in the designated payment system and maintains the operational framework for the system. In the case of an automated clearinghouse system, the term “operator” has the same meaning as provided in the ACH Rules.
(w) Participant in a designated payment system means an operator of a designated payment system, a financial transaction provider that is a member of, or has contracted for financial transaction services with, or is otherwise participating in, a designated payment system, or a third-party processor. This term does not include a customer of the financial transaction provider, unless the customer is also a financial transaction provider otherwise participating in the designated payment system on its own behalf.
(x) Reasoned legal opinion means a written expression of professional judgment by a State-licensed attorney that addresses the facts of a particular client’s business and the legality of the client’s provision of its services to relevant customers in the relevant jurisdictions under applicable federal and State law, and, in the case of intratribal transactions, applicable tribal ordinances, tribal resolutions, and Tribal-State compacts. A written legal opinion will not be considered “reasoned” if it does nothing more than recite the facts and express a conclusion.
(y) Restricted transaction means any of the following transactions or transmittals involving any credit, funds, instrument, or proceeds that the Act prohibits any person engaged in the business of betting or wagering (which does not include the activities of a financial transaction provider, or any interactive computer service or telecommunications service) from knowingly accepting, in connection with the participation of another person in unlawful Internet gambling –
(1) Credit, or the proceeds of credit, extended to or on behalf of such other person (including credit extended through the use of a credit card);
(2) An electronic fund transfer, or funds transmitted by or through a money transmitting business, or the proceeds of an electronic fund transfer or money transmitting service, from or on behalf of such other person; or
(3) Any check, draft, or similar instrument that is drawn by or on behalf of such other person and is drawn on or payable at or through any financial institution.
(z) State means any State of the United States, the District of Columbia, or any commonwealth, territory, or other possession of the United States, including the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, and the Virgin Islands.
(aa) Third-party processor means a service provider that –
(1) In the case of a debit transaction payment, such as an ACH debit entry or card system transaction, has a direct relationship with the commercial customer that is initiating the debit transfer transaction and acts as an intermediary between the commercial customer and the first depository institution to handle the transaction;
(2) In the case of a credit transaction payment, such as an ACH credit entry, has a direct relationship with the commercial customer that is to receive the proceeds of the credit transfer and acts as an intermediary between the commercial customer and the last depository institution to handle the transaction; and
(3) In the case of a cross-border ACH debit or check collection transaction, is the first service provider located within the United States to receive the ACH debit instructions or check for collection.
(bb) Unlawful Internet gambling means to place, receive, or otherwise knowingly transmit a bet or wager by any means which involves the use, at least in part, of the Internet where such bet or wager is unlawful under any applicable Federal or State law in the State or Tribal lands in which the bet or wager is initiated, received, or otherwise made. The term does not include placing, receiving, or otherwise transmitting a bet or wager that is excluded from the definition of this term by the Act as an intrastate transaction or an intra-tribal transaction, and does not include any activity that is allowed under the Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et seq.; see § 233.1(a)). The intermediate routing of electronic data shall not determine the location or locations in which a bet or wager is initiated, received, or otherwise made.
(cc) Wire transfer system means a system through which an unconditional order to a bank to pay a fixed or determinable amount of money to a beneficiary upon receipt, or on a day stated in the order, is transmitted by electronic or other means through the network, between banks, or on the books of a bank. When referring to wire transfer systems, the terms in this regulation (such as “bank,” “originator’s bank,” “beneficiary’s bank,” and “intermediary bank”) are defined as those terms are defined in 12 CFR part 210, appendix B.
§ 233.3 Designated payment systems.
The following payment systems could be used by participants in connection with, or to facilitate, a restricted transaction:
(a) Automated clearing house systems;
(b) Card systems;
(c) Check collection systems;
(d) Money transmitting businesses solely to the extent they
(1) Engage in the transmission of funds, which does not include check cashing, currency exchange, or the issuance or redemption of money orders, travelers’ checks, and other similar instruments; and
(2) Permit customers to initiate transmission of funds transactions remotely from a location other than a physical office of the money transmitting business; and
(e) Wire transfer systems.
§ 233.4 Exemptions.
(a) Automated clearing house systems. The participants processing a particular transaction through an automated clearing house system are exempt from this regulation’s requirements for establishing written policies and procedures reasonably designed to prevent or prohibit restricted transactions with respect to that transaction, except for –
(1) The receiving depository financial institution and any third-party processor receiving the transaction on behalf of the receiver in an ACH credit transaction;
(2) The originating depository financial institution and any third-party processor initiating the transaction on behalf of the originator in an ACH debit transaction; and
(3) The receiving gateway operator and any third-party processor that receives instructions for an ACH debit transaction directly from a foreign sender (which could include a foreign banking office, a foreign third-party processor, or a foreign originating gateway operator).
(b) Check collection systems. The participants in a particular check collection through a check collection system are exempt from this regulation’s requirements for establishing written policies and procedures reasonably designed to prevent or prohibit restricted transactions with respect to that check collection, except for the depositary bank.
(c) Money transmitting businesses. The participants in a money transmitting business are exempt from this regulation’s requirements for establishing written policies and procedures reasonably designed to prevent or prohibit restricted transactions, except for the operator.
(d) Wire transfer systems. The participants in a particular wire transfer through a wire transfer system are exempt from this regulation’s requirements for establishing written policies and procedures reasonably designed to prevent or prohibit restricted transactions with respect to that transaction, except for the beneficiary’s bank.
§ 233.5 Policies and procedures required.
(a) All non-exempt participants in designated payment systems shall establish and implement written policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions.
(b) A non-exempt financial transaction provider participant in a designated payment system shall be considered to be in compliance with the requirements of paragraph (a) of this section if –
(1) It relies on and complies with the written policies and procedures of the designated payment system that are reasonably designed to –
(i) Identify and block restricted transactions; or
(ii) Otherwise prevent or prohibit the acceptance of the products or services of the designated payment system or participant in connection with restricted transactions; and
(2) Such policies and procedures of the designated payment system comply with the requirements of this part.
(c) For purposes of paragraph (b)(2) in this section, a participant in a designated payment system may rely on a written statement or notice by the operator of that designated payment system to its participants that states that the operator has designed or structured the system’s policies and procedures for identifying and blocking or otherwise preventing or prohibiting restricted transactions to comply with the requirements of this part as conclusive evidence that the system’s policies and procedures comply with the requirements of this part, unless the participant is notified otherwise by its Federal functional regulator or, in the case of participants that are not directly supervised by a Federal functional regulator, the Federal Trade Commission.
(d) As provided in the Act, a person that identifies and blocks a transaction, prevents or prohibits the acceptance of its products or services in connection with a transaction, or otherwise refuses to honor a transaction, shall not be liable to any party for such action if –
(1) The transaction is a restricted transaction;
(2) Such person reasonably believes the transaction to be a restricted transaction; or
(3) The person is a participant in a designated payment system and blocks or otherwise prevents the transaction in reliance on the policies and procedures of the designated payment system in an effort to comply with this regulation.
(e) Nothing in this part requires or is intended to suggest that designated payment systems or participants therein must or should block or otherwise prevent or prohibit any transaction in connection with any activity that is excluded from the definition of “unlawful Internet gambling” in the Act as an intrastate transaction, an intratribal transaction, or a transaction in connection with any activity that is allowed under the Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et seq.; see § 233.1(a)).
(f) Nothing in this part modifies any requirement imposed on a participant by other applicable law or regulation to file a suspicious activity report to the appropriate authorities.
(g) The requirement of this part to establish and implement written policies and procedures applies only to the U.S. offices of participants in designated payment systems.
§ 233.6 Non-exclusive examples of policies and procedures.
(a) In general. The examples of policies and procedures to identify and block or otherwise prevent or prohibit restricted transactions set out in this section are non-exclusive. In establishing and implementing written policies and procedures to identify and block or otherwise prevent or prohibit restricted transactions, a non-exempt participant in a designated payment system is permitted to design and implement policies and procedures tailored to its business that may be different than the examples provided in this section. In addition, non-exempt participants may use different policies and procedures with respect to different business lines or different parts of the organization.
(b) Due diligence. If a non-exempt participant in a designated payment system establishes and implements procedures for due diligence of its commercial customer accounts or commercial customer relationships in order to comply, in whole or in part, with the requirements of this regulation, those due diligence procedures will be deemed to be reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions if the procedures include the steps set out in paragraphs (b)(1), (b)(2), and (b)(3) of this section and subject to paragraph (b)(4) of this section.
(1) At the establishment of the account or relationship, the participant conducts due diligence of a commercial customer and its activities commensurate with the participant’s judgment of the risk of restricted transactions presented by the customer’s business.
(2) Based on its due diligence, the participant makes a determination regarding the risk the commercial customer presents of engaging in an Internet gambling business and follows either paragraph (b)(2)(i) or (b)(2)(ii) of this section.
(i) The participant determines that the commercial customer presents a minimal risk of engaging in an Internet gambling business.
(ii) The participant cannot determine that the commercial customer presents a minimal risk of engaging in an Internet gambling business, in which case it obtains the documentation in either paragraph (b)(2)(ii)(A) or (b)(2)(ii)(B) of this section –
(A) Certification from the commercial customer that it does not engage in an Internet gambling business; or
(B) If the commercial customer does engage in an Internet gambling business, each of the following –
(1) Evidence of legal authority to engage in the Internet gambling business, such as –
(i) A copy of the commercial customer’s license that expressly authorizes the customer to engage in the Internet gambling business issued by the appropriate State or Tribal authority or, if the commercial customer does not have such a license, a reasoned legal opinion that demonstrates that the commercial customer’s Internet gambling business does not involve restricted transactions; and
(ii) A written commitment by the commercial customer to notify the participant of any changes in its legal authority to engage in its Internet gambling business.
(2) A third-party certification that the commercial customer’s systems for engaging in the Internet gambling business are reasonably designed to ensure that the commercial customer’s Internet gambling business will remain within the licensed or otherwise lawful limits, including with respect to age and location verification.
(3) The participant notifies all of its commercial customers, through provisions in the account or commercial customer relationship agreement or otherwise, that restricted transactions are prohibited from being processed through the account or relationship.
(4) With respect to the determination in paragraph (b)(2)(i) of this section, participants may deem the following commercial customers to present a minimal risk of engaging in an Internet gambling business –
(i) An entity that is directly supervised by a Federal functional regulator as set out in § 233.7(a); or
(ii) An agency, department, or division of the Federal government or a State government.
(c) Automated clearing house system examples. (1) The policies and procedures of the originating depository financial institution and any third party processor in an ACH debit transaction, and the receiving depository financial institution and any third party processor in an ACH credit transaction, are deemed to be reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions if they –
(i) Address methods to conduct due diligence in establishing a commercial customer account or relationship as set out in § 233.6(b);
(ii) Address methods to conduct due diligence as set out in § 233.6(b)(2)(ii)(B) in the event that the participant has actual knowledge that an existing commercial customer of the participant engages in an Internet gambling business; and
(iii) Include procedures to be followed with respect to a commercial customer if the originating depository financial institution or third-party processor has actual knowledge that its commercial customer has originated restricted transactions as ACH debit transactions or if the receiving depository financial institution or third-party processor has actual knowledge that its commercial customer has received restricted transactions as ACH credit transactions, such as procedures that address –
(A) The circumstances under which the commercial customer should not be allowed to originate ACH debit transactions or receive ACH credit transactions; and
(B) The circumstances under which the account should be closed.
(2) The policies and procedures of a receiving gateway operator and third-party processor that receives instructions to originate an ACH debit transaction directly from a foreign sender are deemed to be reasonably designed to prevent or prohibit restricted transactions if they include procedures to be followed with respect to a foreign sender if the receiving gateway operator or third-party processor has actual knowledge, obtained through notification by a government entity, such as law enforcement or a regulatory agency, that such instructions included instructions for restricted transactions. Such procedures may address sending notification to the foreign sender, such as in the form of the notice contained in appendix A to this part.
(d) Card system examples. The policies and procedures of a card system operator, a merchant acquirer, third-party processor, or a card issuer, are deemed to be reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions, if the policies and procedures –
(1) Provide for either –
(i) Methods to conduct due diligence –
(A) In establishing a commercial customer account or relationship as set out in § 233.6(b); and
(B) As set out in § 233.6(b)(2)(ii)(B) in the event that the participant has actual knowledge that an existing commercial customer of the participant engages in an Internet gambling business; or
(ii) Implementation of a code system, such as transaction codes and merchant/business category codes, that are required to accompany the authorization request for a transaction, including –
(A) The operational functionality to enable the card system operator or the card issuer to reasonably identify and deny authorization for a transaction that the coding procedure indicates may be a restricted transaction; and
(B) Procedures for ongoing monitoring or testing by the card system operator to detect potential restricted transactions, including –
(1) Conducting testing to ascertain whether transaction authorization requests are coded correctly; and
(2) Monitoring and analyzing payment patterns to detect suspicious payment volumes from a merchant customer; and
(2) For the card system operator, merchant acquirer, or third-party processor, include procedures to be followed when the participant has actual knowledge that a merchant has received restricted transactions through the card system, such as –
(i) The circumstances under which the access to the card system for the merchant, merchant acquirer, or third-party processor should be denied; and
(ii) The circumstances under which the merchant account should be closed.
(e) Check collection system examples. (1) The policies and procedures of a depositary bank are deemed to be reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions, if they –
(i) Address methods for the depositary bank to conduct due diligence in establishing a commercial customer account or relationship as set out in § 233.6(b);
(ii) Address methods for the depositary bank to conduct due diligence as set out in § 233.6(b)(2)(ii)(B) in the event that the depositary bank has actual knowledge that an existing commercial customer engages in an Internet gambling business; and
(iii) Include procedures to be followed if the depositary bank has actual knowledge that a commercial customer of the depositary bank has deposited checks that are restricted transactions, such as procedures that address –
(A) The circumstances under which check collection services for the customer should be denied; and
(B) The circumstances under which the account should be closed.
(2) The policies and procedures of a depositary bank that receives checks for collection from a foreign banking office are deemed to be reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions if they include procedures to be followed by the depositary bank when it has actual knowledge, obtained through notification by a government entity, such as law enforcement or a regulatory agency, that a foreign banking office has sent checks to the depositary bank that are restricted transactions. Such procedures may address sending notification to the foreign banking office, such as in the form of the notice contained in the appendix to this part.
(f) Money transmitting business examples. The policies and procedures of an operator of a money transmitting business are deemed to be reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions if they –
(1) Address methods for the operator to conduct due diligence in establishing a commercial customer relationship as set out in § 233.6(b);
(2) Address methods for the operator to conduct due diligence as set out in § 233.6(b)(2)(ii)(B) in the event that the operator has actual knowledge that an existing commercial customer engages in an Internet gambling business;
(3) Include procedures regarding ongoing monitoring or testing by the operator to detect potential restricted transactions, such as monitoring and analyzing payment patterns to detect suspicious payment volumes to any recipient; and
(4) Include procedures when the operator has actual knowledge that a commercial customer of the operator has received restricted transactions through the money transmitting business, that address –
(i) The circumstances under which money transmitting services should be denied to that commercial customer; and
(ii) The circumstances under which the commercial customer account should be closed.
(g) Wire transfer system examples. The policies and procedures of the beneficiary’s bank in a wire transfer are deemed to be reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions if they –
(1) Address methods for the beneficiary’s bank to conduct due diligence in establishing a commercial customer account as set out in § 233.6(b);
(2) Address methods for the beneficiary’s bank to conduct due diligence as set out in § 233.6(b)(2)(ii)(B) in the event that the beneficiary’s bank has actual knowledge that an existing commercial customer of the bank engages in an Internet gambling business;
(3) Include procedures to be followed if the beneficiary’s bank obtains actual knowledge that a commercial customer of the bank has received restricted transactions through the wire transfer system, such as procedures that address
(i) The circumstances under which the beneficiary bank should deny wire transfer services to the commercial customer; and
(ii) The circumstances under which the commercial customer account should be closed.
§ 233.7 Regulatory enforcement.
The requirements under this part are subject to the exclusive regulatory enforcement of –
(a) The Federal functional regulators, with respect to the designated payment systems and participants therein that are subject to the respective jurisdiction of such regulators under section 505(a) of the Gramm-Leach-Bliley Act (15 U.S.C. 6805(a)) and section 5g of the Commodity Exchange Act (7 U.S.C. 7b-2); and
(b) The Federal Trade Commission, with respect to designated payment systems and participants therein not otherwise subject to the jurisdiction of any Federal functional regulators (including the Commission) as described in paragraph (a) of this section.
Appendix A to Part 233 – Model Notice
On [date], U.S. government officials informed us that your institution processed payments through our facilities for Internet gambling transactions restricted by U.S. law on [dates, recipients, and other relevant information if available].
We provide this notice to comply with U.S. Government regulations implementing the Unlawful Internet Gambling Enforcement Act of 2006 (Act), a U.S. federal law. Our policies and procedures established in accordance with those regulations provide that we will notify a foreign counterparty if we learn that the counterparty has processed payments through our facilities for Internet gambling transactions restricted by the Act. This notice ensures that you are aware that we have received information that your institution has processed payments for Internet gambling restricted by the Act.
The Act is codified in subchapter IV, chapter 53, title 31 of the U.S. Code (31 U.S.C. 5361 et seq.). Implementing regulations that duplicate one another can be found at part 233 of title 12 of the U.S. Code of Federal Regulations (12 CFR part 233) and part 132 of title 31 of the U.S. Code of Federal Regulations (31 CFR part 132).
PART 234 – DESIGNATED FINANCIAL MARKET UTILITIES (REGULATION HH)
§ 234.1 Authority, purpose, and scope.
(a) Authority. This part is issued under the authority of sections 805, 806, and 810 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) (Pub. L. 111-203, 124 Stat. 1376; 12 U.S.C. 5464, 5465, and 5469).
(b) Purpose and scope. This part establishes risk-management standards governing the operations related to the payment, clearing, and settlement activities of designated financial market utilities. In addition, this part sets out requirements and procedures for a designated financial market utility that proposes to make a change to its rules, procedures, or operations that could materially affect the nature or level of risks presented by the designated financial market utility and for which the Board is the Supervisory Agency (as defined below). The risk management standards do not apply, however, to a designated financial market utility that is a derivatives clearing organization registered under section 5b of the Commodity Exchange Act (7 U.S.C. 7a-1) or a clearing agency registered with the Securities and Exchange Commission under section 17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1), which are governed by the risk-management standards promulgated by the Commodity Futures Trading Commission or the Securities and Exchange Commission, respectively, for which each is the Supervisory Agency. This part also sets out standards, restrictions, and guidelines regarding a Federal Reserve Bank establishing and maintaining an account for, and providing services to, a designated financial market utility. In addition, this part sets forth the terms under which a Reserve Bank may pay a designated financial market utility interest on the designated financial market utility’s balances held at the Reserve Bank.
§ 234.2 Definitions.
(a) Backtest means the ex post comparison of realized outcomes with margin model forecasts to analyze and monitor model performance and overall margin coverage.
(b) Central counterparty means an entity that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer.
(c) Central securities depository means an entity that provides securities accounts and central safekeeping services.
(d) Designated financial market utility means a financial market utility that is currently designated by the Financial Stability Oversight Council under section 804 of the Dodd-Frank Act (12 U.S.C. 5463).
(e) Financial market utility has the same meaning as the term is defined in section 803(6) of the Dodd-Frank Act (12 U.S.C. 5462(6)).
(f) Link means, for purposes of § 234.3(a)(20), a set of contractual and operational arrangements between two or more central counterparties, central securities depositories, or securities settlement systems, or between one or more of these financial market utilities and one or more trade repositories, that connect them directly or indirectly, such as for the purposes of participating in settlement, cross margining, or expanding their services to additional instruments and participants.
(g) Orderly wind-down means the actions of a designated financial market utility to effect the permanent cessation, sale, or transfer of one or more of its critical operations or services in a manner that would not increase the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system.
(h) Recovery means, for purposes of § 234.3(a)(3) and (15), the actions of a designated financial market utility, consistent with its rules, procedures, and other ex ante contractual arrangements, to address any uncovered loss, liquidity shortfall, or capital inadequacy, whether arising from participant default or other causes (such as business, operational, or other structural weaknesses), including actions to replenish any depleted prefunded financial resources and liquidity arrangements, as necessary to maintain the designated financial market utility’s viability as a going concern and to continue its provision of critical services.
(i) Securities settlement system means an entity that enables securities to be transferred and settled by book entry and allows transfers of securities free of or against payment.
(j) Stress test means the estimation of credit or liquidity exposures that would result from the realization of potential stress scenarios, such as extreme price changes, multiple defaults, and changes in other valuation inputs and assumptions.
(k) Supervisory Agency has the same meaning as the term is defined in section 803(8) of the Dodd-Frank Act (12 U.S.C. 5462(8)).
(l) Trade repository means an entity that maintains a centralized electronic record of transaction data, such as a swap data repository or a security-based swap data repository.
§ 234.3 Standards for payment systems.
(a) A designated financial market utility must implement rules, procedures, or operations designed to ensure that it meets or exceeds the following risk-management standards with respect to its payment, clearing, and settlement activities.
(1) Legal basis. The designated financial market utility has a well-founded, clear, transparent, and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.
(2) Governance. The designated financial market utility has governance arrangements that –
(i) Are clear, transparent, and documented;
(ii) Promote the safety and efficiency of the designated financial market utility;
(iii) Support the stability of the broader financial system, other relevant public interest considerations such as fostering fair and efficient markets, and the legitimate interests of relevant stakeholders, including the designated financial market utility’s owners, participants, and participants’ customers; and
(iv) Are designed to ensure –
(A) Lines of responsibility and accountability are clear and direct;
(B) The roles and responsibilities of the board of directors and senior management are clearly specified;
(C) The board of directors consists of suitable individuals having appropriate skills to fulfill its multiple roles;
(D) The board of directors includes a majority of individuals who are not executives, officers, or employees of the designated financial market utility or an affiliate of the designated financial market utility;
(E) The board of directors establishes policies and procedures to identify, address, and manage potential conflicts of interest of board members and to review its performance and the performance of individual board members on a regular basis;
(F) The board of directors establishes a clear, documented risk-management framework that includes the designated financial market utility’s risk-tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decisionmaking in crises and emergencies;
(G) Senior management has the appropriate experience, skills, and integrity necessary to discharge operational and risk-management responsibilities;
(H) The risk-management function has sufficient authority, resources, and independence from other operations of the designated financial market utility, and has a direct reporting line to and is overseen by a committee of the board of directors;
(I) The internal audit function has sufficient authority, resources, and independence from management, and has a direct reporting line to and is overseen by a committee of the board of directors; and
(J) Major decisions of the board of directors are clearly disclosed to relevant stakeholders, including the designated financial market utility’s owners, participants, and participants’ customers, and, where there is a broad market impact, the public.
(3) Framework for the comprehensive management of risks. The designated financial market utility has a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, general business, custody, investment, and other risks that arise in or are borne by the designated financial market utility. This framework is subject to periodic review and includes –
(i) Risk-management policies, procedures, and systems that enable the designated financial market utility to identify, measure, monitor, and manage the risks that arise in or are borne by the designated financial market utility, including those posed by other entities as a result of interdependencies;
(ii) Risk-management policies, procedures, and systems that enable the designated financial market utility to identify, measure, monitor, and manage the material risks that it poses to other entities, such as other financial market utilities, settlement banks, liquidity providers, or service providers, as a result of interdependencies; and
(iii) Integrated plans for the designated financial market utility’s recovery and orderly wind-down that –
(A) Identify the designated financial market utility’s critical operations and services related to payment, clearing, and settlement;
(B) Identify scenarios that may potentially prevent it from being able to provide its critical operations and services as a going concern, including uncovered credit losses (as described in paragraph (a)(4)(vi)(A) of this section), uncovered liquidity shortfalls (as described in paragraph (a)(7)(viii)(A) of this section), and general business losses (as described in paragraph (a)(15) of this section);
(C) Identify criteria that could trigger the implementation of the recovery or orderly wind-down plan;
(D) Include rules, procedures, policies, and any other tools the designated financial market utility would use in a recovery or orderly wind-down to address the scenarios identified under paragraph (a)(3)(iii)(B) of this section;
(E) Include procedures to ensure timely implementation of the recovery and orderly wind-down plans in the scenarios identified under paragraph (a)(3)(iii)(B) of this section;
(F) Include procedures for informing the Board, as soon as practicable, if the designated financial market utility is considering initiating recovery or orderly wind-down; and
(G) Are reviewed the earlier of every two years or following changes to the system or the environment in which the designated financial market utility operates that would significantly affect the viability or execution of the plans.
(4) Credit risk. The designated financial market utility effectively measures, monitors, and manages its credit exposures to participants and those arising from its payment, clearing, and settlement processes. In this regard, the designated financial market utility maintains sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. In addition, the designated financial market utility –
(i) If it operates as a central counterparty, maintains additional prefunded financial resources that are sufficient to cover its credit exposure under a wide range of significantly different stress scenarios that includes the default of the participant and its affiliates that would potentially cause the largest aggregate credit exposure to the designated financial market utility in extreme but plausible market conditions;
(ii) If it operates as a central counterparty, may be directed by the Board to maintain additional prefunded financial resources that are sufficient to cover its credit exposure under a wide range of significantly different stress scenarios that includes the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure to the designated financial market utility in extreme but plausible market conditions. The Board may consider such a direction if the central counterparty –
(A) Is involved in activities with a more-complex risk profile, such as clearing financial instruments characterized by discrete jump-to-default price changes or that are highly correlated with potential participant defaults, or
(B) Has been determined by another jurisdiction to be systemically important in that jurisdiction;
(iii) If it operates as a central counterparty, determines the amount and regularly tests the sufficiency of the total financial resources available to meet the requirements of this paragraph by –
(A) On a daily basis, conducting a stress test of its total financial resources using standard and predetermined stress scenarios, parameters, and assumptions;
(B) On at least a monthly basis, and more frequently when the products cleared or markets served experience high volatility or become less liquid, or when the size or concentration of positions held by the central counterparty’s participants increases significantly, conducting a comprehensive and thorough analysis of the existing stress scenarios, models, and underlying parameters and assumptions such that the designated financial market utility meets its required level of default protection in light of current and evolving market conditions; and
(C) Having clear procedures to report the results of its stress tests to decisionmakers at the central counterparty and using these results to evaluate the adequacy of and adjust its total financial resources;
(iv) If it operates as a central counterparty, excludes assessments for additional default or guaranty fund contributions (that is, default or guaranty fund contributions that are not prefunded) in its calculation of financial resources available to meet the total financial resource requirement under this paragraph;
(v) At least annually, provides for a validation of the designated financial market utility’s risk-management models used to determine the sufficiency of its total financial resources that –
(A) Includes the designated financial market utility’s models used to comply with the collateral provisions under paragraph (a)(5) of this section and models used to determine initial margin under paragraph (a)(6) of this section; and
(B) Is performed by a qualified person who does not perform functions associated with the model (except as part of the annual model validation), does not report to such a person, and does not have a financial interest in whether the model is determined to be valid; and
(vi) Establishes rules and procedures that explicitly –
(A) Address allocation of credit losses the designated financial market utility may face if its collateral and other financial resources are insufficient to cover fully its credit exposures, including the repayment of any funds a designated financial market utility may borrow from liquidity providers; and
(B) Describe the designated financial market utility’s process to replenish any financial resources that the designated financial market utility may employ during a stress event, including a participant default.
(5) Collateral. If it requires collateral to manage its or its participants’ credit exposure, the designated financial market utility accepts collateral with low credit, liquidity, and market risks and sets and enforces conservative haircuts and concentration limits, in order to ensure the value of the collateral in the event of liquidation and that the collateral can be used in a timely manner. In this regard, the designated financial market utility –
(i) Establishes prudent valuation practices and develops haircuts that are tested regularly and take into account stressed market conditions;
(ii) Establishes haircuts that are calibrated to include relevant periods of stressed market conditions to reduce the need for procyclical adjustments;
(iii) Provides for annual validation of its haircut procedures, as part of its risk-management model validation under paragraph (a)(4)(v) of this section;
(iv) Avoids concentrated holdings of any particular type of asset where the concentration could significantly impair the ability to liquidate such assets quickly without significant adverse price effects;
(v) Uses a collateral management system that is well-designed and operationally flexible such that it, among other things, –
(A) Accommodates changes in the ongoing monitoring and management of collateral; and
(B) Allows for the timely valuation of collateral and execution of any collateral or margin calls.
(6) Margin. If it operates as a central counterparty, the designated financial market utility covers its credit exposures to its participants for all products by establishing a risk-based margin system that –
(i) Is conceptually and methodologically sound for the risks and particular attributes of each product, portfolio, and markets it serves, as demonstrated by documented and empirical evidence supporting design choices, methods used, variables selected, theoretical bases, key assumptions, and limitations;
(ii) Establishes margin levels commensurate with the risks and particular attributes of each product, portfolio, and market it serves;
(iii) Has a reliable source of timely price data;
(iv) Has procedures and sound valuation models for addressing circumstances in which pricing data are not readily available or reliable;
(v) Marks participant positions to market and collects variation margin at least daily and has the operational capacity to make intraday margin calls and payments, both scheduled and unscheduled, to participants;
(vi) Generates initial margin requirements sufficient to cover potential changes in the value of each participant’s position during the interval between the last margin collection and the closeout of positions following a participant default by –
(A) Ensuring that initial margin meets an established single-tailed confidence level of at least 99 percent with respect to the estimated distribution of future exposure; and
(B) Using a conservative estimate of the time horizons for the effective hedging or closeout of the particular types of products cleared, including in stressed market conditions; and
(vii) Is monitored on an ongoing basis and regularly reviewed, tested, and verified through –
(A) Daily backtests;
(B) Monthly sensitivity analyses, performed more frequently during stressed market conditions or significant fluctuations in participant positions, with this analysis taking into account a wide range of parameters and assumptions that reflect possible market conditions that captures a variety of historical and hypothetical conditions, including the most volatile periods that have been experienced by the markets the designated financial market utility serves; and
(C) Annual model validations of the designated financial market utility’s margin models and related parameters and assumptions, as part of its risk-management model validation under paragraph (a)(4)(v) of this section.
(7) Liquidity risk. The designated financial market utility effectively measures, monitors, and manages the liquidity risk that arises in or is borne by the designated financial market utility. In this regard, the designated financial market utility –
(i) Has effective operational and analytical tools to identify, measure, and monitor its settlement and funding flows on an ongoing and timely basis, including its use of intraday liquidity;
(ii) Maintains sufficient liquid resources in all relevant currencies to effect same-day and, where applicable, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of significantly different potential stress scenarios that includes the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the designated financial market utility in extreme but plausible market conditions;
(iii) Holds, for purposes of meeting the minimum liquid resource requirement under paragraph (a)(7)(ii) of this section, –
(A) cash in each relevant currency at the central bank of issue or creditworthy commercial banks;
(B) assets that are readily available and convertible into cash, through committed arrangements without material adverse change conditions, such as collateralized lines of credit, foreign exchange swaps, and repurchase agreements; or
(C) subject to the determination of the Board, highly marketable collateral and investments that are readily available and convertible into cash with prearranged and highly reliable funding arrangements, even in extreme but plausible market conditions;
(iv) Evaluates and confirms, at least annually, whether each provider of the arrangements as described in paragraphs (a)(7)(iii)(B) and (C) of this section has sufficient information to understand and manage that provider’s associated liquidity risks, and whether the provider has the capacity to perform;
(v) Maintains and tests its procedures and operational capacity for accessing each type of liquid resource required under this paragraph at least annually;
(vi) Determines the amount and regularly tests the sufficiency of the liquid resources necessary to meet the minimum liquid resource requirement under this paragraph by –
(A) On a daily basis, conducting a stress test of its liquid resources using standard and predetermined stress scenarios, parameters, and assumptions;
(B) On at least a monthly basis, and more frequently when products cleared or markets served experience high volatility or become less liquid, or when the size or concentration of positions held by the designated financial market utility’s participants increases significantly, conducting a comprehensive and thorough analysis of the existing stress scenarios, models, and underlying parameters and assumptions such that the designated financial market utility meets its identified liquidity needs and resources in light of current and evolving market conditions; and
(C) Having clear procedures to report the results of its stress tests to decisionmakers at the designated financial market utility and using these results to evaluate the adequacy of and make adjustments to its liquidity risk-management framework;
(vii) At least annually, provides for a validation of its liquidity risk-management model by a qualified person who does not perform functions associated with the model (except as part of the annual model validation), does not report to such a person, and does not have a financial interest in whether the model is determined to be valid; and
(viii) Establishes rules and procedures that explicitly –
(A) Address potential liquidity shortfalls that would not be covered by the designated financial market utility’s liquid resources and avoid unwinding, revoking, or delaying the same-day settlement of payment obligations; and
(B) Describe the designated financial market utility’s process to replenish any liquid resources that it may employ during a stress event, including a participant default.
(8) Settlement finality. The designated financial market utility provides clear and certain final settlement intraday or in real time as appropriate, and at a minimum, by the end of the value date. The designated financial market utility clearly defines the point at which settlement is final and the point after which unsettled payments, transfer instructions, or other settlement instructions may not be revoked by a participant.
(9) Money settlements. The designated financial market utility conducts its money settlements in central bank money where practical and available. If central bank money is not used, the designated financial market utility minimizes and strictly controls the credit and liquidity risks arising from conducting its money settlements in commercial bank money, including settlement on its own books. If it conducts its money settlements at a commercial bank, the designated financial market utility –
(i) Establishes and monitors adherence to criteria based on high standards for its settlement banks that take account of, among other things, their applicable regulatory and supervisory frameworks, creditworthiness, capitalization, access to liquidity, and operational reliability;
(ii) Monitors and manages the concentration of credit and liquidity exposures to its commercial settlement banks; and
(iii) Ensures that its legal agreements with its settlement banks state clearly –
(A) When transfers on the books of individual settlement banks are expected to occur;
(B) That transfers are final when funds are credited to the recipient’s account; and
(C) That the funds credited to the recipient are available immediately for retransfer or withdrawal.
(10) Physical deliveries. A designated financial market utility that operates as a central counterparty, securities settlement system, or central securities depository clearly states its obligations with respect to the delivery of physical instruments or commodities and identifies, monitors, and manages the risks associated with such physical deliveries.
(11) Central securities depositories. A designated financial market utility that operates as a central securities depository has appropriate rules and procedures to help ensure the integrity of securities issues and minimizes and manages the risks associated with the safekeeping and transfer of securities. In this regard, the designated financial market utility maintains securities in an immobilized or dematerialized form for their transfer by book entry.
(12) Exchange-of-value settlement systems. If it settles transactions that involve the settlement of two linked obligations, such as a transfer of securities against payment or the exchange of one currency for another, the designated financial market utility eliminates principal risk by conditioning the final settlement of one obligation upon the final settlement of the other.
(13) Participant-default rules and procedures. The designated financial market utility has effective and clearly defined rules and procedures to manage a participant default that are designed to ensure that the designated financial market utility can take timely action to contain losses and liquidity pressures so that it can continue to meet its obligations. In this regard, the designated financial market utility tests and reviews its default procedures, including any closeout procedures, at least annually or following material changes to these rules and procedures.
(14) Segregation and portability. A designated financial market utility that operates as a central counterparty has rules and procedures that enable the segregation and portability of positions of a participant’s customers and the collateral provided to the designated financial market utility with respect to those positions.
(15) General business risk. The designated financial market utility identifies, monitors, and manages its general business risk, which is the risk of losses that may arise from its administration and operation as a business enterprise (including losses from execution of business strategy, negative cash flows, or unexpected and excessively large operating expenses) that are neither related to participant default nor separately covered by financial resources maintained for credit or liquidity risk. In this regard, in addition to holding financial resources required to manage credit risk (paragraph (a)(4) of this section) and liquidity risk (paragraph (a)(7) of this section), the designated financial market utility –
(i) Maintains liquid net assets funded by equity that are at all times sufficient to ensure a recovery or orderly wind-down of critical operations and services such that it –
(A) Holds unencumbered liquid financial assets, such as cash or highly liquid securities, that are sufficient to cover the greater of –
(1) The cost to implement the plans to address general business losses as required under paragraph (a)(3)(iii) of this section and
(2) Six months of current operating expenses or as otherwise determined by the Board; and
(B) Holds equity, such as common stock, disclosed reserves, and other retained earnings, that is at all times greater than or equal to the amount of unencumbered liquid financial assets that are required to be held under paragraph (a)(15)(i)(A) of this section; and
(ii) Maintains a viable plan, approved by the board of directors, for raising additional equity should the designated financial market utility’s equity fall below the amount required under paragraph (a)(15)(i) of this section, and updates the plan the earlier of every two years or following changes to the designated financial market utility or the environment in which it operates that would significantly affect the viability or execution of the plan.
(16) Custody and investment risks. The designated financial market utility –
(i) Safeguards its own and its participants’ assets and minimizes the risk of loss on and delay in access to these assets by –
(A) Holding its own and its participants’ assets at supervised and regulated entities that have accounting practices, safekeeping procedures, and internal controls that fully protect these assets; and
(B) Evaluating its exposures to its custodian banks, taking into account the full scope of its relationships with each; and
(ii) Invests its own and its participants’ assets –
(A) In instruments with minimal credit, market, and liquidity risks, such as investments that are secured by, or are claims on, high-quality obligors and investments that allow for timely liquidation with little, if any, adverse price effect; and
(B) Using an investment strategy that is consistent with its overall risk-management strategy and fully disclosed to its participants.
(17) Operational risk. The designated financial market utility manages its operational risks by establishing a robust operational risk-management framework that is approved by the board of directors. In this regard, the designated financial market utility –
(i) Identifies the plausible sources of operational risk, both internal and external, and mitigates their impact through the use of appropriate systems, policies, procedures, and controls that are reviewed, audited, and tested periodically and after major changes;
(ii) Identifies, monitors, and manages the risks its operations might pose to other financial market utilities and trade repositories, if any;
(iii) Has policies and systems that are designed to achieve clearly defined objectives to ensure a high degree of security and operational reliability;
(iv) Has systems that have adequate, scalable capacity to handle increasing stress volumes and achieve the designated financial market utility’s service-level objectives;
(v) Has comprehensive physical, information, and cyber security policies, procedures, and controls that address potential and evolving vulnerabilities and threats;
(vi) Has business continuity management that provides for rapid recovery and timely resumption of critical operations and fulfillment of its obligations, including in the event of a wide-scale disruption or a major disruption; and
(vii) Has a business continuity plan that –
(A) Incorporates the use of a secondary site that is located at a sufficient geographical distance from the primary site to have a distinct risk profile;
(B) Is designed to enable critical systems, including information technology systems, to recover and resume operations no later than two hours following disruptive events;
(C) Is designed to enable it to complete settlement by the end of the day of the disruption, even in case of extreme circumstances; and
(D) Is tested at least annually.
(18) Access and participation requirements. The designated financial market utility has objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access. The designated financial market utility –
(i) Monitors compliance with its participation requirements on an ongoing basis and has the authority to impose more-stringent restrictions or other risk controls on a participant in situations where the designated financial market utility determines the participant poses heightened risk to the designated financial market utility; and
(ii) Has clearly defined and publicly disclosed procedures for facilitating the suspension and orderly exit of a participant that fails to meet the participation requirements.
(19) Tiered participation arrangements. The designated financial market utility identifies, monitors, and manages the material risks arising from arrangements in which firms that are not direct participants in the designated financial market utility rely on the services provided by direct participants to access the designated financial market utility’s payment, clearing, or settlement facilities, whether the risks are borne by the designated financial market utility or by its participants as a result of their participation. The designated financial market utility –
(i) Conducts an analysis to determine whether material risks arise from tiered participation arrangements;
(ii) Where material risks are identified, mitigates or manages such risks; and
(iii) Reviews and updates the analysis conducted under paragraph (a)(19)(i) of this section the earlier of every two years or following material changes to the system design or operations or the environment in which the designated financial market utility operates if those changes could affect the analysis conducted under paragraph (a)(19)(i) of this section.
(20) Links. If it operates as a central counterparty, securities settlement system, or central securities depository and establishes a link with one or more of these types of financial market utilities or trade repositories, the designated financial market utility identifies, monitors, and manages risks related to this link. In this regard, each central counterparty in a link arrangement with another central counterparty covers, at least on a daily basis, its current and potential future exposures to the linked central counterparty and its participants, if any, fully with a high degree of confidence without reducing the central counterparty’s ability to fulfill its obligations to its own participants.
(21) Efficiency and effectiveness. The designated financial market utility –
(i) Is efficient and effective in meeting the requirements of its participants and the markets it serves, in particular, with regard to its –
(A) Clearing and settlement arrangement;
(B) Risk-management policies, procedures, and systems;
(C) Scope of products cleared and settled; and
(D) Use of technology and communication procedures;
(ii) Has clearly defined goals and objectives that are measurable and achievable, such as minimum service levels, risk-management expectations, and business priorities; and
(iii) Has policies and procedures for the regular review of its efficiency and effectiveness.
(22) Communication procedures and standards. The designated financial market utility uses, or at a minimum accommodates, relevant internationally accepted communication procedures and standards in order to facilitate efficient payment, clearing, and settlement.
(23) Disclosure of rules, key procedures, and market data. The designated financial market utility –
(i) Has clear and comprehensive rules and procedures;
(ii) Publicly discloses all rules and key procedures, including key aspects of its default rules and procedures;
(iii) Provides sufficient information to enable participants to have an accurate understanding of the risks, fees, and other material costs they incur by participating in the designated financial market utility;
(iv) Provides a comprehensive public disclosure of its legal, governance, risk management, and operating framework, that includes –
(A) Executive summary. An executive summary of the key points from paragraphs (a)(23)(iv)(B) through (D) of this section;
(B) Summary of major changes since the last update of the disclosure. A summary of the major changes since the last update of paragraph (a)(23)(iv)(C), (D), or (E) of this section;
(C) General background on the designated financial market utility. A description of –
(1) The designated financial market utility’s function and the markets it serves,
(2) Basic data and performance statistics on its services and operations, such as basic volume and value statistics by product type, average aggregate intraday exposures to its participants, and statistics on the designated financial market utility’s operational reliability, and
(3) The designated financial market utility’s general organization, legal and regulatory framework, and system design and operations;
(D) Standard-by-standard summary narrative. A comprehensive narrative disclosure for each applicable standard set forth in this paragraph (a) with sufficient detail and context to enable a reader to understand the designated financial market utility’s approach to controlling the risks and addressing the requirements in each standard; and
(E) List of publicly available resources. A list of publicly available resources, including those referenced in the disclosure, that may help a reader understand how the designated financial market utility controls its risks and addresses the requirements set forth in this paragraph (a); and
(v) Updates the public disclosure under paragraph (a)(23)(iv) of this section the earlier of every two years or following changes to its system or the environment in which it operates that would significantly change the accuracy of the statements provided under paragraph (a)(23)(iv) of this section.
(b) The Board, by order, may apply heightened risk-management standards to a particular designated financial market utility in accordance with the risks presented by that designated financial market utility. The Board, by order, may waive the application of a standard or standards to a particular designated financial market utility where the risks presented by or the design of that designated financial market utility would make the application of the standard or standards inappropriate.
§ 234.4 Changes to rules, procedures, or operations.
(a) Advance notice. (1) A designated financial market utility shall provide at least 60-days advance notice to the Board of any proposed change to its rules, procedures, or operations that could materially affect the nature or level of risks presented by the designated financial market utility.
(2) The notice of the proposed change shall describe –
(i) The nature of the change and expected effects on risks to the designated financial market utility, its participants, or the market; and
(ii) How the designated financial market utility plans to manage any identified risks.
(3) The Board may require the designated financial market utility to provide additional information necessary to assess the effect the proposed change would have on the nature or level of risks associated with the utility’s payment, clearing, or settlement activities and the sufficiency of any proposed risk-management techniques.
(4) A designated financial market utility shall not implement a change to which the Board has an objection.
(5) The Board will notify the designated financial market utility of any objection before the end of 60 days after the later of –
(i) The date the Board receives the notice of proposed change; or
(ii) The date the Board receives any further information it requests for consideration of the notice.
(6) A designated financial market utility may implement a change if it has not received an objection to the proposed change before the end of 60 days after the later of –
(i) The date the Board receives the notice of proposed change; or
(ii) The date the Board receives any further information it requests for consideration of the notice.
(7) With respect to proposed changes that raise novel or complex issues, the Board may, by written notice during the 60-day review period, extend the review period for an additional 60 days. Any extension under this paragraph will extend the time periods under paragraphs (a)(5) and (a)(6) of this section to 120 days.
(8) A designated financial market utility may implement a proposed change before the expiration of the applicable review period if the Board notifies the designated financial market utility in writing that the Board does not object to the proposed change and authorizes the designated financial market utility to implement the change on an earlier date, subject to any conditions imposed by the Board.
(b) Emergency changes. (1) A designated financial market utility may implement a change that would otherwise require advance notice under this section if it determines that –
(i) An emergency exists; and
(ii) Immediate implementation of the change is necessary for the designated financial market utility to continue to provide its services in a safe and sound manner.
(2) The designated financial market utility shall provide notice of any such emergency change to the Board as soon as practicable and no later than 24 hours after implementation of the change.
(3) In addition to the information required for changes requiring advance notice in paragraph (a)(2) of this section, the notice of an emergency change shall describe –
(i) The nature of the emergency; and
(ii) The reason the change was necessary for the designated financial market utility to continue to provide its services in a safe and sound manner.
(4) The Board may require modification or rescission of the change if it finds that the change is not consistent with the purposes of the Dodd-Frank Act or any applicable rules, order, or standards prescribed under section 805(a) of the Dodd-Frank Act.
(c) Materiality. (1) The term “materially affect the nature or level of risks presented” in paragraph (a)(1) of this section means matters as to which there is a reasonable possibility that the change would materially affect the overall nature or level of risk presented by the designated financial market utility, including risk arising in the performance of payment, clearing, or settlement functions.
(2) A change to rules, procedures, or operations that would materially affect the nature or level of risks presented includes, but is not limited to, changes that materially affect any one or more of the following:
(i) Participant eligibility or access criteria;
(ii) Product eligibility;
(iii) Risk management;
(iv) Settlement failure or default procedures;
(v) Financial resources;
(vi) Business continuity and disaster recovery plans;
(vii) Daily or intraday settlement procedures;
(viii) The scope of services, including the addition of a new service or discontinuation of an existing service;
(ix) Technical design or operating platform, which results in non-routine changes to the underlying technological framework for payment, clearing, or settlement functions; or
(x) Governance.
(3) A change to rules, procedures, or operations that does not meet the conditions of paragraph (c)(2) of this section and would not materially affect the nature or level of risks presented includes, but is not limited to the following:
(i) A routine technology systems upgrade;
(ii) A change in a fee, price, or other charge for services provided by the designated financial market utility;
(iii) A change related solely to the administration of the designated financial market utility or related to the routine, daily administration, direction, and control of employees; or
(iv) A clerical change and other non-substantive revisions to rules, procedures, or other documentation.
§ 234.5 Access to Federal Reserve Bank accounts and services.
(a) This section applies to any designated financial market utility for which the Board may authorize a Federal Reserve Bank to open an account or provide services in accordance with section 806(a) of the Dodd-Frank Act. Upon receipt of Board authorization and subject to any limitations, restrictions, or other requirements established by the Board, a Federal Reserve Bank may enter into agreements governing the details of its accounts and services with a designated financial market utility, consistent with this section and any other applicable Board direction. The agreements may include, among other things, provisions regarding documentation to establish the account and receive services, conditions imposed on the account and services, service charges, reporting, accounting for activity in the account, liability and duty of care, and termination.
(b) A Federal Reserve Bank should ensure that its establishment and maintenance of an account for or provision of services to a designated financial market utility does not create undue credit, settlement, or other risk to the Reserve Bank. In order to establish and maintain an account with a Federal Reserve Bank or receive financial services from a Federal Reserve Bank, the designated financial market utility must be in compliance with the Supervisory Agency’s regulatory and supervisory requirements regarding financial resources, liquidity, participant default management, and other aspects of risk management, as determined by the Supervisory Agency. In addition, at a minimum, the designated financial market utility must, in the Federal Reserve Bank’s judgment –
(1) Be in generally sound financial condition, including maintenance of sufficient working capital and cash flow to permit the designated financial market utility to continue as a going concern and to meet its current and projected operating expenses under a range of scenarios;
(2) Be in compliance with Board orders and policies, Federal Reserve Bank account agreements and, as applicable, operating circulars, and other applicable Federal Reserve requirements regarding the establishment and maintenance of an account at a Federal Reserve Bank and the receipt of financial services from a Federal Reserve Bank; and
(3) Have an ongoing ability, including during periods of market stress or a participant default, to meet all of its obligations under its agreement for a Federal Reserve Bank account and services, including by maintaining –
(i) Sufficient liquid resources to meet its obligations under the account agreement;
(ii) The operational capacity to ensure that such liquid resources are available to satisfy the account obligations on a timely basis in accordance with the account agreement; and
(iii) Sound money settlement processes designed to adequately monitor its Federal Reserve Bank account on an intraday basis, process money transfers through its account in an orderly manner, and complete final money settlement no later than the value date.
(c) The Board will consult with the Supervisory Agency of a designated financial market utility prior to authorizing a Federal Reserve Bank to open an account, and periodically thereafter, to ascertain the views of the Supervisory Agency regarding the designated financial market utility’s compliance with the requirements in paragraph (b) of this section.
(d) In addition to any right that a Reserve Bank has to limit or terminate an account or the use of a service pursuant to its account agreement, the Board may direct the Federal Reserve Bank to impose limits, restrictions, or other conditions on the availability or use of a Federal Reserve Bank account or service by a designated financial market utility, including directing the Reserve Bank to terminate the use of a particular service or to close the account. If the Reserve Bank determines that a designated financial market utility no longer complies with one or more of the minimum conditions in subsection (b), the Reserve Bank will consult with the Board regarding continued maintenance of the account and provision of services.
§ 234.6 Interest on balances.
(a) A Federal Reserve Bank may pay interest on balances maintained by a designated financial market utility at the Federal Reserve Bank in accordance with this section and under such other terms and conditions as the Board may prescribe.
(b) Interest on balances paid under this section shall be at the rate paid on balances maintained by depository institutions or another rate determined by the Board from time to time, not to exceed the general level of short-term interest rates.
(c) For purposes of this section, “short-term interest rates” shall have the same meaning as the meaning provided for that term in § 204.10(b)(3) of this chapter.
PART 235 – DEBIT CARD INTERCHANGE FEES AND ROUTING (REGULATION II)
§ 235.1 Authority and purpose.
(a) Authority. This part is issued by the Board of Governors of the Federal Reserve System (Board) under section 920 of the Electronic Fund Transfer Act (EFTA) (15 U.S.C. 1693o-2, as added by section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010)).
(b) Purpose. This part implements the provisions of section 920 of the EFTA, including standards for reasonable and proportional interchange transaction fees for electronic debit transactions, standards for receiving a fraud-prevention adjustment to interchange transaction fees, exemptions from the interchange transaction fee limitations, prohibitions on evasion and circumvention, prohibitions on payment card network exclusivity arrangements and routing restrictions for debit card transactions, and reporting requirements for debit card issuers and payment card networks.
§ 235.2 Definitions.
For purposes of this part:
(a) Account (1) Means a transaction, savings, or other asset account (other than an occasional or incidental credit balance in a credit plan) established for any purpose and that is located in the United States; and
(2) Does not include an account held under a bona fide trust agreement that is excluded by section 903(2) of the Electronic Fund Transfer Act and rules prescribed thereunder.
(b) Acquirer means a person that contracts directly or indirectly with a merchant to provide settlement for the merchant’s electronic debit transactions over a payment card network. An acquirer does not include a person that acts only as a processor for the services it provides to the merchant.
(c) Affiliate means any company that controls, is controlled by, or is under common control with another company.
(d) Cardholder means the person to whom a debit card is issued.
(e) Control of a company means –
(1) Ownership, control, or power to vote 25 percent or more of the outstanding shares of any class of voting security of the company, directly or indirectly, or acting through one or more other persons;
(2) Control in any manner over the election of a majority of the directors, trustees, or general partners (or individuals exercising similar functions) of the company; or
(3) The power to exercise, directly or indirectly, a controlling influence over the management or policies of the company, as the Board determines.
(f) Debit card (1) Means any card, or other payment code or device, issued or approved for use through a payment card network to debit an account, regardless of whether authorization is based on signature, personal identification number (PIN), or other means, and regardless of whether the issuer holds the account, and
(2) Includes any general-use prepaid card; and
(3) Does not include –
(i) Any card, or other payment code or device, that is redeemable upon presentation at only a single merchant or an affiliated group of merchants for goods or services; or
(ii) A check, draft, or similar paper instrument, or an electronic representation thereof.
(g) Designated automated teller machine (ATM) network means either –
(1) All ATMs identified in the name of the issuer; or
(2) Any network of ATMs identified by the issuer that provides reasonable and convenient access to the issuer’s customers.
(h) Electronic debit transaction (1) Means the use of a debit card by a person as a form of payment in the United States to initiate a debit to an account, and
(2) Does not include transactions initiated at an ATM, including cash withdrawals and balance transfers initiated at an ATM.
(i) General-use prepaid card means a card, or other payment code or device, that is –
(1) Issued on a prepaid basis in a specified amount, whether or not that amount may be increased or reloaded, in exchange for payment; and
(2) Redeemable upon presentation at multiple, unaffiliated merchants for goods or services.
(j) Interchange transaction fee means any fee established, charged, or received by a payment card network and paid by a merchant or an acquirer for the purpose of compensating an issuer for its involvement in an electronic debit transaction.
(k) Issuer means any person that authorizes the use of a debit card to perform an electronic debit transaction.
(l) Merchant means any person that accepts debit cards as payment.
(m) Payment card network means an entity that –
(1) Directly or indirectly provides the proprietary services, infrastructure, and software that route information and data to an issuer from an acquirer to conduct the authorization, clearance, and settlement of electronic debit transactions; and
(2) A merchant uses in order to accept as a form of payment a brand of debit card or other device that may be used to carry out electronic debit transactions.
(n) Person means a natural person or an organization, including a corporation, government agency, estate, trust, partnership, proprietorship, cooperative, or association.
(o) Processor means a person that processes or routes electronic debit transactions for issuers, acquirers, or merchants.
(p) Route means to direct and send information and data to an unaffiliated entity or to an affiliated entity acting on behalf of an unaffiliated entity.
(q) United States means the States, territories, and possessions of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any political subdivision of any of the foregoing.
§ 235.3 Reasonable and proportional interchange transaction fees.
(a) In general. The amount of any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction shall be reasonable and proportional to the cost incurred by the issuer with respect to the electronic debit transaction.
(b) Determination of reasonable and proportional fees. An issuer complies with the requirements of paragraph (a) of this section only if each interchange transaction fee received or charged by the issuer for an electronic debit transaction is no more than the sum of –
(1) 21 cents and;
(2) 5 basis points multiplied by the value of the transaction.
§ 235.4 Fraud-prevention adjustment.
(a) In general. Subject to paragraph (b) of this section, an issuer may receive or charge an amount of no more than 1 cent per transaction in addition to any interchange transaction fee it receives or charges in accordance with § 235.3.
(b) Issuer standards. (1) To be eligible to receive or charge the fraud-prevention adjustment in paragraph (a) of this section, an issuer must develop and implement policies and procedures reasonably designed to take effective steps to reduce the occurrence of, and costs to all parties from, fraudulent electronic debit transactions, including through the development and implementation of cost-effective fraud-prevention technology.
(2) An issuer’s policies and procedures must address –
(i) Methods to identify and prevent fraudulent electronic debit transactions;
(ii) Monitoring of the volume and value of its fraudulent electronic debit transactions;
(iii) Appropriate responses to suspicious electronic debit transactions in a manner designed to limit the costs to all parties from and prevent the occurrence of future fraudulent electronic debit transactions;
(iv) Methods to secure debit card and cardholder data; and
(v) Such other factors as the issuer considers appropriate.
(3) An issuer must review, at least annually, its fraud-prevention policies and procedures, and their implementation and update them as necessary in light of –
(i) Their effectiveness in reducing the occurrence of, and cost to all parties from, fraudulent electronic debit transactions involving the issuer;
(ii) Their cost-effectiveness; and
(iii) Changes in the types of fraud, methods used to commit fraud, and available methods for detecting and preventing fraudulent electronic debit transactions that the issuer identifies from –
(A) Its own experience or information;
(B) Information provided to the issuer by its payment card networks, law enforcement agencies, and fraud-monitoring groups in which the issuer participates; and
(C) Applicable supervisory guidance.
(c) Notification. To be eligible to receive or charge a fraud-prevention adjustment, an issuer must annually notify its payment card networks that it complies with the standards in paragraph (b) of this section.
(d) Change in status. An issuer is not eligible to receive or charge a fraud-prevention adjustment if the issuer is substantially non-compliant with the standards set forth in paragraph (b) of this section, as determined by the issuer or the appropriate agency under § 235.9. Such an issuer must notify its payment card networks that it is no longer eligible to receive or charge a fraud-prevention adjustment no later than 10 days after determining or receiving notification from the appropriate agency under § 235.9 that the issuer is substantially non-compliant with the standards set forth in paragraph (b) of this section. The issuer must stop receiving and charging the fraud-prevention adjustment no later than 30 days after notifying its payment card networks.
§ 235.5 Exemptions.
(a) Exemption for small issuers – (1) In general. Except as provided in paragraph (a)(3) of this section, §§ 235.3, 235.4, and 235.6 do not apply to an interchange transaction fee received or charged by an issuer with respect to an electronic debit transaction if –
(i) The issuer holds the account that is debited; and
(ii) The issuer, together with its affiliates, has assets of less than $10 billion as of the end of the calendar year preceding the date of the electronic debit transaction.
(2) Determination of issuer asset size. A person may rely on lists published by the Board to determine whether an issuer, together with its affiliates, has assets of less than $10 billion as of the end of the calendar year preceding the date of the electronic debit transaction.
(3) Change in status. If an issuer qualifies for the exemption in paragraph (a)(1) in a particular calendar year, but, as of the end of that calendar year no longer qualifies for the exemption because at that time it, together with its affiliates, has assets of $10 billion or more, the issuer must begin complying with §§ 235.3, 235.4, and 235.6 no later than July 1 of the succeeding calendar year.
(4)(i) Temporary relief for 2020 and 2021. Except as provided in paragraph (a)(4)(ii) of this section, for purposes of determining eligibility for the exemption for small issuers described in paragraph (a)(1) of this section, issuer asset size that is calculated as of the end of the calendar year 2020 shall be determined based on the lesser of:
(A) The assets of the issuer, together with its affiliates, as of the end of the calendar year 2019; and
(B) The assets of the issuer, together with its affiliates, as of the end of the calendar year 2020.
(ii) The relief provided under this paragraph (a)(4) does not apply to an issuer if the Board determines that permitting the issuer to determine its assets in accordance with that paragraph would not be commensurate with the asset profile of the issuer. When making this determination, the Board will consider all relevant factors, including the extent of asset growth of the issuer since December 31, 2019; the causes of such growth, including whether growth occurred as a result of mergers or acquisitions; whether such growth is likely to be temporary or permanent; whether the issuer has become involved in any additional activities since December 31, 2019; the asset size of any parent companies; and the type of assets held by the issuer. In making a determination pursuant to this paragraph (a)(4)(ii), the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202.
(b) Exemption for government-administered programs. Except as provided in paragraph (d) of this section, §§ 235.3, 235.4, and 235.6 do not apply to an interchange transaction fee received or charged by an issuer with respect to an electronic debit transaction if –
(1) The electronic debit transaction is made using a debit card that has been provided to a person pursuant to a Federal, State, or local government-administered payment program; and
(2) The cardholder may use the debit card only to transfer or debit funds, monetary value, or other assets that have been provided pursuant to such program.
(c) Exemption for certain reloadable prepaid cards – (1) In general. Except as provided in paragraph (d) of this section, §§ 235.3, 235.4, and 235.6 do not apply to an interchange transaction fee received or charged by an issuer with respect to an electronic debit transaction using a general-use prepaid card that is –
(i) Not issued or approved for use to access or debit any account held by or for the benefit of the cardholder (other than a subaccount or other method of recording or tracking funds purchased or loaded on the card on a prepaid basis);
(ii) Reloadable and not marketed or labeled as a gift card or gift certificate; and
(iii) The only means of access to the underlying funds, except when all remaining funds are provided to the cardholder in a single transaction.
(2) Temporary cards. For purposes of this paragraph (c), the term “reloadable” includes a temporary non-reloadable card issued solely in connection with a reloadable general-use prepaid card.
(d) Exception. The exemptions in paragraphs (b) and (c) of this section do not apply to any interchange transaction fee received or charged by an issuer on or after July 21, 2012, with respect to an electronic debit transaction if any of the following fees may be charged to a cardholder with respect to the card:
(1) A fee or charge for an overdraft, including a shortage of funds or a transaction processed for an amount exceeding the account balance, unless the fee or charge is imposed for transferring funds from another asset account to cover a shortfall in the account accessed by the card; or
(2) A fee imposed by the issuer for the first withdrawal per calendar month from an ATM that is part of the issuer’s designated ATM network.
§ 235.6 Prohibition on circumvention, evasion, and net compensation.
(a) Prohibition of circumvention or evasion. No person shall circumvent or evade the interchange transaction fee restrictions in §§ 235.3 and 235.4.
(b) Prohibition of net compensation. An issuer may not receive net compensation from a payment card network with respect to electronic debit transactions or debit card-related activities within a calendar year. Net compensation occurs when the total amount of payments or incentives received by an issuer from a payment card network with respect to electronic debit transactions or debit card-related activities, other than interchange transaction fees passed through to the issuer by the network, during a calendar year exceeds the total amount of all fees paid by the issuer to the network with respect to electronic debit transactions or debit card-related activities during that calendar year. Payments and incentives paid by a network to an issuer, and fees paid by an issuer to a network, with respect to electronic debit transactions or debit card related activities are not limited to volume-based or transaction-specific payments, incentives, or fees, but also include other payments, incentives or fees related to an issuer’s provision of debit card services.
§ 235.7 Limitations on payment card restrictions.
(a) Prohibition on network exclusivity – (1) In general. An issuer or payment card network shall not directly or through any agent, processor, or licensed member of a payment card network, by contract, requirement, condition, penalty, or otherwise, restrict the number of payment card networks on which an electronic debit transaction may be processed to less than two unaffiliated networks.
(2) Permitted arrangements. An issuer satisfies the requirements of paragraph (a)(1) of this section only if the issuer allows an electronic debit transaction to be processed on at least two unaffiliated payment card networks, each of which does not, by rule or policy, restrict the operation of the network to a limited geographic area, specific merchant, or particular type of merchant or transaction, and each of which has taken steps reasonably designed to enable the network to process the electronic debit transactions that the network would reasonably expect will be routed to it, based on expected transaction volume.
(3) Prohibited exclusivity arrangements by networks. For purposes of paragraph (a)(1) of this section, a payment card network may not restrict or otherwise limit an issuer’s ability to contract with any other payment card network that may process an electronic debit transaction involving the issuer’s debit cards.
(4) Subsequent affiliation. If unaffiliated payment card networks become affiliated as a result of a merger or acquisition such that an issuer is no longer in compliance with paragraph (a) of this section, the issuer must add an unaffiliated payment card network through which electronic debit transactions on the relevant debit card may be processed no later than six months after the date on which the previously unaffiliated payment card networks consummate the affiliation.
(b) Prohibition on routing restrictions. An issuer or payment card network shall not, directly or through any agent, processor, or licensed member of the network, by contract, requirement, condition, penalty, or otherwise, inhibit the ability of any person that accepts or honors debit cards for payments to direct the routing of electronic debit transactions for processing over any payment card network that may process such transactions.
(c) Compliance dates – (1) General. Except as otherwise provided in paragraphs (c)(2), (c)(3), and (c)(4) of this section, the compliance date of paragraph (a) of this section is April 1, 2012.
(2) Restrictions by payment card networks. The compliance date of paragraphs (a)(1) and (a)(3) of this section for payment card networks is October 1, 2011.
(3) Debit cards that use transaction qualification or substantiation systems. Issuers shall comply with the requirements of paragraph (a) of this section by April 1, 2013, for electronic debit transactions using debit cards that use point-of-sale transaction qualification or substantiation systems for verifying the eligibility of purchased goods or services.
(4) General-use prepaid cards. Issuers shall comply with the requirements of paragraph (a) of this section with respect to general-use prepaid cards as set out below.
(i) With respect to non-reloadable general-use prepaid cards, the compliance date is April 1, 2013. Non-reloadable general-use prepaid cards sold prior to April 1, 2013 are not subject to paragraph (a) of this section.
(ii) With respect to reloadable general-use prepaid cards, the compliance date is April 1, 2013. Reloadable general-use prepaid cards sold prior to April 1, 2013 are not subject to paragraph (a) of this section unless and until they are reloaded, in which case the following compliance dates apply:
(A) With respect to reloadable general-use prepaid cards sold and reloaded prior to April 1, 2013, the compliance date is May 1, 2013.
(B) With respect to reloadable general-use prepaid cards sold prior to April 1, 2013, and reloaded on or after April 1, 2013, the compliance date is 30 days after the date of reloading.
§ 235.8 Reporting requirements and record retention.
(a) Entities required to report. Each issuer that is not otherwise exempt from the requirements of this part under § 235.5(a) and each payment card network shall file a report with the Board in accordance with this section.
(b) Report. Each entity required to file a report with the Board shall submit data in a form prescribed by the Board for that entity. Data required to be reported may include, but may not be limited to, data regarding costs incurred with respect to an electronic debit transaction, interchange transaction fees, network fees, fraud-prevention costs, fraud losses, and transaction value, volume, and type.
(c) Record retention. (1) An issuer subject to this part shall retain evidence of compliance with the requirements imposed by this part for a period of not less than five years after the end of the calendar year in which the electronic debit transaction occurred.
(2) Any person subject to this part having actual notice that it is the subject of an investigation or an enforcement proceeding by its enforcement agency shall retain the records that pertain to the investigation, action, or proceeding until final disposition of the matter unless an earlier time is allowed by court or agency order.
§ 235.9 Administrative enforcement.
(a) (1) Compliance with the requirements of this part shall be enforced under –
(i) Section 8 of the Federal Deposit Insurance Act, by the appropriate Federal banking agency, as defined in section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)), with respect to –
(A) National banks, federal savings associations, and federal branches and federal agencies of foreign banks;
(B) Member banks of the Federal Reserve System (other than national banks), branches and agencies of foreign banks (other than federal branches, federal Agencies, and insured state branches of foreign banks), commercial lending companies owned or controlled by foreign banks, and organizations operating under section 25 or 25A of the Federal Reserve Act;
(C) Banks and state savings associations insured by the Federal Deposit Insurance Corporation (other than members of the Federal Reserve System), and insured state branches of foreign banks;
(ii) The Federal Credit Union Act (12 U.S.C. 1751 et seq.), by the Administrator of the National Credit Union Administration (National Credit Union Administration Board) with respect to any federal credit union;
(iii) The Federal Aviation Act of 1958 (49 U.S.C. 40101 et seq.), by the Secretary of Transportation, with respect to any air carrier or foreign air carrier subject to that Act; and
(iv) The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), by the Securities and Exchange Commission, with respect to any broker or dealer subject to that Act.
(2) The terms used in paragraph (a)(1) of this section that are not defined in this part or otherwise defined in section 3(s) of the Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall have the meaning given to them in section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
(b) Additional powers. (1) For the purpose of the exercise by any agency referred to in paragraphs (a)(1)(i) through (a)(1)(iv) of this section of its power under any statute referred to in those paragraphs, a violation of this part is deemed to be a violation of a requirement imposed under that statute.
(2) In addition to its powers under any provision of law specifically referred to in paragraphs (a)(1)(i) through (a)(1)(iv) of this section, each of the agencies referred to in those paragraphs may exercise, for the purpose of enforcing compliance under this part, any other authority conferred on it by law.
(c) Enforcement authority of Federal Trade Commission. Except to the extent that enforcement of the requirements imposed under this title is specifically granted to another government agency under paragraphs (a)(1)(i) through (a)(1)(iv) of this section, and subject to subtitle B of the Consumer Financial Protection Act of 2010, the Federal Trade Commission has the authority to enforce such requirements. For the purpose of the exercise by the Federal Trade Commission of its functions and powers under the Federal Trade Commission Act, a violation of this part shall be deemed a violation of a requirement imposed under the Federal Trade Commission Act. All of the functions and powers of the Federal Trade Commission under the Federal Trade Commission Act are available to the Federal Trade Commission to enforce compliance by any person subject to the jurisdiction of the Federal Trade Commission with the requirements of this part, regardless of whether that person is engaged in commerce or meets any other jurisdictional tests under the Federal Trade Commission Act.
§ 235.10 Effective and compliance dates.
Except as provided in § 235.7, this part becomes effective and compliance is mandatory on October 1, 2011.
Appendix A to Part 235 – Official Board Commentary on Regulation II
The following commentary to Regulation II (12 CFR part 235) provides background material to explain the Board’s intent in adopting a particular part of the regulation. The commentary also provides examples to aid in understanding how a particular requirement is to work.
1. Types of accounts. The term “account” includes accounts held by any person, including consumer accounts (i.e., those established primarily for personal, family or household purposes) and business accounts. Therefore, the limitations on interchange transaction fees and the prohibitions on network exclusivity arrangements and routing restrictions apply to all electronic debit transactions, regardless of whether the transaction involves a debit card issued primarily for personal, family, or household purposes or for business purposes. For example, an issuer of a business-purpose debit card is subject to the restrictions on interchange transaction fees and is also prohibited from restricting the number of payment card networks on which an electronic debit transaction may be processed under § 235.7.
2. Bona fide trusts. This part does not define the term bona fide trust agreement; therefore, institutions must look to state or other applicable law for interpretation. An account held under a custodial agreement that qualifies as a trust under the Internal Revenue Code, such as an individual retirement account, is considered to be held under a trust agreement for purposes of this part.
3. Account located in the United States. This part applies only to electronic debit transactions that are initiated to debit (or credit, for example, in the case of returned goods or cancelled services) an account located in the United States. If a cardholder uses a debit card to debit an account held outside the United States, then the electronic debit transaction is not subject to this part.
1. In general. The term “acquirer” includes only the institution that contracts, directly or indirectly, with a merchant to provide settlement for the merchant’s electronic debit transactions over a payment card network (referred to as acquiring the merchant’s electronic debit transactions). In some acquiring relationships, an institution provides processing services to the merchant and is a licensed member of the payment card network, but does not settle the transactions with the merchant (by crediting the merchant’s account) or with the issuer. These institutions are not “acquirers” because they do not provide credit to the merchant for the transactions or settle the merchant’s transactions with the issuer. These institutions are considered processors and in some circumstances may be considered payment card networks for purposes of this part (See §§ 235.2(m), 235.2(o), and commentary thereto).
1. Types of entities. The term “affiliate” includes any bank and nonbank affiliates located in the United States or a foreign country.
2. Other affiliates. For commentary on whether merchants are affiliated, see comment 2(f)-7.
1. Scope. In the case of debit cards that access funds in transaction, savings, or other similar asset accounts, “the person to whom a card is issued” generally will be the named person or persons holding the account. If the account is a business account, multiple employees (or other persons associated with the business) may have debit cards that can access the account. Each employee that has a debit card that can access the account is a cardholder. In the case of a prepaid card, the cardholder generally is either the purchaser of the card or a person to whom the purchaser gave the card, such as a gift recipient.
1. Card, or other payment code or device. The term “debit card” as defined in § 235.2(f) applies to any card, or other payment code or device, even if it is not issued in a physical form. Debit cards include, for example, an account number or code that can be used to access funds in an account to make Internet purchases. Similarly, the term “debit card” includes a device with a chip or other embedded mechanism, such as a mobile phone or sticker containing a contactless chip that links the device to funds stored in an account, and enables an account to be debited. The term “debit card,” however, does not include a one-time password or other code if such password or code is used for the purposes of authenticating the cardholder and is used in addition to another card, or other payment code or device, rather than as the payment code or device.
2. Deferred debit cards. The term “debit card” includes a card, or other payment code or device, that is used in connection with deferred debit card arrangements in which transactions are not immediately posted to and funds are not debited from the underlying transaction, savings, or other asset account upon settlement of the transaction. Instead, the funds in the account typically are held and made unavailable for other transactions for a period of time specified in the issuer-cardholder agreement. After the expiration of the time period, the cardholder’s account is debited for the value of all transactions made using the card that have been submitted to the issuer for settlement during that time period. For example, under some deferred debit card arrangements, the issuer may debit the consumer’s account for all debit card transactions that occurred during a particular month at the end of the month. Regardless of the time period between the transaction and account posting, a card, or other payment code or device, that is used in connection with a deferred debit arrangement is considered a debit card for purposes of the requirements of this part.
3. Decoupled debit cards. Decoupled debit cards are issued by an entity other than the financial institution holding the cardholder’s account. In a decoupled debit arrangement, transactions that are authorized by the card issuer settle against the cardholder’s account held by an entity other than the issuer, generally via a subsequent ACH debit to that account. The term “debit card” includes any card, or other payment code or device, issued or approved for use through a payment card network to debit an account, regardless of whether the issuer holds the account. Therefore, decoupled debit cards are debit cards for purposes of this part.
4. Hybrid cards.
i. Some cards, or other payment codes or devices, may have both credit- and debit-like features (“hybrid cards”). For example, these cards may enable a cardholder to access a line of credit, but select certain transactions for immediate repayment (i.e., prior to the end of a billing cycle) via a debit to the cardholder’s account, as the term is defined in § 235.2(a), held either with the issuer or at another institution. If a card permits a cardholder to initiate transactions that debit an account or funds underlying a prepaid card, the card is considered a debit card for purposes of this part. Not all transactions initiated by such a hybrid card, however, are electronic debit transactions. Rather, only those transactions that debit an account as defined in this part or funds underlying a prepaid card are electronic debit transactions. If the transaction posts to a line of credit, then the transaction is a credit transaction.
ii. If an issuer conditions the availability of a credit or charge card that permits pre-authorized repayment of some or all transactions on the cardholder maintaining an account at the issuer, such a card is considered a debit card for purposes of this part.
5. Virtual wallets. A virtual wallet is a device (e.g., a mobile phone) that stores several different payment codes or devices (“virtual cards”) that access different accounts, funds underlying the card, or lines of credit. At the point of sale, the cardholder may select from the virtual wallet the virtual card he or she wishes to use for payment. The virtual card that the cardholder uses for payment is considered a debit card under this part if the virtual card that initiates a transaction meets the definition of debit card, notwithstanding the fact that other cards in the wallet may not be debit cards.
6. General-use prepaid card. The term “debit card” includes general-use prepaid cards. See § 235.2(i) and related commentary for information on general-use prepaid cards.
7. Store cards. The term “debit card” does not include prepaid cards that may be used at a single merchant or affiliated merchants. Two or more merchants are affiliated if they are related by either common ownership or by common corporate control. For purposes of the “debit card” definition, franchisees are considered to be under common corporate control if they are subject to a common set of corporate policies or practices under the terms of their franchise licenses.
8. Checks, drafts, and similar instruments. The term “debit card” does not include a check, draft, or similar paper instrument or a transaction in which the check is used as a source of information to initiate an electronic payment. For example, if an account holder provides a check to buy goods or services and the merchant takes the account number and routing number information from the MICR line at the bottom of a check to initiate an ACH debit transfer from the cardholder’s account, the check is not a debit card, and such a transaction is not considered an electronic debit transaction. Likewise, the term “debit card” does not include an electronic representation of a check, draft, or similar paper instrument.
9. ACH transactions. The term “debit card” does not include an account number when it is used by a person to initiate an ACH transaction that debits that person’s account. For example, if an account holder buys goods or services over the Internet using an account number and routing number to initiate an ACH debit, the account number is not a debit card, and such a transaction is not considered an electronic debit transaction. However, the use of a card to purchase goods or services that debits the cardholder’s account that is settled by means of a subsequent ACH debit initiated by the card issuer to the cardholder’s account, as in the case of a decoupled debit card arrangement, involves the use of a debit card for purposes of this part.
1. Reasonable and convenient access clarified. Under § 235.2(g)(2), a designated ATM network includes any network of ATMs identified by the issuer that provides reasonable and convenient access to the issuer’s cardholders. Whether a network provides reasonable and convenient access depends on the facts and circumstances, including the distance between ATMs in the designated network and each cardholder’s last known home or work address, or if a home or work address is not known, where the card was first issued.
1. Debit an account. The term “electronic debit transaction” includes the use of a card to debit an account. The account debited could be, for example, the cardholder’s asset account or the account that holds the funds used to settle prepaid card transactions.
2. Form of payment. The term “electronic debit transaction” includes the use of a card as a form of payment that may be made in exchange for goods or services, as a charitable contribution, to satisfy an obligation (e.g., tax liability), or for other purposes.
3. Subsequent transactions. The term “electronic debit transaction” includes both the cardholder’s use of a debit card for the initial payment and any subsequent use by the cardholder of the debit card in connection with the initial payment. For example, the term “electronic debit transaction” includes using the debit card to return merchandise or cancel a service that then results in a debit to the merchant’s account and a credit to the cardholder’s account.
4. Cash withdrawal at the point of sale. The term “electronic debit transaction” includes a transaction in which a cardholder uses the debit card both to make a purchase and to withdraw cash (known as a “cash-back transaction”).
5. Geographic limitation. This regulation applies only to electronic debit transactions that are initiated at a merchant located in the United States. If a cardholder uses a debit card at a merchant located outside the United States to debit an account held in the United States, the electronic debit transaction is not subject to this part.
1. Redeemable upon presentation at multiple, unaffiliated merchants. A prepaid card is redeemable upon presentation at multiple, unaffiliated merchants if such merchants agree to honor the card.
2. Selective authorization cards. Selective authorization cards, (e.g., mall cards) are generally intended to be used or redeemed for goods or services at participating retailers within a shopping mall or other limited geographic area. Selective authorization cards are considered general-use prepaid cards, regardless of whether they carry the mark, logo, or brand of a payment card network, if they are redeemable at multiple, unaffiliated merchants.
1. In general. Generally, the payment card network is the entity that establishes and charges the interchange transaction fee to the acquirers or merchants. The acquirers then pay to the issuers any interchange transaction fee established and charged by the network. Acquirers typically pass the interchange transaction fee through to merchant-customers.
2. Compensating an issuer. The term “interchange transaction fee” is limited to those fees that a payment card network establishes, charges, or receives to compensate the issuer for its role in the electronic debit transaction. By contrast, payment card networks generally charge issuers and acquirers fees for services the network performs. Such fees are not interchange transaction fees because the payment card network is charging and receiving the fee as compensation for services it provides.
3. Established, charged, or received. Interchange transaction fees are not limited to those fees for which a payment card network sets the value. A fee that compensates an issuer is an interchange transaction fee if the fee is set by the issuer but charged to acquirers by virtue of the network determining each participant’s net settlement position.
1. In general. A person issues a debit card by authorizing the use of debit card by a cardholder to perform electronic debit transactions. That person may provide the card directly to the cardholder or indirectly by using a third party (such as a processor, or a telephone network or manufacturer) to provide the card, or other payment code or device, to the cardholder. The following examples illustrate the entity that is the issuer under various card program arrangements. For purposes of determining whether an issuer is exempted under § 235.5(a), however, the term issuer is limited to the entity that holds the account being debited.
2. Traditional debit card arrangements. In a traditional debit card arrangement, the bank or other entity holds the cardholder’s funds and authorizes the cardholder to use the debit card to access those funds through electronic debit transactions, and the cardholder receives the card directly or indirectly (e.g., through an agent) from the bank or other entity that holds the funds (except for decoupled debit cards, discussed below). In this system, the bank or entity holding the cardholder’s funds is the issuer.
3. BIN-sponsor arrangements. Payment card networks assign Bank Identification Numbers (BINs) to member-institutions for purposes of issuing cards, authorizing, clearing, settling, and other processes. In exchange for a fee or other financial considerations, some members of payment card networks permit other entities to issue debit cards using the member’s BIN. The entity permitting the use of its BIN is referred to as the “BIN sponsor” and the entity that uses the BIN to issue cards is often referred to as the “affiliate member.” BIN sponsor arrangements can follow at least two different models:
i. Sponsored debit card model. In some cases, a community bank or credit union may provide debit cards to its account holders through a BIN sponsor arrangement with a member institution. In general, the bank or credit union will authorize its account holders to use debit cards to perform electronic debit transactions that access funds in accounts at the bank or credit union. The bank or credit union’s name typically will appear on the debit card. The bank or credit union may directly or indirectly provide the cards to cardholders. Under these circumstances, the bank or credit union is the issuer for purposes of this part. If that bank or credit union, together with its affiliates, has assets of less than $10 billion, then that bank or credit union is exempt from the interchange transaction fee restrictions. Although the bank or credit union may distribute cards through the BIN sponsors, the BIN sponsor does not enter into the agreement with the cardholder that authorizes the cardholder to use the card to perform electronic debit transactions that access funds in the account at the bank or credit union, and therefore the BIN sponsor is not the issuer.
ii. Prepaid card model. A member institution may also serve as the BIN sponsor for a prepaid card program. Under these arrangements, a program manager distributes prepaid cards to the cardholders and the BIN-sponsoring institution generally holds the funds for the prepaid card program in an omnibus or pooled account. Either the BIN sponsor or the prepaid card program manager may keep track of the underlying funds for each individual prepaid card through subaccounts. While the cardholder may receive the card directly from the program manager or at a retailer, the BIN sponsor authorizes the cardholder to use the card to perform electronic debit transactions that access the funds in the pooled account and the cardholder’s relationship generally is with the BIN sponsor. Accordingly, under these circumstances, the BIN sponsor, or the bank holding the pooled account, is the issuer.
4. Decoupled debit cards. In the case of decoupled debit cards, an entity other than the bank holding the cardholder’s account enters into a relationship with the cardholder authorizing the use of the card to perform electronic debit transactions. The entity authorizing the use of the card to perform electronic debit transaction typically arranges for the card to be provided directly or indirectly to the cardholder and has a direct relationship with the cardholder with respect to the card. The bank holding the cardholder’s account has agreed generally to permit ACH debits to the account, but has not authorized the use of the debit card to access the funds through electronic debit transactions. Under these circumstances, the entity authorizing the use of the debit card, and not the account-holding institution, is considered the issuer. An issuer of a decoupled debit card is not exempt under § 235.5(a), even if, together with its affiliates, it has assets of less than $10 billion, because it is not the entity holding the account to be debited.
1. In general. An entity is a considered a payment card network with respect to an electronic debit transaction for purposes of this rule if it routes information and data to the issuer from the acquirer to conduct authorization, clearance, and settlement of the electronic debit transaction. By contrast, if an entity receives transaction information and data from a merchant and authorizes and settles the transaction without routing the information and data to another entity (i.e., the issuer or the issuer’s processor) for authorization, clearance, or settlement, that entity is not considered a payment card network with respect to the electronic debit transaction.
2. Three-party systems. In the case of a three-party system, electronic debit transactions are processed by an entity that acts as system operator and issuer, and may also act as the acquirer. The entity acting as system operator and issuer that receives the transaction information from the merchant or acquirer also holds the cardholder’s funds. Therefore, rather than directing the transaction information to a separate issuer, the entity authorizes and settles the transaction based on the information received from the merchant. As these entities do not connect (or “network”) multiple issuers and do not route information to conduct the transaction, they are not “payment card networks” with respect to these transactions.
3. Processors as payment card networks. A processor is considered a payment card network if, in addition to acting as processor for an acquirer and issuer, the processor routes transaction information and data received from a merchant or the merchant’s acquirer to an issuer. For example, if a merchant uses a processor in order to accept any, some, or all brands of debit cards and the processor routes transaction information and data to the issuer or issuer’s processor, the merchant’s processor is considered a payment card network with respect to the electronic debit transaction. If the processor establishes, charges, or receives a fee for the purpose of compensating an issuer, that fee is considered an interchange transaction fee for purposes of this part.
4. Automated clearing house (ACH) operators. An ACH operator is not considered a payment card network for purposes of this part. While an ACH operator processes transactions that debit an account and provides for interbank clearing and settlement of such transactions, a person does not use the ACH system to accept as a form of payment a brand of debit card.
5. ATM networks. An ATM network is not considered a payment card network for purposes of this part. While ATM networks process transactions that debit an account and provide for interbank clearing and settlement of such transactions, a cash withdrawal from an ATM is not a payment because there is no exchange of money for goods or services, or payment made as a charitable contribution, to satisfy an obligation (e.g., tax liability), or for other purposes.
1. Distinction from acquirers. A processor may perform all transaction-processing functions for a merchant or acquirer, but if it does not acquire (that is, settle with the merchant for the transactions), it is not an acquirer. The entity that acquirers electronic debit transactions is the entity that is responsible to other parties to the electronic debit transaction for the amount of the transaction.
2. Issuers. A processor may perform services related to authorization, clearance, and settlement of transactions for an issuer without being considered to be an issuer for purposes of this part.
1. An entity routes information if it both directs and sends the information to an unaffiliated entity (or affiliated entity acting on behalf of the unaffiliated entity). This other entity may be a payment card network or processor (if the entity directing and sending the information is a merchant or an acquirer) or an issuer or processor (if the entity directing and sending the information is a payment card network).
1. Two components. The standard for the maximum permissible interchange transaction fee that an issuer may receive consists of two components: a base component that does not vary with a transaction’s value and an ad valorem component. The amount of any interchange transaction fee received or charged by an issuer may not exceed the sum of the maximum permissible amounts of each component and any fraud-prevention adjustment the issuer is permitted to receive under § 235.4 of this part.
2. Variation in interchange fees. An issuer is permitted to charge or receive, and a network is permitted to establish, interchange transaction fees that vary in their base component and ad valorem component based on, for example, the type of transaction or merchant, provided the amount of any interchange transaction fee for any transaction does not exceed the sum of the maximum permissible base component of 21 cents and 5 basis points of the value of the transaction.
3. Example. For a $39 transaction, the maximum permissible interchange transaction fee is 22.95 cents (21 cents plus 5 basis points of $39). A payment card network may, for example, establish an interchange transaction fee of 22 cents without any ad valorem component.
1. An issuer’s policies and procedures should address fraud related to debit card use by unauthorized persons. Examples of use by unauthorized persons include, but are not limited to, the following:
i. A thief steals a cardholder’s wallet and uses the debit card to purchase goods, without the authority of the cardholder.
ii. A cardholder makes a purchase at a merchant. Subsequently, the merchant’s employee uses information from the debit card to initiate a subsequent transaction, without the authority of the cardholder.
iii. A hacker steals cardholder account information from the issuer or a merchant processor and uses the stolen information to make unauthorized card-not-present purchases or to create a counterfeit card to make unauthorized card-present purchases.
2. An issuer’s policies and procedures must be designed to reduce fraud, where cost effective, across all types of electronic debit transactions in which its cardholders engage. Therefore, an issuer should consider whether its policies and procedures are effective for each method used to authenticate the card (e.g., a chip or a code embedded in the magnetic stripe) and the cardholder (e.g., a signature or a PIN), and for different sales channels (e.g., card-present and card-not-present).
3. An issuer’s policies and procedures must be designed to take effective steps to reduce both the occurrence of and costs to all parties from fraudulent electronic debit transactions. An issuer should take steps reasonably designed to reduce the number and value of its fraudulent electronic debit transactions relative to its non-fraudulent electronic debit transactions. These steps should reduce the costs from fraudulent transactions to all parties, not merely the issuer. For example, an issuer should take steps to reduce the number and value of its fraudulent electronic debit transactions relative to its non-fraudulent transactions whether or not it bears the fraud losses as a result of regulations or network rules.
4. For any given issuer, the number and value of fraudulent electronic debit transactions relative to non-fraudulent transactions may vary materially from year to year. Therefore, in certain circumstances, an issuer’s policies and procedures may be effective notwithstanding a relative increase in the transactions that are fraudulent in a particular year. However, continuing increases in the share of fraudulent transactions would warrant further scrutiny.
5. In determining which fraud-prevention technologies to implement or retain, an issuer must consider the cost-effectiveness of the technology, that is, the expected cost of the technology relative to its expected effectiveness in controlling fraud. In evaluating the cost of a particular technology, an issuer should consider whether and to what extent other parties will incur costs to implement the technology, even though an issuer may not have complete information about the costs that may be incurred by other parties, such as the cost of new merchant terminals. In evaluating the costs, an issuer should consider both initial implementation costs and ongoing costs of using the fraud-prevention method.
6. An issuer need not develop fraud-prevention technologies itself to satisfy the standards in § 235.4(b). An issuer may implement fraud-prevention technologies that have been developed by a third party that the issuer has determined are appropriate under its own policies and procedures.
1. In general. An issuer may tailor its policies and procedures to address its particular debit card program, including the size of the program, the types of transactions in which its cardholders commonly engage, fraud types and methods experienced by the issuer, and the cost of implementing new fraud-prevention methods in light of the expected fraud reduction.
1. In general. Examples of policies and procedures reasonably designed to identify and prevent fraudulent electronic debit transactions include the following:
i. Practices to help determine whether a card is authentic and whether the user is authorized to use the card at the time of a transaction. For example, an issuer may specify the use of particular authentication technologies or methods, such as dynamic data, to better authenticate a card and cardholder at the time of the transaction, to the extent doing so does not inhibit the ability of a merchant to direct the routing of electronic debit transactions for processing over any payment card network that may process such transactions. (See § 235.7 and commentary thereto.)
ii. An automated mechanism to assess the risk that a particular electronic debit transaction is fraudulent during the authorization process (i.e., before the issuer approves or declines an authorization request). For example, an issuer may use neural networks to identify transactions that present increased risk of fraud. As a result of this analysis, the issuer may decide to decline to authorize these transactions. An issuer may not be able to determine whether a given transaction in isolation is fraudulent at the time of authorization, and therefore may have implemented policies and procedures that monitor sets of transactions initiated with a cardholder’s debit card. For example, an issuer could compare a set of transactions initiated with the card to a customer’s typical transactions in order to determine whether a transaction is likely to be fraudulent. Similarly, an issuer could compare a set of transactions initiated with a debit card and common fraud patterns in order to determine whether a transaction or future transaction is likely to be fraudulent.
iii. Practices to support reporting of lost and stolen cards or suspected incidences of fraud by cardholders or other parties to a transaction. As an example, an issuer may promote customer awareness by providing text alerts of transactions in order to detect fraudulent transactions in a timely manner. An issuer may also report debit cards suspected of being fraudulent to their networks for inclusion in a database of potentially compromised cards.
1. Tracking its fraudulent electronic debit transactions over time enables an issuer to assess whether its policies and procedures are effective. Accordingly, an issuer must include policies and procedures designed to monitor trends in the number and value of its fraudulent electronic debit transactions. An effective monitoring program would include tracking issuer losses from fraudulent electronic debit transactions, fraud-related chargebacks to acquirers, losses passed on to cardholders, and any other reimbursements from other parties. Other reimbursements could include payments made to issuers as a result of fines assessed to merchants for noncompliance with Payment Card Industry (PCI) Data Security Standards or other industry standards. An issuer should also establish procedures to track fraud-related information necessary to perform its reviews under § 235.4(b)(3) and to retain and report information as required under § 235.8.
1. An issuer may identify transactions that it suspects to be fraudulent after it has authorized or settled the transaction. For example, a cardholder may inform the issuer that the cardholder did not initiate a transaction or transactions, or the issuer may learn of a fraudulent transaction or possibly compromised debit cards from the network, the acquirer, or other parties. An issuer must implement policies and procedures designed to provide an appropriate response once an issuer has identified suspicious transactions to reduce the occurrence of future fraudulent electronic debit transactions and the costs associated with such transactions. The appropriate response may differ depending on the facts and circumstances, including the issuer’s assessment of the risk of future fraudulent electronic debit transactions. For example, in some circumstances, it may be sufficient for an issuer to monitor more closely the account with the suspicious transactions. In other circumstances, it may be necessary to contact the cardholder to verify a transaction, reissue a card, or close an account. An appropriate response may also require coordination with industry organizations, law enforcement agencies, and other parties, such as payment card networks, merchants, and issuer or merchant processors.
1. An issuer must implement policies and procedures designed to secure debit card and cardholder data. These policies and procedures should apply to data that are transmitted by the issuer (or its service provider) during transaction processing, that are stored by the issuer (or its service provider), and that are carried on media (e.g., laptops, transportable data storage devices) by employees or agents of the issuer. This standard may be incorporated into an issuer’s information security program, as required by Section 501(b) of the Gramm-Leach-Bliley Act.
1. i. An issuer’s assessment of the effectiveness of its policies and procedures should consider whether they are reasonably designed to reduce the number and value of fraudulent electronic debit transactions relative to non-fraudulent electronic debit transactions and are cost effective. (See comment 4(b)(1)-3 and comment 4(b)(1)-5).
ii. An issuer must also assess its policies and procedures in light of changes in fraud types (e.g., the use of counterfeit cards, lost or stolen cards) and methods (e.g., common purchase patterns indicating possible fraudulent behavior), as well as changes in the available methods of detecting and preventing fraudulent electronic debit transactions (e.g., transaction monitoring, authentication methods) as part of its periodic review of its policies and procedures. An issuer’s review of its policies and procedures must consider information from the issuer’s own experience and that the issuer otherwise identified itself; information from payment card networks, law enforcement agencies, and fraud-monitoring groups in which the issuer participates; and supervisory guidance. For example, an issuer should consider warnings and alerts it receives from payment card networks regarding compromised cards and data breaches.
2. An issuer should review its policies and procedures and their implementation more frequently than annually if the issuer determines that more frequent review is appropriate based on information obtained from monitoring its fraudulent electronic debit transactions, changes in the types or methods of fraud, or available methods of detecting and preventing fraudulent electronic debit transactions. (See § 235.4(b)(1)(ii) and commentary thereto.)
3. In light of an issuer’s review of its policies and procedures, and their implementation, the issuer may determine that updates to its policies and procedures, and their implementation, are necessary. Merely determining that updates are necessary does not render an issuer ineligible to receive or charge the fraud-prevention adjustment. To remain eligible to receive or charge a fraud-prevention adjustment, however, an issuer should develop and implement such updates as soon as reasonably practicable, in light of the facts and circumstances.
1. Payment card networks that plan to allow issuers to receive or charge a fraud-prevention adjustment can develop processes for identifying issuers eligible for this adjustment. Each issuer that wants to be eligible to receive or charge a fraud-prevention adjustment must notify annually the payment card networks in which it participates of its compliance through the networks’ processes.
1. Eligibility for multiple exemptions. An electronic debit transaction may qualify for one or more exemptions. For example, a debit card that has been provided to a person pursuant to a Federal, State, or local government-administered payment program may be issued by an entity that, together with its affiliates, has assets of less than $10 billion as of the end of the preceding calendar year. In this case, an electronic debit transaction made using that card may qualify for the exemption under § 235.5(a) for small issuers or for the exemption under § 235.5(b) for government-administered payment programs. A payment card network establishing interchange fees for transactions that qualify for more than one exemption need only satisfy itself that the issuer’s transactions qualify for at least one of the exemptions in order to exempt the electronic debit transaction from the interchange fee restrictions.
2. Certification process. Payment card networks that plan to allow issuers to receive higher interchange fees than permitted under §§ 235.3 and 235.4 pursuant to one of the exemptions in § 235.5 could develop their own processes for identifying issuers and products eligible for such exemptions. Section 235.5(a)(2) permits payment card networks to rely on lists published by the Board to help determine eligibility for the small issuer exemption set forth in § 235.5(a)(1).
1. Asset size determination. An issuer would qualify for the small-issuer exemption if its total worldwide banking and nonbanking assets, including assets of affiliates, other than trust assets under management, are less than $10 billion, as of December 31 of the preceding calendar year.
2. Change in status. If an exempt issuer becomes covered based on its and its affiliates assets at the end of a calendar year, that issuer must begin complying with the interchange fee standards (§ 235.3), the fraud-prevention adjustment standards (to the extent the issuer wishes to receive a fraud-prevention adjustment) (§ 235.4), and the provisions prohibiting circumvention, evasion, and net compensation (§ 235.6) no later than July 1.
1. Government-administered payment program. A program is considered government-administered regardless of whether a Federal, State, or local government agency operates the program or outsources some or all functions to third parties so long as the program is operated on behalf of the government agency. In addition, a program may be government-administered even if a Federal, State, or local government agency is not the source of funds for the program it administers. For example, child support programs are government-administered programs even though a Federal, State, or local government agency is not the source of funds. A tribal government is considered a local government for purposes of this exemption.
1. Subaccount clarified. A subaccount is an account within an account, opened in the name of an agent, nominee, or custodian for the benefit of two or more cardholders, where the transactions and balances of individual cardholders are tracked in such subaccounts. An account that is opened solely in the name of a single cardholder is not a subaccount.
2. Reloadable. A general-use prepaid card is “reloadable” if the terms and conditions of the agreement permit funds to be added to the general-use prepaid card at any time after the initial purchase or issuance. A general-use prepaid card is not “reloadable” merely because the issuer or processor is technically able to add functionality that would otherwise enable the general-use prepaid card to be reloaded.
3. Marketed or labeled as a gift card or gift certificate. i. Electronic debit transactions made using a reloadable general-use prepaid card are not exempt from the interchange fee restrictions if the card is marketed or labeled as a gift card or gift certificate. The term “marketed or labeled as a gift card or gift certificate” means directly or indirectly offering, advertising or otherwise suggesting the potential use of a general-use prepaid card as a gift for another person. Whether the exclusion applies generally does not depend on the type of entity that makes the promotional message. For example, a card may be marketed or labeled as a gift card or gift certificate if anyone (other than the purchaser of the card), including the issuer, the retailer, the program manager that may distribute the card, or the payment network on which a card is used, promotes the use of the card as a gift card or gift certificate. A general-use prepaid card is marketed or labeled as a gift card or gift certificate even if it is only occasionally marketed as a gift card or gift certificate. For example, a network-branded general purpose reloadable card would be marketed or labeled as a gift card or gift certificate if the issuer principally advertises the card as a less costly alternative to a bank account but promotes the card in a television, radio, newspaper, or Internet advertisement, or on signage as “the perfect gift” during the holiday season.
ii. The mere mention of the availability of gift cards or gift certificates in an advertisement or on a sign that also indicates the availability of exempted general-use prepaid cards does not by itself cause the general-use prepaid card to be marketed as a gift card or a gift certificate. For example, the posting of a sign in a store that refers to the availability of gift cards does not by itself constitute the marketing of otherwise exempted general-use prepaid cards that may also be sold in the store along with gift cards or gift certificates, provided that a person acting reasonably under the circumstances would not be led to believe that the sign applies to all cards sold in the store. (See, however, comment 5(c)-4.ii.)
4. Examples of marketed or labeled as a gift card or gift certificate.
i. The following are examples of marketed or labeled as a gift card or gift certificate:
A. Using the word “gift” or “present” on a card or accompanying material, including documentation, packaging and promotional displays;
B. Representing or suggesting that a card can be given to another person, for example, as a “token of appreciation” or a “stocking stuffer,” or displaying a congratulatory message on the card or accompanying material;
C. Incorporating gift-giving or celebratory imagery or motifs, such as a bow, ribbon, wrapped present, candle, or a holiday or congratulatory message, on a card, accompanying documentation, or promotional material;
ii. The term does not include the following:
A. Representing that a card can be used as a substitute for a checking, savings, or deposit account;
B. Representing that a card can be used to pay for a consumer’s health-related expenses – for example, a card tied to a health savings account;
C. Representing that a card can be used as a substitute for travelers checks or cash;
D. Representing that a card can be used as a budgetary tool, for example, by teenagers, or to cover emergency expenses.
5. Reasonable policies and procedures to avoid marketing as a gift card. The exemption for a general-use prepaid card that is reloadable and not marketed or labeled as a gift card or gift certificate in § 235.5(c) applies if a reloadable general-use prepaid card is not marketed or labeled as a gift card or gift certificate and if persons involved in the distribution or sale of the card, including issuers, program managers, and retailers, maintain policies and procedures reasonably designed to avoid such marketing. Such policies and procedures may include contractual provisions prohibiting a reloadable general-use prepaid card from being marketed or labeled as a gift card or gift certificate, merchandising guidelines or plans regarding how the product must be displayed in a retail outlet, and controls to regularly monitor or otherwise verify that the general-use prepaid card is not being marketed as a gift card. Whether a general-use prepaid card has been marketed as a gift card or gift certificate will depend on the facts and circumstances, including whether a reasonable person would be led to believe that the general-use prepaid card is a gift card or gift certificate. The following examples illustrate the application of § 235.5(c):
i. An issuer or program manager of prepaid cards agrees to sell general-purpose reloadable cards through a retailer. The contract between the issuer or program manager and the retailer establishes the terms and conditions under which the cards may be sold and marketed at the retailer. The terms and conditions prohibit the general-purpose reloadable cards from being marketed as a gift card or gift certificate, and require policies and procedures to regularly monitor or otherwise verify that the cards are not being marketed as such. The issuer or program manager sets up one promotional display at the retailer for gift cards and another physically separated display for exempted products under § 235.5(c), including general-purpose reloadable cards, such that a reasonable person would not believe that the exempted cards are gift cards. The exemption in § 235.5(c) applies because policies and procedures reasonably designed to avoid the marketing of the general-purpose reloadable cards as gift cards or gift certificates are maintained, even if a retail clerk inadvertently stocks or a consumer inadvertently places a general-purpose reloadable card on the gift card display.
ii. Same facts as in comment 5(c)-5.i, except that the issuer or program manager sets up a single promotional display at the retailer on which a variety of prepaid cards are sold, including store gift cards and general-purpose reloadable cards. A sign stating “Gift Cards” appears prominently at the top of the display. The exemption in § 235.5(c) does not apply with respect to the general-purpose reloadable cards because policies and procedures reasonably designed to avoid the marketing of exempted cards as gift cards or gift certificates are not maintained.
iii. Same facts as in comment 5(c)-5.i, except that the issuer or program manager sets up a single promotional multi-sided display at the retailer on which a variety of prepaid card products, including store gift cards and general-purpose reloadable cards are sold. Gift cards are segregated from exempted cards, with gift cards on one side of the display and exempted cards on a different side of a display. Signs of equal prominence at the top of each side of the display clearly differentiate between gift cards and the other types of prepaid cards that are available for sale. The retailer does not use any more conspicuous signage suggesting the general availability of gift cards, such as a large sign stating “Gift Cards” at the top of the display or located near the display. The exemption in § 235.5(c) applies because policies and procedures reasonably designed to avoid the marketing of the general-purpose reloadable cards as gift cards or gift certificates are maintained, even if a retail clerk inadvertently stocks or a consumer inadvertently places a general-purpose reloadable card on the gift card display.
iv. Same facts as in comment 5(c)-5.i, except that the retailer sells a variety of prepaid card products, including store gift cards and general-purpose reloadable cards, arranged side-by-side in the same checkout lane. The retailer does not affirmatively indicate or represent that gift cards are available, such as by displaying any signage or other indicia at the checkout lane suggesting the general availability of gift cards. The exemption in § 235.5(c) applies because policies and procedures reasonably designed to avoid marketing the general-purpose reloadable cards as gift cards or gift certificates are maintained.
6. On-line sales of prepaid cards. Some web sites may prominently advertise or promote the availability of gift cards or gift certificates in a manner that suggests to a consumer that the web site exclusively sells gift cards or gift certificates. For example, a web site may display a banner advertisement or a graphic on the home page that prominently states “Gift Cards,” “Gift Giving,” or similar language without mention of other available products, or use a web address that includes only a reference to gift cards or gift certificates in the address. In such a case, a consumer acting reasonably under the circumstances could be led to believe that all prepaid products sold on the web site are gift cards or gift certificates. Under these facts, the web site has marketed all such products as gift cards or gift certificates, and the exemption in § 235.5(c) does not apply to any products sold on the web site.
7. Temporary non-reloadable cards issued in connection with a general-use reloadable card. Certain general-purpose prepaid cards that are typically marketed as an account substitute initially may be sold or issued in the form of a temporary non-reloadable card. After the card is purchased, the cardholder is typically required to call the issuer to register the card and to provide identifying information in order to obtain a reloadable replacement card. In most cases, the temporary non-reloadable card can be used for purchases until the replacement reloadable card arrives and is activated by the cardholder. Because the temporary non-reloadable card may only be obtained in connection with the reloadable card, the exemption in § 235.5(c) applies so long as the card is not marketed as a gift card or gift certificate.
1. Additional ATM access. Some debit cards may be used to withdraw cash from ATMs that are not part of the issuer’s designated ATM network. An electronic debit card transaction may still qualify for the exemption under §§ 235.5(b) or (c) with a respect to a card for which a fee may be imposed for a withdrawal from an ATM that is outside of the issuer’s designated ATM network as long as the card complies with the condition set forth in § 235.5(d)(2) for withdrawals within the issuer’s designated ATM network. The condition with respect to ATM fees does not apply to cards that do not provide ATM access.
1. No applicability to exempt issuers or electronic debit transactions. The prohibition against circumventing or evading the interchange transaction fee restrictions or against net compensation does not apply to issuers or electronic debit transactions that qualify for an exemption under § 235.5 from the interchange transaction fee restrictions.
1. Finding of circumvention or evasion. A finding of evasion or circumvention will depend on all relevant facts and circumstances. Although net compensation may be one form of circumvention or evasion prohibited under § 235.6(a), it is not the only form.
2. Examples of circumstances that may constitute circumvention or evasion.
The following examples do not constitute per se circumvention or evasion, but may warrant additional supervisory scrutiny to determine whether the totality of the facts and circumstances constitute circumvention or evasion:
i. A payment card network decreases network processing fees paid by issuers for electronic debit transactions by 50 percent and increases the network processing fees charged to merchants or acquirers with respect to electronic debit transactions by a similar amount. Because the requirements of this subpart do not restrict or otherwise establish the amount of fees that a network may charge for its services, the increase in network fees charged to merchants or acquirers and decrease in fees charged to issuers is not a per se circumvention or evasion of the interchange transaction fee standards, but may warrant additional supervisory scrutiny to determine whether the facts and circumstances constitute circumvention or evasion.
ii. An issuer replaces its debit cards with prepaid cards that are exempt from the interchange limits of §§ 235.3 and 235.4. The exempt prepaid cards are linked to its customers’ transaction accounts and funds are swept from the transaction accounts to the prepaid accounts as needed to cover transactions made. Again, this arrangement is not per se circumvention or evasion, but may warrant additional supervisory scrutiny to determine whether the facts and circumstances constitute circumvention or evasion.
1. Net compensation. Net compensation to an issuer through the use of network fees is prohibited.
2. Consideration of payments or incentives provided by the network in net compensation determination.
i. For purposes of the net compensation determination, payments or incentives paid by a payment card network to an issuer with respect to electronic debit transactions or debit card related activities could include, but are not limited to, marketing incentives; payments or rebates for meeting or exceeding a specific transaction volume, percentage share, or dollar amount of transactions processed; or other payments for debit card related activities. For example, signing bonuses paid by a network to an issuer for the issuer’s debit card portfolio would also be included in the total amount of payments or incentives received by an issuer from a payment card network with respect to electronic debit transactions. A signing bonus for an entire card portfolio, including credit cards, may be allocated to the issuer’s debit card business based on the proportion of the cards or transactions that are debit cards or electronic debit transactions, as appropriate to the situation, for purposes of the net compensation determination.
ii. Incentives paid by the network with respect to multiple-year contracts may be allocated over the life of the contract.
iii. For purposes of the net compensation determination, payments or incentives paid by a payment card network with respect to electronic debit transactions or debit card-related activities do not include interchange transaction fees that are passed through to the issuer by the network, or discounts or rebates provided by the network or an affiliate of the network for issuer-processor services. In addition, funds received by an issuer from a payment card network as a result of chargebacks, fines paid by merchants or acquirers for violations of network rules, or settlements or recoveries from merchants or acquirers to offset the costs of fraudulent transactions or a data security breach do not constitute incentives or payments made by a payment card network.
3. Consideration of fees paid by an issuer in net compensation determination.
i. For purposes of the net compensation determination, fees paid by an issuer to a payment card network with respect to electronic debit transactions or debit card related activities include, but are not limited to, membership or licensing fees, network administration fees, and fees for optional network services, such as risk management services.
ii. For purposes of the net compensation determination, fees paid by an issuer to a payment card network with respect to electronic debit transactions or debit card-related activities do not include network processing fees (such as switch fees and network connectivity fees) or fees paid to an issuer processor affiliated with the network for authorizing, clearing, or settling an electronic debit transaction.
4. Example of circumstances not involving net compensation to the issuer. The following example illustrates circumstances that would not indicate net compensation by the payment card network to the issuer:
i. Because of an increase in debit card transactions that are processed through a payment card network during a calendar year, an issuer receives an additional volume-based incentive payment from the network for that period. Over the same period, however, the total network fees (other than processing fees) the issuer pays the payment card network with respect to debit card transactions also increase so that the total amount of fees paid by the issuer to the network continue to exceed incentive payments by the network to the issuer. Under these circumstances, the issuer does not receive net compensation from the network for electronic debit transactions or debit card related activities.
1. Application of small issuer, government-administered payment program, and reloadable card exemptions to payment card network restrictions. The exemptions under § 235.5 for small issuers, cards issued pursuant to government-administered payment programs, and certain reloadable prepaid cards do not apply to the limitations on payment card network restrictions. For example, debit cards for government-administered payment programs, although exempt from the restrictions on interchange transaction fees, are subject to the requirement that electronic debit transactions made using such cards must be capable of being processed on at least two unaffiliated payment card networks and to the prohibition on inhibiting a merchant’s ability to determine the routing for electronic debit transactions.
1. Scope of restriction. Section 235.7(a) requires a debit card subject to the regulation to be enabled on at least two unaffiliated payment card networks. This paragraph does not, however, require an issuer to have two or more unaffiliated networks available for each method of cardholder authentication. For example, it is sufficient for an issuer to issue a debit card that operates on one signature-based card network and on one PIN-based card network, as long as the two card networks are not affiliated. Alternatively, an issuer may issue a debit card that is accepted on two unaffiliated signature-based card networks or on two unaffiliated PIN-based card networks. See also, comment 7(a)-7.
2. Permitted networks. i. A smaller payment card network could be used to help satisfy the requirement that an issuer enable two unaffiliated networks if the network was willing to expand its coverage in response to increased merchant demand for access to its network and it meets the other requirements for a permitted arrangement, including taking steps reasonably designed to enable it to process the electronic debit transactions that it would reasonably expect to be routed to it. If, however, the network’s policy or practice is to limit such expansion, it would not qualify as one of the two unaffiliated networks.
ii. A payment card network that is accepted only at a limited category of merchants (such as a particular grocery store chain, merchants located in a particular shopping mall, or a single class of merchants, such as grocery stores or gas stations) would not satisfy the rule.
iii. One of the steps a network can take to form a reasonable expectation of transaction volume is to consider factors such as the number of cards expected to be issued that are enabled on the network and expected card usage patterns.
3. Examples of prohibited network restrictions on an issuer’s ability to contract. The following are examples of prohibited network restrictions on an issuer’s ability to contract with other payment card networks:
i. Network rules or contract provisions limiting or otherwise restricting the other payment card networks that may be enabled on a particular debit card, or network rules or contract provisions that specify the other networks that may be enabled on a particular debit card.
ii. Network rules or guidelines that allow only that network’s (or its affiliated network’s) brand, mark, or logo to be displayed on a particular debit card, or that otherwise limit the ability of brands, marks, or logos of other payment card networks to appear on the debit card.
4. Network logos or symbols on card not required. Section 235.7(a) does not require that a debit card display the brand, mark, or logo of each payment card network over which an electronic debit transaction may be processed. For example, this rule does not require a debit card that is enabled for two or more unaffiliated payment card networks to bear the brand, mark, or logo for each card network.
5. Voluntary exclusivity arrangements prohibited. Section 235.7(a) requires the issuance of debit cards that are enabled on at least two unaffiliated payment card networks, even if the issuer is not subject to any rule of, or contract or other agreement with, a payment card network requiring that all or a specified minimum percentage of electronic debit transactions be processed on the network or its affiliated networks.
6. Affiliated payment card networks. Section 235.7(a) does not prohibit an issuer from including an affiliated payment card network among the networks that may process an electronic debit transaction with respect to a particular debit card, as long as at least two of the networks that are enabled on the card are unaffiliated. For example, an issuer may offer debit cards that are accepted on a payment card network for signature debit transactions and on an affiliated payment card network for PIN debit transactions as long as those debit cards may also be accepted on another unaffiliated payment card network.
7. Application of rule regardless of form factor. The network exclusivity provisions in § 235.7(a) require that all debit cards be enabled on at least two unaffiliated payment card networks for electronic debit transactions, regardless of whether the debit card is issued in card form. This applies to any supplemental device, such as a fob or token, or chip or application in a mobile phone, that is issued in connection with a plastic card, even if that plastic card fully complies with the rule.
1. Relationship to the network exclusivity restrictions. An issuer or payment card network is prohibited from inhibiting a merchant’s ability to route or direct an electronic debit transaction over any of the payment card networks that the issuer has enabled to process an electronic debit transaction for that particular debit card. This rule does not permit a merchant to route the transaction over a network that the issuer did not enable to process transactions using that debit card.
2. Examples of prohibited merchant restrictions. The following are examples of issuer or network practices that would inhibit a merchant’s ability to direct the routing of an electronic debit transaction that are prohibited under § 235.7(b):
i. Prohibiting a merchant from encouraging or discouraging a cardholder’s use of a particular method of debit card authorization, such as rules prohibiting merchants from favoring a cardholder’s use of PIN debit over signature debit, or from discouraging the cardholder’s use of signature debit.
ii. Establishing network rules or designating issuer priorities directing the processing of an electronic debit transaction on a specified payment card network or its affiliated networks, or directing the processing of the transaction away from a specified network or its affiliates, except as a default rule in the event the merchant, or its acquirer or processor, does not designate a routing preference, or if required by state law.
iii. Requiring a specific payment card network based on the type of access device provided to the cardholder by the issuer.
3. Merchant payments not prohibited. A payment card network does not restrict a merchant’s ability to route transactions over available payment card networks in violation of § 235.7(b) by offering payments or other incentives to encourage the merchant to route electronic debit card transactions to the network for processing.
4. Real-time routing decision not required. A merchant need not make network routing decisions on a transaction-by-transaction basis. A merchant and its acquirer or processor may agree to a pre-determined set of routing choices that apply to all electronic debit transactions that are processed by the acquirer or processor on behalf of the merchant.
5. No effect on network rules governing the routing of subsequent transactions. Section 235.7 does not supersede a network rule that requires a chargeback or return of an electronic debit transaction to be processed on the same network that processed the original transaction.
1. Health care and employee benefit cards. Section 235.7(c)(1) delays the effective date of the network exclusivity provisions for certain debit cards issued in connection with a health care or employee benefit account to the extent such cards use (even if not required) transaction substantiation or qualification authorization systems at point of sale to verify that the card is only used for eligible goods and services for purposes of qualifying for favorable tax treatment under Internal Revenue Code requirements. Debit cards that may qualify for the delayed effective date include, but may not be limited to, cards issued in connection with flexible spending accounts established under section 125 of the Internal Revenue Code for health care related expenses and health reimbursement accounts established under section 105 of the Internal Revenue Code.
[Reserved]
[Reserved]
[Reserved]
PART 237 – SWAPS MARGIN AND SWAPS PUSH-OUT (REGULATION KK)
Subpart A – Margin and Capital Requirements for Covered Swap Entities (Regulation KK)
§ 237.1 Authority, purpose, scope, exemptions and compliance dates.
(a) Authority. This subpart (Regulation KK) is issued by the Board of Governors of the Federal Reserve System (Board) under section 4s(e) of the Commodity Exchange Act of 1936, as amended (7 U.S.C. 6s(e)), and section 15F(e) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78o-10(e)), as well as under the Federal Reserve Act, as amended (12 U.S.C. 221 et seq.); section 8 of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818); the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1841 et seq.); the International Banking Act of 1978, as amended (12 U.S.C. 3101 et seq.), and the Home Owners’ Loan Act, as amended (1461 et seq.).
(b) Purpose. Section 4s of the Commodity Exchange Act of 1936 (7 U.S.C. 6s) and section 15F of the Securities Exchange Act of 1934 (15 U.S.C. 78o-10) require the Board to establish capital and margin requirements for any state member bank (as defined in 12 CFR 208.2(g)), bank holding company (as defined in 12 U.S.C. 1841), savings and loan holding company (as defined in 12 U.S.C. 1467a (on or after the transfer established under Section 311 of the Dodd-Frank Act) (12 U.S.C. 5411)), foreign banking organization (as defined in 12 CFR 211.21(o)), foreign bank that does not operate an insured branch, state branch or state agency of a foreign bank (as defined in 12 U.S.C. 3101(b)(11) and (12)), or Edge or agreement corporation (as defined in 12 CFR 211.1(c)(2) and (3)) that is registered as a swap dealer, major swap participant, security-based swap dealer, or major security-based swap participant with respect to all non-cleared swaps and non-cleared security-based swaps. This subpart implements section 4s of the Commodity Exchange Act of 1936 and section 15F of the Securities Exchange Act of 1934 by defining terms used in the statute and related terms, establishing capital and margin requirements, and explaining the statutes’ requirements.
(c) Scope. This subpart establishes minimum capital and margin requirements for each covered swap entity subject to this subpart with respect to all non-cleared swaps and non-cleared security-based swaps. This subpart applies to any non-cleared swap or non-cleared security-based swap entered into by a covered swap entity on or after the relevant compliance date set forth in paragraph (e) of this section. Nothing in this subpart is intended to prevent a covered swap entity from collecting margin in amounts greater than are required under this subpart.
(d) Exemptions – (1) Swaps. The requirements of this subpart (except for § 237.12) shall not apply to a non-cleared swap if the counterparty:
(i) Qualifies for an exception from clearing under section 2(h)(7)(A) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(7)(A)) and implementing regulations;
(ii) Qualifies for an exemption from clearing under a rule, regulation, or order that the Commodity Futures Trading Commission issued pursuant to its authority under section 4(c)(1) of the Commodity Exchange Act of 1936 (7 U.S.C. 6(c)(1)) concerning cooperative entities that would otherwise be subject to the requirements of section 2(h)(1)(A) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(1)(A)); or
(iii) Satisfies the criteria in section 2(h)(7)(D) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(7)(D)) and implementing regulations.
(2) Security-based swaps. The requirements of this subpart (except for § 237.12) shall not apply to a non-cleared security-based swap if the counterparty:
(i) Qualifies for an exception from clearing under section 3C(g)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(1)) and implementing regulations; or
(ii) Satisfies the criteria in section 3C(g)(4) of the Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(4)) and implementing regulations.
(e) Compliance dates. Covered swap entities shall comply with the minimum margin requirements of this subpart on or before the following dates for non-cleared swaps and non-cleared security-based swaps entered into on or after the following dates:
(1) September 1, 2016 with respect to the requirements in § 237.3 for initial margin and § 237.4 for variation margin for any non-cleared swaps and non-cleared security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an average daily aggregate notional amount of non-cleared swaps, non-cleared security-based swaps, foreign exchange forwards and foreign exchange swaps for March, April and May 2016 that exceeds $3 trillion, where such amounts are calculated only for business days; and
(iii) In calculating the amounts in paragraphs (e)(1)(i) and (ii) of this section, an entity shall count the average daily aggregate notional amount of a non-cleared swap, a non-cleared security-based swap, a foreign exchange forward or a foreign exchange swap between the entity and an affiliate only one time, and shall not count a swap or security-based swap that is exempt pursuant to paragraph (d) of this section.
(2) March 1, 2017 with respect to the requirements in § 237.4 for variation margin for any other covered swap entity with respect to non-cleared swaps and non-cleared security-based swaps entered into with any other counterparty.
(3) September 1, 2017 with respect to the requirements in § 237.3 for initial margin for any non-cleared swaps and non-cleared security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an average daily aggregate notional amount of non-cleared swaps, non-cleared security-based swaps, foreign exchange forwards and foreign exchange swaps for March, April and May 2017 that exceeds $2.25 trillion, where such amounts are calculated only for business days; and
(iii) In calculating the amounts in paragraphs (e)(3)(i) and (ii) of this section, an entity shall count the average daily aggregate notional amount of a non-cleared swap, a non-cleared security-based swap, a foreign exchange forward or a foreign exchange swap between the entity and an affiliate only one time, and shall not count a swap or security-based swap that is exempt pursuant to paragraph (d) of this section.
(4) September 1, 2018 with respect to the requirements in § 237.3 for initial margin for any non-cleared swaps and non-cleared security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an average daily aggregate notional amount of non-cleared swaps, non-cleared security-based swaps, foreign exchange forwards and foreign exchange swaps for March, April and May 2018 that exceeds $1.5 trillion, where such amounts are calculated only for business days; and
(iii) In calculating the amounts in paragraphs (e)(4)(i) and (ii) of this section, an entity shall count the average daily aggregate notional amount of a non-cleared swap, a non-cleared security-based swap, a foreign exchange forward or a foreign exchange swap between the entity and an affiliate only one time, and shall not count a swap or security-based swap that is exempt pursuant to paragraph (d) of this section.
(5) September 1, 2019 with respect to the requirements in § 237.3 for initial margin for any non-cleared swaps and non-cleared security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an average daily aggregate notional amount of non-cleared swaps, non-cleared security-based swaps, foreign exchange forwards and foreign exchange swaps for March, April and May 2019 that exceeds $0.75 trillion, where such amounts are calculated only for business days; and
(iii) In calculating the amounts in paragraphs (e)(5)(i) and (ii) of this section, an entity shall count the average daily aggregate notional amount of a non-cleared swap, a non-cleared security-based swap, a foreign exchange forward or a foreign exchange swap between the entity and an affiliate only one time, and shall not count a swap or security-based swap that is exempt pursuant to paragraph (d) of this section.
(6) September 1, 2021 with respect to requirements in § 237.3 for initial margin for any non-cleared swaps and non-cleared security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an average daily aggregate notional amount of non-cleared swaps, foreign exchange forwards and foreign exchange swaps for March, April and May 2021 that exceeds $50 billion, where such amounts are calculated only for business days; and
(iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii) of this section, an entity shall count the average daily aggregate notional amount of a non-cleared swap, a non-cleared security-based swap, a foreign exchange forward or a foreign exchange swap between the entity and an affiliate only one time, and shall not count a swap or security-based swap that is exempt pursuant to paragraph (d) of this section.
(7) September 1, 2022 with respect to requirements in § 237.3 for initial margin for any other covered swap entity with respect to non-cleared swaps and non-cleared security-based swaps entered into with any other counterparty.
(f) Once a covered swap entity must comply with the margin requirements for non-cleared swaps and non-cleared security-based swaps with respect to a particular counterparty based on the compliance dates in paragraph (e) of this section, the covered swap entity shall remain subject to the requirements of this subpart with respect to that counterparty.
(g)(1) If a covered swap entity’s counterparty changes its status such that a non-cleared swap or non-cleared security-based swap with that counterparty becomes subject to stricter margin requirements under this subpart (such as if the counterparty’s status changes from a financial end user without material swaps exposure to a financial end user with material swaps exposure), then the covered swap entity shall comply with the stricter margin requirements for any non-cleared swap or non-cleared security-based swap entered into with that counterparty after the counterparty changes its status.
(2) If a covered swap entity’s counterparty changes its status such that a non-cleared swap or non-cleared security-based swap with that counterparty becomes subject to less strict margin requirements under this subpart (such as if the counterparty’s status changes from a financial end user with material swaps exposure to a financial end user without material swaps exposure), then the covered swap entity may comply with the less strict margin requirements for any non-cleared swap or non-cleared security-based swap entered into with that counterparty after the counterparty changes its status as well as for any outstanding non-cleared swap or non-cleared security-based swap entered into after the applicable compliance date in paragraph (e) of this section and before the counterparty changed its status.
(h) Legacy swaps. Covered swaps entities are required to comply with the requirements of this subpart for non-cleared swaps and non-cleared security-based swaps entered into on or after the relevant compliance dates for variation margin and for initial margin established in paragraph (e) of this section. Any non-cleared swap or non-cleared security-based swap entered into before such relevant date shall remain outside the scope of this subpart if amendments are made to the non-cleared swap or non-cleared security-based swap by method of adherence to a protocol, other amendment of a contract or confirmation, or execution of a new contract or confirmation in replacement of and immediately upon termination of an existing contract or confirmation, as follows:
(1) Amendments to the non-cleared swap or non-cleared security-based swap solely to comply with the requirements of 12 CFR part 47, 12 CFR part 252 subpart I, or 12 CFR part 382, as applicable;
(2) The non-cleared swap or non-cleared security based swap was amended under the following conditions:
(i) The swap was originally entered into before the relevant compliance date established in paragraph (e) of this section and one party to the swap booked it at, or otherwise held it at, an entity (including a branch or other authorized form of establishment) located in the United Kingdom;
(ii) The entity in the United Kingdom subsequently arranged to amend the swap, solely for the purpose of transferring it to an affiliate, or a branch or other authorized form of establishment, located in any European Union member state or the United States, in connection with the entity’s planning for or response to the event described in paragraph (h)(2)(iii) of this section, and the transferee is:
(A) A covered swap entity, or
(B) A covered swap entity’s counterparty to the swap, and the counterparty represents to the covered swap entity that the counterparty performed the transfer in compliance with the requirements of paragraphs (h)(2)(i) and (ii) of this section;
(iii) The law of the European Union ceases to apply to the United Kingdom pursuant to Article 50(3) of the Treaty on European Union, without conclusion of a Withdrawal Agreement between the United Kingdom and the European Union pursuant to Article 50(2);
(iv) The amendments do not modify any of the following: The payment amount calculation methods, the maturity date, or the notional amount of the swap;
(v) The amendments cause the transfer to take effect on or after the date of the event described in paragraph (h)(2)(iii) of this section transpires; and
(vi) The amendments cause the transfer to take effect by the later of:
(A) The date that is one year after the date of the event described in paragraph (h)(2)(iii) of this section; or
(B) Such other date permitted by transitional provisions under Article 35 of Commission Delegated Regulation (E.U.) No. 2016/2251, as amended.
(3)(i) Amendments to the non-cleared swap or non-cleared security-based swap that are made solely to accommodate the replacement of:
(A) An interbank offered rate (IBOR) including, but not limited to, the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered Rate (HIBOR);
(B) Any other interest rate that a covered swap entity reasonably expects to be replaced or discontinued or reasonably determines has lost its relevance as a reliable benchmark due to a significant impairment; or
(C) Any other interest rate that succeeds a rate referenced in paragraph (h)(3)(i)(A) or (B) of this section. An amendment made under this paragraph (h)(3)(i)(C) could be one of multiple amendments made under this paragraph (h)(3)(i)(C). For example, an amendment could replace an IBOR with a temporary interest rate and later replace the temporary interest rate with a permanent interest rate.
(ii) Amendments to accommodate replacement of an interest rate described in paragraph (h)(3)(i) of this section may also incorporate spreads or other adjustments to the replacement interest rate and make other necessary technical changes to operationalize the determination of payments or other exchanges of economic value using the replacement interest rate, including changes to determination dates, calculation agents, and payment dates. The changes may not extend the maturity or increase the total effective notional amount of the non-cleared swap or non-cleared security-based swap beyond what is necessary to accommodate the differences between market conventions for an outgoing interest rate and its replacement.
(iii) Amendments to accommodate replacement of an interest rate described in paragraph (h)(3)(i) of this section may also be effectuated through portfolio compression between or among covered swap entities and their counterparties. Portfolio compression under this paragraph is not subject to the limitations in paragraph (h)(4) of this section, but any non-cleared swaps or non-cleared security-based swaps resulting from the portfolio compression may not have a longer maturity or increase the total effective notional amount more than what is necessary to accommodate the differences between market conventions for an outgoing interest rate and its replacement.
(4) Amendments solely to reduce risk or remain risk-neutral through portfolio compression between or among covered swap entities and their counterparties, as long as any non-cleared swaps or non-cleared security-based swaps resulting from the portfolio compression do not:
(i) Exceed the sum of the total effective notional amounts of all of the swaps that were submitted to the compression exercise that had the same or longer remaining maturity as the resulting swap; or
(ii) Exceed the longest remaining maturity of all the swaps submitted to the compression exercise.
(5) The non-cleared swap or non-cleared security-based swap was amended solely for one of the following reasons:
(i) To reflect technical changes, such as addresses, identities of parties for delivery of formal notices, and other administrative or operational provisions as long as they do not alter the non-cleared swap’s or non-cleared security-based swap’s underlying asset or reference, the remaining maturity, or the total effective notional amount; or
(ii) To reduce the notional amount, so long as:
(A) All payment obligations attached to the total effective notional amount being eliminated as a result of the amendment are fully terminated; or
(B) All payment obligations attached to the total effective notional amount being eliminated as a result of the amendment are fully novated to a third party, who complies with applicable margin rules for the novated portion upon the transfer.
§ 237.2 Definitions.
Affiliate. A company is an affiliate of another company if:
(1) Either company consolidates the other on financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles, the International Financial Reporting Standards, or other similar standards;
(2) Both companies are consolidated with a third company on a financial statement prepared in accordance with such principles or standards;
(3) For a company that is not subject to such principles or standards, if consolidation as described in paragraph (1) or (2) of this definition would have occurred if such principles or standards had applied; or
(4) The Board has determined that a company is an affiliate of another company, based on Board’s conclusion that either company provides significant support to, or is materially subject to the risks or losses of, the other company.
Bank holding company has the meaning specified in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841).
Broker has the meaning specified in section 3(a)(4) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)).
Business day means any day other than a Saturday, Sunday, or legal holiday.
Clearing agency has the meaning specified in section 3(a)(23) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(23)).
Company means a corporation, partnership, limited liability company, business trust, special purpose entity, association, or similar organization.
Counterparty means, with respect to any non-cleared swap or non-cleared security-based swap to which a person is a party, each other party to such non-cleared swap or non-cleared security-based swap.
Covered swap entity means any swap entity that is a:
(1) State member bank (as defined in 12 CFR 208.2(g));
(2) Bank holding company (as defined in 12 U.S.C. 1841);
(3) Savings and loan holding company (as defined in 12 U.S.C. 1467a);
(4) Foreign banking organization (as defined in 12 CFR 211.21(o));
(5) Foreign bank that does not operate an insured branch;
(6) State branch or state agency of a foreign bank (as defined in 12 U.S.C. 3101(b)(11) and (12));
(7) Edge or agreement corporation (as defined in 12 CFR 211.1(c)(2) and (3)); or
(8) Covered swap entity as determined by the Board. Covered swap entity would not include an affiliate of an entity listed in paragraphs (1) through (7) of this definition for which the Office of the Comptroller of the Currency or the Federal Deposit Insurance Corporation is the prudential regulator or that is required to be registered with the U.S. Commodity Futures Trading Commission as a swap dealer or major swap participant or with the U.S. Securities and Exchange Commission as a security-based swap dealer or major security-based swap participant.
Cross-currency swap means a swap in which one party exchanges with another party principal and interest rate payments in one currency for principal and interest rate payments in another currency, and the exchange of principal occurs on the date the swap is entered into, with a reversal of the exchange of principal at a later date that is agreed upon when the swap is entered into.
Currency of settlement means a currency in which a party has agreed to discharge payment obligations related to a non-cleared swap, a non-cleared security-based swap, a group of non-cleared swaps, or a group of non-cleared security-based swaps subject to a master agreement at the regularly occurring dates on which such payments are due in the ordinary course.
Day of execution means the calendar day at the time the parties enter into a non-cleared swap or non-cleared security-based swap, provided:
(1) If each party is in a different calendar day at the time the parties enter into the non-cleared swap or non-cleared security-based swap, the day of execution is deemed the latter of the two dates; and
(2) If a non-cleared swap or non-cleared security-based swap is:
(i) Entered into after 4:00 p.m. in the location of a party; or
(ii) Entered into on a day that is not a business day in the location of a party, then the non-cleared swap or non-cleared security-based swap is deemed to have been entered into on the immediately succeeding day that is a business day for both parties, and both parties shall determine the day of execution with reference to that business day.
Dealer has the meaning specified in section 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(5)).
Depository institution has the meaning specified in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
Derivatives clearing organization has the meaning specified in section 1a(15) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(15)).
Eligible collateral means collateral described in § 237.6.
Eligible master netting agreement means a written, legally enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default following any stay permitted by paragraph (2) of this definition, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty;
(2) The agreement provides the covered swap entity the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case,
(i) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than:
(A) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5381 et seq.), the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended (12 U.S.C. 4617), or the Farm Credit Act of 1971, as amended (12 U.S.C. 2183 and 2279cc), or laws of foreign jurisdictions that are substantially similar to the U.S. laws referenced in this paragraph (2)(i)(A) in order to facilitate the orderly resolution of the defaulting counterparty; or
(B) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (2)(i)(A) of this definition; and
(ii) The agreement may limit the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty to the extent necessary for the counterparty to comply with the requirements of part 47, subpart I of part 252 or part 382 of title 12, as applicable;
(3) The agreement does not contain a walkaway clause (that is, a provision that permits a non-defaulting counterparty to make a lower payment than it otherwise would make under the agreement, or no payment at all, to a defaulter or the estate of a defaulter, even if the defaulter or the estate of the defaulter is a net creditor under the agreement); and
(4) A covered swap entity that relies on the agreement for purposes of calculating the margin required by this part must:
(i) Conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that:
(A) The agreement meets the requirements of paragraph (2) of this definition; and
(B) In the event of a legal challenge (including one resulting from default or from receivership, conservatorship, insolvency, liquidation, or similar proceeding), the relevant court and administrative authorities would find the agreement to be legal, valid, binding, and enforceable under the law of the relevant jurisdictions; and
(ii) Establish and maintain written procedures to monitor possible changes in relevant law and to ensure that the agreement continues to satisfy the requirements of this definition.
Financial end user means:
(1) Any counterparty that is not a swap entity and that is:
(i) A bank holding company or an affiliate thereof; a savings and loan holding company; a U.S. intermediate holding company established or designated for purposes of compliance with 12 CFR 252.153; or a nonbank financial institution supervised by the Board of Governors of the Federal Reserve System under Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5323);
(ii) A depository institution; a foreign bank; a Federal credit union or State credit union as defined in section 2 of the Federal Credit Union Act (12 U.S.C. 1752(1) & (6)); an institution that functions solely in a trust or fiduciary capacity as described in section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(D)); an industrial loan company, an industrial bank, or other similar institution described in section 2(c)(2)(H) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(H));
(iii) An entity that is state-licensed or registered as:
(A) A credit or lending entity, including a finance company; money lender; installment lender; consumer lender or lending company; mortgage lender, broker, or bank; motor vehicle title pledge lender; payday or deferred deposit lender; premium finance company; commercial finance or lending company; or commercial mortgage company; except entities registered or licensed solely on account of financing the entity’s direct sales of goods or services to customers;
(B) A money services business, including a check casher; money transmitter; currency dealer or exchange; or money order or traveler’s check issuer;
(iv) A regulated entity as defined in section 1303(20) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended (12 U.S.C. 4502(20)) or any entity for which the Federal Housing Finance Agency or its successor is the primary federal regulator;
(v) Any institution chartered in accordance with the Farm Credit Act of 1971, as amended, 12 U.S.C. 2001 et seq., that is regulated by the Farm Credit Administration;
(vi) A securities holding company; a broker or dealer; an investment adviser as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or a company that has elected to be regulated as a business development company pursuant to section 54(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-53(a));
(vii) A private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80-b-2(a)); an entity that would be an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is deemed not to be an investment company under section 3 of the Investment Company Act of 1940 pursuant to Investment Company Act Rule 3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange Commission;
(viii) A commodity pool, a commodity pool operator, or a commodity trading advisor as defined, respectively, in section 1a(10), 1a(11), and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10), 1a(11), and 1a(12)); a floor broker, a floor trader, or introducing broker as defined, respectively, in 1a(22), 1a(23) and 1a(31) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined in 1a(28) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28));
(ix) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974 (29 U.S.C. 1002);
(x) An entity that is organized as an insurance company, primarily engaged in writing insurance or reinsuring risks underwritten by insurance companies, or is subject to supervision as such by a State insurance regulator or foreign insurance regulator;
(xi) An entity, person or arrangement that is, or holds itself out as being, an entity, person, or arrangement that raises money from investors, accepts money from clients, or uses its own money primarily for the purpose of investing or trading or facilitating the investing or trading in loans, securities, swaps, funds or other assets for resale or other disposition or otherwise trading in loans, securities, swaps, funds or other assets; or
(xii) An entity that would be a financial end user described in paragraph (1) of this definition or a swap entity, if it were organized under the laws of the United States or any State thereof.
(2) The term “financial end user” does not include any counterparty that is:
(i) A sovereign entity;
(ii) A multilateral development bank;
(iii) The Bank for International Settlements;
(iv) An entity that is exempt from the definition of financial entity pursuant to section 2(h)(7)(C)(iii) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(7)(C)(iii)) and implementing regulations; or
(v) An affiliate that qualifies for the exemption from clearing pursuant to section 2(h)(7)(D) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(7)(D)) or section 3C(g)(4) of the Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(4)) and implementing regulations.
Foreign bank means an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States.
Foreign exchange forward has the meaning specified in section 1a(24) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(24)).
Foreign exchange swap has the meaning specified in section 1a(25) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(25)).
Initial margin means the collateral as calculated in accordance with § 237.8 that is posted or collected in connection with a non-cleared swap or non-cleared security-based swap.
Initial margin collection amount means:
(1) In the case of a covered swap entity that does not use an initial margin model, the amount of initial margin with respect to a non-cleared swap or non-cleared security-based swap that is required under appendix A of this subpart; and
(2) In the case of a covered swap entity that uses an initial margin model pursuant to § 237.8, the amount of initial margin with respect to a non-cleared swap or non-cleared security-based swap that is required under the initial margin model.
Initial margin model means an internal risk management model that:
(1) Has been developed and designed to identify an appropriate, risk-based amount of initial margin that the covered swap entity must collect with respect to one or more non-cleared swaps or non-cleared security-based swaps to which the covered swap entity is a party; and
(2) Has been approved by the Board pursuant to § 237.8.
Initial margin threshold amount means an aggregate credit exposure of $50 million resulting from all non-cleared swaps and non-cleared security-based swaps between a covered swap entity and its affiliates, and a counterparty and its affiliates. For purposes of this calculation, an entity shall not count a swap or security-based swap that is exempt pursuant to § 237.1(d).
Major currency means:
(1) United States Dollar (USD);
(2) Canadian Dollar (CAD);
(3) Euro (EUR);
(4) United Kingdom Pound (GBP);
(5) Japanese Yen (JPY);
(6) Swiss Franc (CHF);
(7) New Zealand Dollar (NZD);
(8) Australian Dollar (AUD);
(9) Swedish Kronor (SEK);
(10) Danish Kroner (DKK);
(11) Norwegian Krone (NOK); or
(12) Any other currency as determined by the Board.
Margin means initial margin and variation margin.
Market intermediary means a securities holding company; a broker or dealer; a futures commission merchant as defined in 1a(28) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28)); a swap dealer as defined in section 1a(49) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(49)); or a security-based swap dealer as defined in section 3(a)(71) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(71)).
Material swaps exposure for an entity means that an entity and its affiliates have an average daily aggregate notional amount of non-cleared swaps, non-cleared security-based swaps, foreign exchange forwards, and foreign exchange swaps with all counterparties for June, July, and August of the previous calendar year that exceeds $8 billion, where such amount is calculated only for business days. An entity shall count the average daily aggregate notional amount of a non-cleared swap, a non-cleared security-based swap, a foreign exchange forward or a foreign exchange swap between the entity and an affiliate only one time. For purposes of this calculation, an entity shall not count a swap or security-based swap that is exempt pursuant to § 237.1(d).
Multilateral development bank means the International Bank for Reconstruction and Development, the Multilateral Investment Guarantee Agency, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the European Investment Fund, the Nordic Investment Bank, the Caribbean Development Bank, the Islamic Development Bank, the Council of Europe Development Bank, and any other entity that provides financing for national or regional development in which the U.S. government is a shareholder or contributing member or which the Board determines poses comparable credit risk.
Non-cleared security-based swap means a security-based swap that is not, directly or indirectly, submitted to and cleared by a clearing agency registered with the U.S. Securities and Exchange Commission pursuant to section 17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1) or by a clearing agency that the U.S. Securities and Exchange Commission has exempted from registration by rule or order pursuant to section 17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1).
Non-cleared swap means a swap that is not cleared by a derivatives clearing organization registered with the Commodity Futures Trading Commission pursuant to section 5b(a) of the Commodity Exchange Act of 1936 (7 U.S.C. 7a-1(a)) or by a clearing organization that the Commodity Futures Trading Commission has exempted from registration by rule or order pursuant to section 5b(h) of the Commodity Exchange Act of 1936 (7 U.S.C. 7a-1(h)).
Prudential regulator has the meaning specified in section 1a(39) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(39)).
Savings and loan holding company has the meaning specified in section 10(n) of the Home Owners’ Loan Act (12 U.S.C. 1467a(n)).
Securities holding company has the meaning specified in section 618 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 1850a).
Security-based swap has the meaning specified in section 3(a)(68) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68)).
Sovereign entity means a central government (including the U.S. government) or an agency, department, ministry, or central bank of a central government.
State means any State, commonwealth, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, or the United States Virgin Islands.
Subsidiary. A company is a subsidiary of another company if:
(1) The company is consolidated by the other company on financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles, the International Financial Reporting Standards, or other similar standards;
(2) For a company that is not subject to such principles or standards, if consolidation as described in paragraph (1) of this definition would have occurred if such principles or standards had applied; or
(3) The Board has determined that the company is a subsidiary of another company, based on Board’s conclusion that either company provides significant support to, or is materially subject to the risks of loss of, the other company.
Swap has the meaning specified in section 1a(47) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(47)).
Swap entity means a person that is registered with the Commodity Futures Trading Commission as a swap dealer or major swap participant pursuant to the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or a person that is registered with the U.S. Securities and Exchange Commission as a security-based swap dealer or a major security-based swap participant pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).
U.S. Government-sponsored enterprise means an entity established or chartered by the U.S. government to serve public purposes specified by federal statute but whose debt obligations are not explicitly guaranteed by the full faith and credit of the U.S. government.
Variation margin means collateral provided by one party to its counterparty to meet the performance of its obligations under one or more non-cleared swaps or non-cleared security-based swaps between the parties as a result of a change in value of such obligations since the last time such collateral was provided.
Variation margin amount means the cumulative mark-to-market change in value to a covered swap entity of a non-cleared swap or non-cleared security-based swap, as measured from the date it is entered into (or, in the case of a non-cleared swap or non-cleared security-based swap that has a positive or negative value to a covered swap entity on the date it is entered into, such positive or negative value plus any cumulative mark-to-market change in value to the covered swap entity of a non-cleared swap or non-cleared security-based swap after such date), less the value of all variation margin previously collected, plus the value of all variation margin previously posted with respect to such non-cleared swap or non-cleared security-based swap.
§ 237.3 Initial margin.
(a) Collection of margin. A covered swap entity shall collect initial margin with respect to any non-cleared swap or non-cleared security-based swap from a counterparty that is a financial end user with material swaps exposure or that is a swap entity in an amount that is no less than the greater of:
(1) Zero; or
(2) The initial margin collection amount for such non-cleared swap or non-cleared security-based swap less the initial margin threshold amount (not including any portion of the initial margin threshold amount already applied by the covered swap entity or its affiliates to other non-cleared swaps or non-cleared security-based swaps with the counterparty or its affiliates), as applicable.
(b) Posting of margin. A covered swap entity shall post initial margin with respect to any non-cleared swap or non-cleared security-based swap to a counterparty that is a financial end user with material swaps exposure. Such initial margin shall be in an amount at least as large as the covered swap entity would be required to collect under paragraph (a) of this section if it were in the place of the counterparty.
(c) Timing. A covered swap entity shall comply with the initial margin requirements described in paragraphs (a) and (b) of this section on each business day, for a period beginning on or before the business day following the day of execution and ending on the date the non-cleared swap or non-cleared security-based swap terminates or expires.
(d) Other counterparties. A covered swap entity is not required to collect or post initial margin with respect to any non-cleared swap or non-cleared security-based swap described in § 237.1(d). For any other non-cleared swap or non-cleared security-based swap between a covered swap entity and a counterparty that is neither a financial end user with a material swaps exposure nor a swap entity, the covered swap entity shall collect initial margin at such times and in such forms and such amounts (if any), that the covered swap entity determines appropriately addresses the credit risk posed by the counterparty and the risks of such non-cleared swap or non-cleared security-based swap.
§ 237.4 Variation margin.
(a) General. After the date on which a covered swap entity enters into a non-cleared swap or non-cleared security-based swap with a swap entity or financial end user, the covered swap entity shall collect variation margin equal to the variation margin amount from the counterparty to such non-cleared swap or non-cleared security-based swap when the amount is positive and post variation margin equal to the variation margin amount to the counterparty to such non-cleared swap or non-cleared security-based swap when the amount is negative.
(b) Timing. A covered swap entity shall comply with the variation margin requirements described in paragraph (a) of this section on each business day, for a period beginning on or before the business day following the day of execution and ending on the date the non-cleared swap or non-cleared security based swap terminates or expires.
(c) Other counterparties. A covered swap entity is not required to collect or post variation margin with respect to any non-cleared swap or non-cleared security-based swap described in § 237.1(d). For any other non-cleared swap or non-cleared security-based swap between a covered swap entity and a counterparty that is neither a financial end user nor a swap entity, the covered swap entity shall collect variation margin at such times and in such forms and such amounts (if any), that the covered swap entity determines appropriately addresses the credit risk posed by the counterparty and the risks of such non-cleared swap or non-cleared security-based swap.
§ 237.5 Netting arrangements, minimum transfer amount, and satisfaction of collecting and posting requirements.
(a) Netting arrangements. (1) For purposes of calculating and complying with the initial margin requirements of § 237.3 using an initial margin model as described in § 237.8, or with the variation margin requirements of § 237.4, a covered swap entity may net non-cleared swaps or non-cleared security-based swaps in accordance with this subsection.
(2) To the extent that one or more non-cleared swaps or non-cleared security-based swaps are executed pursuant to an eligible master netting agreement between a covered swap entity and its counterparty that is a swap entity or financial end user, a covered swap entity may calculate and comply with the applicable requirements of this subpart on an aggregate net basis with respect to all non-cleared swaps and non-cleared security-based swaps governed by such agreement, subject to paragraph (a)(3) of this section.
(3)(i) Except as permitted in paragraph (a)(3)(ii) of this section, if an eligible master netting agreement covers non-cleared swaps and non-cleared security-based swaps entered into on or after the applicable compliance date set forth in § 237.1(e) or (g), all the non-cleared swaps and non-cleared security-based swaps covered by that agreement are subject to the requirements of this subpart and included in the aggregate netting portfolio for the purposes of calculating and complying with the margin requirements of this subpart.
(ii) An eligible master netting agreement may identify one or more separate netting portfolios that independently meet the requirements in paragraph (1) of the definition of “Eligible master netting agreement” in § 237.2 and to which collection and posting of margin applies on an aggregate net basis separate from and exclusive of any other non-cleared swaps or non-cleared security-based swaps covered by the eligible master netting agreement. Any such netting portfolio that contains any non-cleared swap or non-cleared security-based swap entered into on or after the applicable compliance date set forth in § 237.1(e) or (g) is subject to the requirements of this subpart. Any such netting portfolio that contains only non-cleared swaps or non-cleared security-based swaps entered into before the applicable compliance date is not subject to the requirements of this subpart.
(4) If a covered swap entity cannot conclude after sufficient legal review with a well-founded basis that the netting agreement described in this section meets the definition of eligible master netting agreement set forth in § 237.2, the covered swap entity must treat the non-cleared swaps and non-cleared security based swaps covered by the agreement on a gross basis for the purposes of calculating and complying with the requirements of this subpart to collect margin, but the covered swap entity may net those non-cleared swaps and non-cleared security-based swaps in accordance with paragraphs (a)(1) through (3) of this section for the purposes of calculating and complying with the requirements of this subpart to post margin.
(b) Minimum transfer amount. Notwithstanding § 237.3 or § 237.4, a covered swap entity is not required to collect or post margin pursuant to this subpart with respect to a particular counterparty unless and until the combined amount of initial margin and variation margin that is required pursuant to this subpart to be collected or posted and that has not yet been collected or posted with respect to the counterparty is greater than $500,000.
(c) Satisfaction of collecting and posting requirements. A covered swap entity shall not be deemed to have violated its obligation to collect or post margin from or to a counterparty under § 237.3, § 237.4, or § 237.6(e) if:
(1) The counterparty has refused or otherwise failed to provide or accept the required margin to or from the covered swap entity; and
(2) The covered swap entity has:
(i) Made the necessary efforts to collect or post the required margin, including the timely initiation and continued pursuit of formal dispute resolution mechanisms, or has otherwise demonstrated upon request to the satisfaction of the Board that it has made appropriate efforts to collect or post the required margin; or
(ii) Commenced termination of the non-cleared swap or non-cleared security-based swap with the counterparty promptly following the applicable cure period and notification requirements.
§ 237.6 Eligible collateral.
(a) Non-cleared swaps and non-cleared security-based swaps with a swap entity. For a non-cleared swap or non-cleared security-based swap with a swap entity, a covered swap entity shall collect initial margin and variation margin required pursuant to this subpart solely in the form of the following types of collateral:
(1) Immediately available cash funds that are denominated in:
(i) U.S. dollars or another major currency; or
(ii) The currency of settlement for the non-cleared swap or non-cleared security-based swap;
(2) With respect to initial margin only:
(i) A security that is issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, the U.S. Department of the Treasury;
(ii) A security that is issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, a U.S. government agency (other than the U.S. Department of Treasury) whose obligations are fully guaranteed by the full faith and credit of the United States government;
(iii) A security that is issued by, or fully guaranteed as to the payment of principal and interest by, the European Central Bank or a sovereign entity that is assigned no higher than a 20 percent risk weight under the capital rules applicable to the covered swap entity as set forth in § 237.12;
(iv) A publicly traded debt security issued by, or an asset-backed security fully guaranteed as to the payment of principal and interest by, a U.S. Government-sponsored enterprise that is operating with capital support or another form of direct financial assistance received from the U.S. government that enables the repayments of the U.S. Government-sponsored enterprise’s eligible securities;
(v) A publicly traded debt security that meets the terms of 12 CFR 1.2(d) and is issued by a U.S. Government-sponsored enterprise not operating with capital support or another form of direct financial assistance from the U.S. government, and is not an asset-backed security;
(vi) A security that is issued by, or fully guaranteed as to the payment of principal and interest by, the Bank for International Settlements, the International Monetary Fund, or a multilateral development bank;
(vii) A security solely in the form of:
(A) Publicly traded debt not otherwise described in paragraph (a)(2) of this section that meets the terms of 12 CFR 1.2(d) and is not an asset-backed security;
(B) Publicly traded common equity that is included in:
(1) The Standard & Poor’s Composite 1500 Index or any other similar index of liquid and readily marketable equity securities as determined by the Board; or
(2) An index that a covered swap entity’s supervisor in a foreign jurisdiction recognizes for purposes of including publicly traded common equity as initial margin under applicable regulatory policy, if held in that foreign jurisdiction;
(viii) Securities in the form of redeemable securities in a pooled investment fund representing the security-holder’s proportional interest in the fund’s net assets and that are issued and redeemed only on the basis of the market value of the fund’s net assets prepared each business day after the security-holder makes its investment commitment or redemption request to the fund, if:
(A) The fund’s investments are limited to the following:
(1) Securities that are issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, the U.S. Department of the Treasury, and immediately-available cash funds denominated in U.S. dollars; or
(2) Securities denominated in a common currency and issued by, or fully guaranteed as to the payment of principal and interest by, the European Central Bank or a sovereign entity that is assigned no higher than a 20 percent risk weight under the capital rules applicable to the covered swap entity as set forth in § 237.12, and immediately-available cash funds denominated in the same currency; and
(B) Assets of the fund may not be transferred through securities lending, securities borrowing, repurchase agreements, reverse repurchase agreements, or other means that involve the fund having rights to acquire the same or similar assets from the transferee; or
(ix) Gold.
(b) Non-cleared swaps and non-cleared security-based swaps with a financial end user. For a non-cleared swap or non-cleared security-based swap with a financial end user, a covered swap entity shall collect and post initial margin and variation margin required pursuant to this subpart solely in the form of the following types of collateral:
(1) Immediately available cash funds that are denominated in:
(i) U.S. dollars or another major currency; or
(ii) The currency of settlement for the non-cleared swap or non-cleared security-based swap;
(2) A security that is issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, the U.S. Department of the Treasury;
(3) A security that is issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, a U.S. government agency (other than the U.S. Department of Treasury) whose obligations are fully guaranteed by the full faith and credit of the United States government;
(4) A security that is issued by, or fully guaranteed as to the payment of principal and interest by, the European Central Bank or a sovereign entity that is assigned no higher than a 20 percent risk weight under the capital rules applicable to the covered swap entity as set forth in § 237.12;
(5) A publicly traded debt security issued by, or an asset-backed security fully guaranteed as to the payment of principal and interest by, a U.S. Government-sponsored enterprise that is operating with capital support or another form of direct financial assistance received from the U.S. government that enables the repayments of the U.S. Government-sponsored enterprise’s eligible securities;
(6) A publicly traded debt security that meets the terms of 12 CFR 1.2(d) and is issued by a U.S. Government-sponsored enterprise not operating with capital support or another form of direct financial assistance from the U.S. government, and is not an asset-backed security;
(7) A security that is issued by, or fully guaranteed as to the payment of principal and interest by, the Bank for International Settlements, the International Monetary Fund, or a multilateral development bank;
(8) A security solely in the form of:
(i) Publicly traded debt not otherwise described in this paragraph (b) that meets the terms of 12 CFR 1.2(d) and is not an asset-backed security;
(ii) Publicly traded common equity that is included in:
(A) The Standard & Poor’s Composite 1500 Index or any other similar index of liquid and readily marketable equity securities as determined by the Board; or
(B) An index that a covered swap entity’s supervisor in a foreign jurisdiction recognizes for purposes of including publicly traded common equity as initial margin under applicable regulatory policy, if held in that foreign jurisdiction;
(9) Securities in the form of redeemable securities in a pooled investment fund representing the security-holder’s proportional interest in the fund’s net assets and that are issued and redeemed only on the basis of the market value of the fund’s net assets prepared each business day after the security-holder makes its investment commitment or redemption request to the fund, if:
(i) The fund’s investments are limited to the following:
(A) Securities that are issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, the U.S. Department of the Treasury, and immediately-available cash funds denominated in U.S. dollars; or
(B) Securities denominated in a common currency and issued by, or fully guaranteed as to the payment of principal and interest by, the European Central Bank or a sovereign entity that is assigned no higher than a 20 percent risk weight under the capital rules applicable to the covered swap entity as set forth in § 237.12, and immediately-available cash funds denominated in the same currency; and
(ii) Assets of the fund may not be transferred through securities lending, securities borrowing, repurchase agreements, reverse repurchase agreements, or other means that involve the fund having rights to acquire the same or similar assets from the transferee; or
(10) Gold.
(c)(1) The value of any eligible collateral collected or posted to satisfy margin requirements pursuant to this subpart is subject to the sum of the following discounts, as applicable:
(i) An 8 percent discount for variation margin collateral denominated in a currency that is not the currency of settlement for the non-cleared swap or non-cleared security-based swap, except for immediately available cash funds denominated in U.S. dollars or another major currency;
(ii) An 8 percent discount for initial margin collateral denominated in a currency that is not the currency of settlement for the non-cleared swap or non-cleared security-based swap, except for eligible types of collateral denominated in a single termination currency designated as payable to the non-posting counterparty as part of the eligible master netting agreement; and
(iii) For variation and initial margin non-cash collateral, the discounts described in appendix B of this subpart.
(2) The value of variation margin or initial margin collateral is computed as the product of the cash or market value of the eligible collateral asset times one minus the applicable discounts pursuant to paragraph (c)(1) of this section expressed in percentage terms. The total value of all variation margin or initial margin collateral is calculated as the sum of those values for each eligible collateral asset.
(d) Notwithstanding paragraphs (a) and (b) of this section, eligible collateral for initial margin and variation margin required by this subpart does not include a security issued by:
(1) The party or an affiliate of the party pledging such collateral;
(2) A bank holding company, a savings and loan holding company, a U.S. intermediate holding company established or designated for purposes of compliance with 12 CFR 252.153, a foreign bank, a depository institution, a market intermediary, a company that would be any of the foregoing if it were organized under the laws of the United States or any State, or an affiliate of any of the foregoing institutions; or
(3) A nonbank financial institution supervised by the Board of Governors of the Federal Reserve System under Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5323).
(e) A covered swap entity shall monitor the market value and eligibility of all collateral collected and posted to satisfy the minimum initial margin and minimum variation margin requirements of this subpart. To the extent that the market value of such collateral has declined, the covered swap entity shall promptly collect or post such additional eligible collateral as is necessary to maintain compliance with the margin requirements of this subpart. To the extent that the collateral is no longer eligible, the covered swap entity shall promptly collect or post sufficient eligible replacement collateral to comply with the margin requirements of this subpart.
(f) A covered swap entity may collect or post initial margin and variation margin that is required by § 237.3(d) or § 237.4(c) or that is not required pursuant to this subpart in any form of collateral.
§ 237.7 Segregation of collateral.
(a) A covered swap entity that posts any collateral other than for variation margin with respect to a non-cleared swap or a non-cleared security-based swap shall require that all funds or other property other than variation margin provided by the covered swap entity be held by one or more custodians that are not the covered swap entity or counterparty and not affiliates of the covered swap entity or the counterparty.
(b) A covered swap entity that collects initial margin required by § 237.3(a) with respect to a non-cleared swap or a non-cleared security-based swap shall require that such initial margin be held by one or more custodians that are not the covered swap entity or counterparty and not affiliates of the covered swap entity or the counterparty.
(c) For purposes of paragraphs (a) and (b) of this section, the custodian must act pursuant to a custody agreement that:
(1) Prohibits the custodian from rehypothecating, repledging, reusing, or otherwise transferring (through securities lending, securities borrowing, repurchase agreement, reverse repurchase agreement or other means) the collateral held by the custodian, except that cash collateral may be held in a general deposit account with the custodian if the funds in the account are used to purchase an asset described in § 237.6(a)(2) or (b), such asset is held in compliance with this § 237.7, and such purchase takes place within a time period reasonably necessary to consummate such purchase after the cash collateral is posted as initial margin; and
(2) Is a legal, valid, binding, and enforceable agreement under the laws of all relevant jurisdictions, including in the event of bankruptcy, insolvency, or a similar proceeding.
(d) Notwithstanding paragraph (c)(1) of this section, a custody agreement may permit the posting party to substitute or direct any reinvestment of posted collateral held by the custodian, provided that, with respect to collateral collected by a covered swap entity pursuant to § 237.3(a) or posted by a covered swap entity pursuant to § 237.3(b), the agreement requires the posting party to:
(1) Substitute only funds or other property that would qualify as eligible collateral under § 237.6, and for which the amount net of applicable discounts described in appendix B of this subpart would be sufficient to meet the requirements of § 237.3; and
(2) Direct reinvestment of funds only in assets that would qualify as eligible collateral under § 237.6, and for which the amount net of applicable discounts described in appendix B of this subpart would be sufficient to meet the requirements of § 237.3.
§ 237.8 Initial margin models and standardized amounts.
(a) Standardized amounts. Unless a covered swap entity’s initial margin model conforms to the requirements of this section, the covered swap entity shall calculate the amount of initial margin required to be collected or posted for one or more non-cleared swaps or non-cleared security-based swaps with a given counterparty pursuant to § 237.3 on a daily basis pursuant to appendix A of this subpart.
(b) Use of initial margin models. A covered swap entity may calculate the amount of initial margin required to be collected or posted for one or more non-cleared swaps or non-cleared security-based swaps with a given counterparty pursuant to § 237.3 on a daily basis using an initial margin model only if the initial margin model meets the requirements of this section.
(c) Requirements for initial margin model. (1) A covered swap entity must obtain the prior written approval of the Board before using any initial margin model to calculate the initial margin required in this subpart.
(2) A covered swap entity must demonstrate that the initial margin model satisfies all of the requirements of this section on an ongoing basis.
(3) A covered swap entity must notify the Board in writing 60 days prior to:
(i) Extending the use of an initial margin model that the Board has approved under this section to an additional product type;
(ii) Making any change to any initial margin model approved by the Board under this section that would result in a material change in the covered swap entity’s assessment of initial margin requirements; or
(iii) Making any material change to modeling assumptions used by the initial margin model.
(4) The Board may rescind its approval of the use of any initial margin model, in whole or in part, or may impose additional conditions or requirements if the Board determines, in its sole discretion, that the initial margin model no longer complies with this section.
(d) Quantitative requirements. (1) The covered swap entity’s initial margin model must calculate an amount of initial margin that is equal to the potential future exposure of the non-cleared swap, non-cleared security-based swap or netting portfolio of non-cleared swaps or non-cleared security-based swaps covered by an eligible master netting agreement. Potential future exposure is an estimate of the one-tailed 99 percent confidence interval for an increase in the value of the non-cleared swap, non-cleared security-based swap or netting portfolio of non-cleared swaps or non-cleared security-based swaps due to an instantaneous price shock that is equivalent to a movement in all material underlying risk factors, including prices, rates, and spreads, over a holding period equal to the shorter of ten business days or the maturity of the non-cleared swap, non-cleared security-based swap or netting portfolio.
(2) All data used to calibrate the initial margin model must be based on an equally weighted historical observation period of at least one year and not more than five years and must incorporate a period of significant financial stress for each broad asset class that is appropriate to the non-cleared swaps and non-cleared security-based swaps to which the initial margin model is applied.
(3) The covered swap entity’s initial margin model must use risk factors sufficient to measure all material price risks inherent in the transactions for which initial margin is being calculated. The risk categories must include, but should not be limited to, foreign exchange or interest rate risk, credit risk, equity risk, and commodity risk, as appropriate. For material exposures in significant currencies and markets, modeling techniques must capture spread and basis risk and must incorporate a sufficient number of segments of the yield curve to capture differences in volatility and imperfect correlation of rates along the yield curve.
(4) In the case of a non-cleared cross-currency swap, the covered swap entity’s initial margin model need not recognize any risks or risk factors associated with the fixed, physically-settled foreign exchange transaction associated with the exchange of principal embedded in the non-cleared cross-currency swap. The initial margin model must recognize all material risks and risk factors associated with all other payments and cash flows that occur during the life of the non-cleared cross-currency swap.
(5) The initial margin model may calculate initial margin for a non-cleared swap or non-cleared security-based swap or a netting portfolio of non-cleared swaps or non-cleared security-based swaps covered by an eligible master netting agreement. It may reflect offsetting exposures, diversification, and other hedging benefits for non-cleared swaps and non-cleared security-based swaps that are governed by the same eligible master netting agreement by incorporating empirical correlations within the following broad risk categories, provided the covered swap entity validates and demonstrates the reasonableness of its process for modeling and measuring hedging benefits: Commodity, credit, equity, and foreign exchange or interest rate. Empirical correlations under an eligible master netting agreement may be recognized by the initial margin model within each broad risk category, but not across broad risk categories.
(6) If the initial margin model does not explicitly reflect offsetting exposures, diversification, and hedging benefits between subsets of non-cleared swaps or non-cleared security-based swaps within a broad risk category, the covered swap entity must calculate an amount of initial margin separately for each subset within which such relationships are explicitly recognized by the initial margin model. The sum of the initial margin amounts calculated for each subset of non-cleared swaps and non-cleared security-based swaps within a broad risk category will be used to determine the aggregate initial margin due from the counterparty for the portfolio of non-cleared swaps and non-cleared security-based swaps within the broad risk category.
(7) The sum of the initial margin amounts calculated for each broad risk category will be used to determine the aggregate initial margin due from the counterparty.
(8) The initial margin model may not permit the calculation of any initial margin collection amount to be offset by, or otherwise take into account, any initial margin that may be owed or otherwise payable by the covered swap entity to the counterparty.
(9) The initial margin model must include all material risks arising from the nonlinear price characteristics of option positions or positions with embedded optionality and the sensitivity of the market value of the positions to changes in the volatility of the underlying rates, prices, or other material risk factors.
(10) The covered swap entity may not omit any risk factor from the calculation of its initial margin that the covered swap entity uses in its initial margin model unless it has first demonstrated to the satisfaction of the Board that such omission is appropriate.
(11) The covered swap entity may not incorporate any proxy or approximation used to capture the risks of the covered swap entity’s non-cleared swaps or non-cleared security-based swaps unless it has first demonstrated to the satisfaction of the Board that such proxy or approximation is appropriate.
(12) The covered swap entity must have a rigorous and well-defined process for re-estimating, re-evaluating, and updating its internal margin model to ensure continued applicability and relevance.
(13) The covered swap entity must review and, as necessary, revise the data used to calibrate the initial margin model at least annually, and more frequently as market conditions warrant, to ensure that the data incorporate a period of significant financial stress appropriate to the non-cleared swaps and non-cleared security-based swaps to which the initial margin model is applied.
(14) The level of sophistication of the initial margin model must be commensurate with the complexity of the non-cleared swaps and non-cleared security-based swaps to which it is applied. In calculating an initial margin collection amount, the initial margin model may make use of any of the generally accepted approaches for modeling the risk of a single instrument or portfolio of instruments.
(15) The Board may in its sole discretion require a covered swap entity using an initial margin model to collect a greater amount of initial margin than that determined by the covered swap entity’s initial margin model if the Board determines that the additional collateral is appropriate due to the nature, structure, or characteristics of the covered swap entity’s transaction(s), or is commensurate with the risks associated with the transaction(s).
(e) Periodic review. A covered swap entity must periodically, but no less frequently than annually, review its initial margin model in light of developments in financial markets and modeling technologies, and enhance the initial margin model as appropriate to ensure that the initial margin model continues to meet the requirements for approval in this section.
(f) Control, oversight, and validation mechanisms. (1) The covered swap entity must maintain a risk control unit that reports directly to senior management and is independent from the business trading units.
(2) The covered swap entity’s risk control unit must validate its initial margin model prior to implementation and on an ongoing basis. The covered swap entity’s validation process must be independent of the development, implementation, and operation of the initial margin model, or the validation process must be subject to an independent review of its adequacy and effectiveness. The validation process must include:
(i) An evaluation of the conceptual soundness of (including developmental evidence supporting) the initial margin model;
(ii) An ongoing monitoring process that includes verification of processes and benchmarking by comparing the covered swap entity’s initial margin model outputs (estimation of initial margin) with relevant alternative internal and external data sources or estimation techniques. The benchmark(s) must address the chosen model’s limitations. When applicable, the covered swap entity should consider benchmarks that allow for non-normal distributions such as historical and Monte Carlo simulations. When applicable, validation shall include benchmarking against observable margin standards to ensure that the initial margin required is not less than what a derivatives clearing organization or a clearing agency would require for similar cleared transactions; and
(iii) An outcomes analysis process that includes backtesting the initial margin model. This analysis must recognize and compensate for the challenges inherent in back-testing over periods that do not contain significant financial stress.
(3) If the validation process reveals any material problems with the initial margin model, the covered swap entity must promptly notify the Board of the problems, describe to the Board any remedial actions being taken, and adjust the initial margin model to ensure an appropriately conservative amount of required initial margin is being calculated.
(4) The covered swap entity must have an internal audit function independent of business-line management and the risk control unit that at least annually assesses the effectiveness of the controls supporting the covered swap entity’s initial margin model measurement systems, including the activities of the business trading units and risk control unit, compliance with policies and procedures, and calculation of the covered swap entity’s initial margin requirements under this subpart. At least annually, the internal audit function must report its findings to the covered swap entity’s board of directors or a committee thereof.
(g) Documentation. The covered swap entity must adequately document all material aspects of its initial margin model, including the management and valuation of the non-cleared swaps and non-cleared security-based swaps to which it applies, the control, oversight, and validation of the initial margin model, any review processes and the results of such processes.
(h) Escalation procedures. The covered swap entity must adequately document internal authorization procedures, including escalation procedures, that require review and approval of any change to the initial margin calculation under the initial margin model, demonstrable analysis that any basis for any such change is consistent with the requirements of this section, and independent review of such demonstrable analysis and approval.
§ 237.9 Cross-border application of margin requirements.
(a) Transactions to which this rule does not apply. The requirements of §§ 237.3 through 237.8 and §§ 237.10 through 237.12 shall not apply to any foreign non-cleared swap or foreign non-cleared security-based swap of a foreign covered swap entity.
(b) For purposes of this section, a foreign non-cleared swap or foreign non-cleared security-based swap is any non-cleared swap or non-cleared security-based swap with respect to which neither the counterparty to the foreign covered swap entity nor any party that provides a guarantee of either party’s obligations under the non-cleared swap or non-cleared security-based swap is:
(1) An entity organized under the laws of the United States or any State (including a U.S. branch, agency, or subsidiary of a foreign bank) or a natural person who is a resident of the United States;
(2) A branch or office of an entity organized under the laws of the United States or any State; or
(3) A swap entity that is a subsidiary of an entity that is organized under the laws of the United States or any State.
(c) For purposes of this section, a foreign covered swap entity is any covered swap entity that is not:
(1) An entity organized under the laws of the United States or any State, including a U.S. branch, agency, or subsidiary of a foreign bank;
(2) A branch or office of an entity organized under the laws of the United States or any State; or
(3) An entity that is a subsidiary of an entity that is organized under the laws of the United States or any State.
(d) Transactions for which substituted compliance determination may apply – (1) Determinations and reliance. For non-cleared swaps and non-cleared security-based swaps entered into by covered swap entities described in paragraph (d)(3) of this section, a covered swap entity may satisfy the provisions of this subpart by complying with the foreign regulatory framework for non-cleared swaps and non-cleared security-based swaps that the prudential regulators jointly, conditionally or unconditionally, determine by public order satisfy the corresponding requirements of §§ 237.3 through 237.8 and §§ 237.10 through 237.12.
(2) Standard. In determining whether to make a determination under paragraph (d)(1) of this section, the prudential regulators will consider whether the requirements of such foreign regulatory framework for non-cleared swaps and non-cleared security-based swaps applicable to such covered swap entities are comparable to the otherwise applicable requirements of this subpart and appropriate for the safe and sound operation of the covered swap entity, taking into account the risks associated with non-cleared swaps and non-cleared security-based swaps.
(3) Covered swap entities eligible for substituted compliance. A covered swap entity may rely on a determination under paragraph (d)(1) of this section only if:
(i) The covered swap entity’s obligations under the non-cleared swap or non-cleared security-based swap do not have a guarantee from:
(A) An entity organized under the laws of the United States or any State (other than a U.S. branch or agency of a foreign bank) or a natural person who is a resident of the United States; or
(B) A branch or office of an entity organized under the laws of the United States or any State; and
(ii) The covered swap entity is:
(A) A foreign covered swap entity;
(B) A U.S. branch or agency of a foreign bank; or
(C) An entity that is not organized under the laws of the United States or any State and is a subsidiary of a depository institution, Edge corporation, or agreement corporation.
(4) Compliance with foreign margin collection requirement. A covered swap entity satisfies its requirement to post initial margin under § 237.3(b) by posting to its counterparty initial margin in the form and amount, and at such times, that its counterparty is required to collect pursuant to a foreign regulatory framework, provided that the counterparty is subject to the foreign regulatory framework and the prudential regulators have made a determination under paragraph (d)(1) of this section, unless otherwise stated in that determination, and the counterparty’s obligations under the non-cleared swap or non-cleared security-based swap do not have a guarantee from:
(i) An entity organized under the laws of the United States or any State (including a U.S. branch, agency, or subsidiary of a foreign bank) or a natural person who is a resident of the United States; or
(ii) A branch or office of an entity organized under the laws of the United States or any State.
(e) Requests for determinations. (1) A covered swap entity described in paragraph (d)(3) of this section may request that the prudential regulators make a determination pursuant to this section. A request for a determination must include a description of:
(i) The scope and objectives of the foreign regulatory framework for non-cleared swaps and non-cleared security-based swaps;
(ii) The specific provisions of the foreign regulatory framework for non-cleared swaps and non-cleared security-based swaps that govern:
(A) The scope of transactions covered;
(B) The determination of the amount of initial margin and variation margin required and how that amount is calculated;
(C) The timing of margin requirements;
(D) Any documentation requirements;
(E) The forms of eligible collateral;
(F) Any segregation and rehypothecation requirements; and
(G) The approval process and standards for models used in calculating initial margin and variation margin;
(iii) The supervisory compliance program and enforcement authority exercised by a foreign financial regulatory authority or authorities in such system to support its oversight of the application of the non-cleared swap or non-cleared security-based swap regulatory framework and how that framework applies to the non-cleared swaps or non-cleared security-based swaps of the covered swap entity; and
(iv) Any other descriptions and documentation that the prudential regulators determine are appropriate.
(2) A covered swap entity described in paragraph (d)(3) of this section may make a request under this section only if the non-cleared swap or non-cleared security-based swap activities of the covered swap entity are directly supervised by the authorities administering the foreign regulatory framework for non-cleared swaps and non-cleared security-based swaps.
(f) Segregation unavailable. Sections 237.3(b) and 237.7 do not apply to a non-cleared swap or non-cleared security-based swap entered into by:
(1) A foreign branch of a covered swap entity that is a depository institution; or
(2) A covered swap entity that is not organized under the laws of the United States or any State and is a subsidiary of a depository institution, Edge corporation, or agreement corporation, if:
(i) Inherent limitations in the legal or operational infrastructure in the foreign jurisdiction make it impracticable for the covered swap entity and the counterparty to post any form of eligible initial margin collateral recognized pursuant to § 237.6(b) in compliance with the segregation requirements of § 237.7;
(ii) The covered swap entity is subject to foreign regulatory restrictions that require the covered swap entity to transact in the non-cleared swap or non-cleared security-based swap with the counterparty through an establishment within the foreign jurisdiction and do not accommodate the posting of collateral for the non-cleared swap or non-cleared security-based swap outside the jurisdiction;
(iii) The counterparty to the non-cleared swap or non-cleared security-based swap is not, and the counterparty’s obligations under the non-cleared swap or non-cleared security-based swap do not have a guarantee from:
(A) An entity organized under the laws of the United States or any State (including a U.S. branch, agency, or subsidiary of a foreign bank) or a natural person who is a resident of the United States; or
(B) A branch or office of an entity organized under the laws of the United States or any State;
(iv) The covered swap entity collects initial margin for the non-cleared swap or non-cleared security-based swap in accordance with § 237.3(a) in the form of cash pursuant to § 237.6(b)(1), and posts and collects variation margin in accordance with § 237.4(a) in the form of cash pursuant to § 237.6(b)(1); and
(v) The Board provides the covered swap entity with prior written approval for the covered swap entity’s reliance on this paragraph (f) for the foreign jurisdiction.
(g) Guarantee means an arrangement pursuant to which one party to a non-cleared swap or non-cleared security-based swap has rights of recourse against a third-party guarantor, with respect to its counterparty’s obligations under the non-cleared swap or non-cleared security-based swap. For these purposes, a party to a non-cleared swap or non-cleared security-based swap has rights of recourse against a guarantor if the party has a conditional or unconditional legally enforceable right to receive or otherwise collect, in whole or in part, payments from the guarantor with respect to its counterparty’s obligations under the non-cleared swap or non-cleared security-based swap. In addition, any arrangement pursuant to which the guarantor has a conditional or unconditional legally enforceable right to receive or otherwise collect, in whole or in part, payments from any other third party guarantor with respect to the counterparty’s obligations under the non-cleared swap or non-cleared security-based swap, such arrangement will be deemed a guarantee of the counterparty’s obligations under the non-cleared swap or non-cleared security-based swap by the other guarantor.
(h)(1) A covered swap entity described in paragraphs (d)(3)(i) and (ii) of this section is not subject to the requirements of § 237.3(a) or § 237.11(a) for any non-cleared swap or non-cleared security-based swap executed with an affiliate of the covered swap entity; and
(2) For purposes of paragraph (h)(1) of this section, “affiliate” has the same meaning provided in 12 CFR 237.11(d).
§ 237.10 Documentation of margin matters.
A covered swap entity shall execute trading documentation with each counterparty that is either a swap entity or financial end user regarding credit support arrangements that:
(a) Provides the covered swap entity and its counterparty with the contractual right to collect and post initial margin and variation margin in such amounts, in such form, and under such circumstances as are required by this subpart, and at such time as initial margin or variation margin is required to be collected or posted under § 237.3 or § 237.4, as applicable; and
(b) Specifies:
(1) The methods, procedures, rules, and inputs for determining the value of each non-cleared swap or non-cleared security-based swap for purposes of calculating variation margin requirements; and
(2) The procedures by which any disputes concerning the valuation of non-cleared swaps or non-cleared security-based swaps, or the valuation of assets collected or posted as initial margin or variation margin, may be resolved; and
(c) Describes the methods, procedures, rules, and inputs used to calculate initial margin for non-cleared swaps and non-cleared security based swaps entered into between the covered swap entity and the counterparty.
§ 237.11 Special rules for affiliates.
(a)(1) A covered swap entity shall calculate on each business day an initial margin collection amount for each counterparty that is a swap entity or financial end user with a material swaps exposure and an affiliate of the covered swap entity.
(2) If the aggregate of all initial margin collection amounts calculated under paragraph (a)(1) of this section does not exceed 15 percent of the covered swap entity’s tier 1 capital, the requirements for a covered swap entity to collect initial margin under § 237.3(a) do not apply with respect to any non-cleared swap or non-cleared security-based swap with a counterparty that is an affiliate.
(3) On each business day that the aggregate of all initial margin collection amounts calculated under paragraph (a)(1) of this section exceeds 15 percent of the covered swap entity’s tier 1 capital:
(i) The covered swap entity shall collect initial margin under § 237.3(a) for each additional non-cleared swap and non-cleared security-based swap executed that business day with a counterparty that is a swap entity or financial end user with a material swaps exposure and an affiliate of the covered swap entity, commencing on the day after execution and continuing on a daily basis as required under § 237.3(c), until the earlier of:
(A) The termination date of such non-cleared swap or non-cleared security-based swap, or
(B) The business day on which the aggregate of all initial margin collection amounts calculated under paragraph (a)(1) of this section falls below 15 percent of the covered swap entity’s tier 1 capital;
(ii) Notwithstanding § 237.7(b), to the extent the covered swap entity collects initial margin pursuant to paragraph (a)(3)(i) of this section in the form of collateral other than cash collateral, the custodian for such collateral may be the covered swap entity or an affiliate of the covered swap entity; and
(4) For purposes of this paragraph (a), “tier 1 capital” means the sum of common equity tier 1 capital as defined in 12 CFR 217.20(b) and additional tier 1 capital as defined in 12 CFR 217.20(c), as reported in the institution’s most recent Consolidated Reports of Income and Condition (Call Report).
(5) If any subsidiary of the covered swap entity (including a subsidiary described in § 237.9(h)) executes any non-cleared swap or non-cleared security-based swap with any counterparty that is a swap entity or financial end user with a material swaps exposure and an affiliate of the covered swap entity:
(i) The covered swap entity shall treat such non-cleared swap or security-based swap as its own for purposes of this paragraph (a); and
(ii) If the subsidiary is itself a covered swap entity, the compliance by its parent affiliated covered swap entity with this paragraph (a)(5) shall be deemed to establish the subsidiary’s compliance with the requirements of this paragraph (a) and to exempt the subsidiary from the requirements for a covered swap entity to collect initial margin under § 237.3(a) from an affiliate.
(b) The requirement for a covered swap entity to post initial margin under § 237.3(b) does not apply with respect to any non-cleared swap or non-cleared security-based swap with a counterparty that is an affiliate.
(c) Section 237.3(d) shall apply to a counterparty that is an affiliate in the same manner as it applies to any counterparty that is neither a financial end user without a material swap exposure nor a swap entity.
(d) For purposes of this section,
(1) An affiliate means:
(i) An affiliate as defined in § 237.2; or
(ii) Any company that controls, is controlled by, or is under common control with the covered swap entity through the direct or indirect exercise of controlling influence over the management or policies of the controlled company.
(2) A subsidiary means:
(i) A subsidiary as defined in § 237.2; or
(ii) Any company that is controlled by the covered swap entity through the direct or indirect exercise of controlling influence over the management or policies of the controlled company.
§ 237.12 Capital.
A covered swap entity shall comply with:
(a) In the case of a covered swap entity that is a state member bank (as defined in 12 CFR 208.2(g)), the provisions of the Board’s Regulation Q (12 CFR part 217) applicable to the state member bank;
(b) In the case of a covered swap entity that is a bank holding company (as defined in 12 U.S.C. 1842) or a savings and loan holding company (as defined in 12 U.S.C. 1467a), the provisions of the Board’s Regulation Q (12 CFR part 217) applicable to the covered swap entity;
(c) In the case of a covered swap entity that is a foreign banking organization (as defined in 12 CFR 211.21(o)), a U.S. intermediate holding company subsidiary of a foreign banking organization (as defined in 12 CFR 252.3(y)) or any state branch or state agency of a foreign bank (as defined in 12 U.S.C. 3101(b)(11) and (12)), the capital standards that are applicable to such covered swap entity under § 225.2(r)(3) of the Board’s Regulation Y (12 CFR 225.2(r)(3)) or the Board’s Regulation YY (12 CFR part 252); and
(d) In the case of a covered swap entity that is an Edge or agreement corporation (as defined in 12 CFR 211.1(c)(2) and (3)), the capital standards applicable to an Edge corporation under § 211.12(c) of the Board’s Regulation K (12 CFR 211.12(c)) and to an agreement corporation under §§ 211.5(g) and 211.12(c) of the Board’s Regulation K (12 CFR 211.5(g) and 211.12(c)).
Appendix A to Subpart A to Part 237 – Standardized Minimum Initial Margin Requirements for Non-Cleared Swaps and Non – Cleared Security-Based Swaps
Table A – Standardized Minimum Gross Initial Margin Requirements for Non-Cleared Swaps and Non-Cleared Security-Based Swaps
1
| Asset Class | Gross initial margin (% of notional exposure) |
|---|---|
| Credit: 0-2 year duration | 2 |
| Credit: 2-5 year duration | 5 |
| Credit: 5+ year duration | 10 |
| Commodity | 15 |
| Equity | 15 |
| Foreign Exchange/Currency | 6 |
| Cross Currency Swaps: 0-2 year duration | 1 |
| Cross-Currency Swaps: 2-5 year duration | 2 |
| Cross-Currency Swaps: 5+ year duration | 4 |
| Interest Rate: 0-2 year duration | 1 |
| Interest Rate: 2-5 year duration | 2 |
| Interest Rate: 5+ year duration | 4 |
| Other | 15 |
1 The initial margin amount applicable to multiple non-cleared swaps or non-cleared security-based swaps subject to an eligible master netting agreement that is calculated according to Appendix A will be computed as follows:
Initial Margin=0.4xGross Initial Margin +0.6x NGRxGross Initial Margin
where;
Gross Initial Margin = the sum of the product of each non-cleared swap’s or non-cleared security-based swap’s effective notional amount and the gross initial margin requirement for all non-cleared swaps and non-cleared security-based swaps subject to the eligible master netting agreement;
and
NGR = the net-to-gross ratio (that is, the ratio of the net current replacement cost to the gross current replacement cost). In calculating NGR, the gross current replacement cost equals the sum of the replacement cost for each non-cleared swap and non-cleared security-based swap subject to the eligible master netting agreement for which the cost is positive. The net current replacement cost equals the total replacement cost for all non-cleared swaps and non-cleared security-based swaps subject to the eligible master netting agreement. In cases where the gross replacement cost is zero, the NGR should be set to 1.0.
Appendix B to Subpart A to Part 237 – Margin Values for Eligible Noncash Margin Collateral
Table B – Margin Values for Eligible Noncash Margin Collateral
| Asset class | Discount (%) |
|---|---|
| Eligible government and related (e.g., central bank, multilateral development bank, GSE securities identified in § 237.6(a)(2)(iv) or (b)(5) debt: residual maturity less than one-year | 0.5 |
| Eligible government and related (e.g., central bank, multilateral development bank, GSE securities identified in § 237.6(a)(2)(iv) or (b)(5) debt: residual maturity between one and five years | 2.0 |
| Eligible government and related (e.g., central bank, multilateral development bank, GSE securities identified in § 237.6(a)(2)(iv) or (b)(5) debt: residual maturity greater than five years | 4.0 |
| Eligible GSE debt securities not identified in § 237.6(a)(2)(iv) or (b)(5): residual maturity less than one-year | 1.0 |
| Eligible GSE debt securities not identified in § 237.6(a)(2)(iv) or (b)(5): residual maturity between one and five years: | 4.0 |
| Eligible GSE debt securities not identified in § 237.6(a)(2)(iv) or (b)(5): residual maturity greater than five years: | 8.0 |
| Other eligible publicly traded debt: residual maturity less than one-year | 1.0 |
| Other eligible publicly traded debt: residual maturity between one and five years | 4.0 |
| Other eligible publicly traded debt: residual maturity greater than five years | 8.0 |
| Equities included in S&P 500 or related index | 15.0 |
| Equities included in S&P 1500 Composite or related index but not S&P 500 or related index | 25.0 |
| Gold | 15.0 |
1 The discount to be applied to an eligible investment fund is the weighted average discount on all assets within the eligible investment fund at the end of the prior month. The weights to be applied in the weighted average should be calculated as a fraction of the fund’s total market value that is invested in each asset with a given discount amount. As an example, an eligible investment fund that is comprised solely of $100 of 91 day Treasury bills and $100 of 3 year US Treasury bonds would receive a discount of (100/200)*0.5+(100/200)*2.0=(0.5)*0.5+(0.5)*2.0=1.25 percent.
Subpart B – Prohibition Against Federal Assistance to Swaps Entities
§ 237.20 Definitions.
Unless otherwise specified, for purposes of this subpart:
(a) Board means the Board of Governors of the Federal Reserve System.
(b) Dodd-Frank Act means the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(c) Foreign bank has the same meaning as in § 211.21(n) of the Board’s Regulation K (12 CFR 211.21(n)).
(d) Major security-based swap participant has the same meaning as in section 3(a)(67) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(67)) and as implemented in rules and orders issued by the Securities and Exchange Commission.
(e) Major swap participant has the same meaning as in section 1a(33) of the Commodity Exchange Act (7 U.S.C. 1a(33)) and as implemented in rules and orders issued by the Commodity Futures Trading Commission.
(f) Security-based swap has the same meaning as in section 3(a)(68) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68)) and as implemented in rules and orders issued by the Securities and Exchange Commission.
(g) Security-based swap dealer has the same meaning as in section 3(a)(71) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(71)) and as implemented in rules and orders issued by the Securities and Exchange Commission.
(h) Swap dealer has the same meaning as in section 1a(49) of the Commodity Exchange Act (7 U.S.C. 1a(49)) and as implemented in rules and orders issued by the Commodity Futures Trading Commission.
(i) Swaps entity means a person that is registered as a swap dealer, security-based swap dealer, major swap participant, or major security-based swap participant under the Commodity Exchange Act or Securities Exchange Act of 1934, other than an insured depository institution that is registered as a major swap participant or major security-based swap participant.
§ 237.21 Definition of insured depository institution for purposes of section 716 of the Dodd-Frank Act.
For purposes of section 716 of the Dodd-Frank Act (15 U.S.C. 8305) and this rule, the term “insured depository institution” includes any insured depository institution as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813) and any uninsured U.S. branch or agency of a foreign bank. The terms branch, agency, and foreign bank are defined in section 1 of the International Banking Act of 1978 (12 U.S.C. 3101).
§ 237.22 Transition period for insured depository institutions.
(a) Approval of transition period. (1) To the extent an insured depository institution for which the Board is the appropriate Federal banking agency qualifies as a “swaps entity” and would be subject to the Federal assistance prohibition in section 716(a) of the Dodd-Frank Act (15 U.S.C. 8305(a)), the insured depository institution may request a transition period of up to 24 months from the later of July 16, 2013, or the date on which it becomes a swaps entity, during which to conform its swaps activities to the requirements of section 716 of the Dodd-Frank Act (15 U.S.C. 8305) by submitting a request in writing to the Board.
(2) Any request submitted pursuant to this paragraph (a) of this section shall, at a minimum, include the following information:
(i) The length of the transition period requested;
(ii) A description of the quantitative and qualitative impacts of divestiture or cessation of swap or security-based swaps activities on the insured depository institution, including information that addresses the factors in paragraph (c) of this section; and
(iii) A detailed explanation of the insured depository institution’s plan for conforming its activities to the requirements of section 716 of the Dodd-Frank Act (15 U.S.C. 8305) and this part.
(3) The Board may, at any time, request additional information that it believes is necessary for its decision.
(b) Transition period for insured depository institutions. Following review of a written request submitted under paragraph (a) of this section, the Board shall permit an insured depository institution for which it is the appropriate Federal banking agency up to 24 months after the later of July 16, 2013, or the date on which the insured depository institution becomes a swaps entity, to comply with the requirements of section 716 of the Dodd-Frank Act (15 U.S.C. 8305) and this subpart based on its consideration of the factors in paragraph (c).
(c) Factors governing Board determinations. In establishing an appropriate transition period pursuant to any request under this section, the Board will take into account and make written findings regarding:
(1) The potential impact of divestiture or cessation of swap or security-based swaps activities on the insured depository institution’s:
(i) Mortgage lending;
(ii) Small business lending;
(iii) Job creation; and
(iv) Capital formation versus the potential negative impact on insured depositors and the Deposit Insurance Fund of the Federal Deposit Insurance Corporation; and
(2) Any other factor that the Board believes appropriate.
(d) Timing of Board review. The Board will seek to act on a request under paragraph (a) of this section expeditiously after the receipt of a complete request.
(e) Extension of transition period. The Board may extend a transition period provided under this section for a period of up to one additional year. To request an extension of the transition period, an insured depository institution must submit a written request containing the information set forth in paragraph (a) of this section no later than 60 days before the end of the transition period.
(f) Authority to impose restrictions during any transition period. The Board may impose such conditions on any transition period granted under this section as the Board determines are necessary or appropriate.
(g) Consultation. The Board shall consult with the Commodity Futures Trading Commission or the Securities and Exchange Commission, as appropriate, prior to the approval of a request by an insured depository institution for a transition period under this section.
PART 238 – SAVINGS AND LOAN HOLDING COMPANIES (REGULATION LL)
Subpart A – General Provisions
§ 238.1 Authority, purpose and scope.
(a) Authority. This part is issued by the Board of Governors of the Federal Reserve System (Board) under section 10(g) of the Home Owners’ Loan Act (HOLA); section 7(j)(13) of the Federal Deposit Insurance Act, as amended by the Change in Bank Control Act of 1978 (12 U.S.C. 1817(j)(13)) (Bank Control Act); sections 8(b), 19 and 32 of the Federal Deposit Insurance Act (12 U.S.C. 1818(b), 1829, and 1831i); and section 914 of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (12 U.S.C. 1831i) and the Depository Institution Management Interlocks Act (12 U.S.C. 3201 et seq.).
(b) Purpose. The principal purposes of this part are to:
(1) Regulate the acquisition of control of savings associations by companies and individuals;
(2) Define and regulate the activities in which savings and loan holding companies may engage;
(3) Set forth the procedures for securing approval for these transactions and activities; and
(4) Set forth the procedures under which directors and executive officers may be appointed or employed by savings and loan holding companies in certain circumstances.
§ 238.2 Definitions.
As used in this part and in the forms under this part, the following definitions apply, unless the context otherwise requires:
(a) Affiliate means any person or company which controls, is controlled by or is under common control with a person, savings association or company.
(b) Bank means any national bank, state bank, state-chartered savings bank, cooperative bank, or industrial bank, the deposits of which are insured by the Deposit Insurance Fund.
(c) Bank holding company has the meaning found in the Board’s Regulation Y (12 CFR 225.2(c)).
(d) Company means any corporation, partnership, trust, association, joint venture, pool, syndicate, unincorporated organization, joint-stock company or similar organization, as defined in paragraph (o) of this section; but a company does not include:
(1) The Federal Deposit Insurance Corporation, the Resolution Trust Corporation, or any Federal Home Loan Bank, or
(2) Any company the majority of shares of which is owned by:
(i) The United States or any State,
(ii) An officer of the United States or any State in his or her official capacity, or
(iii) An instrumentality of the United States or any State.
(e) A person shall be deemed to have control of:
(1) A savings association if the person directly or indirectly or acting in concert with one or more other persons, or through one or more subsidiaries, owns, controls, or holds with power to vote, or holds proxies representing, more than 25 percent of the voting shares of such savings association, or controls in any manner the election of a majority of the directors of such association;
(2) Any other company if the person directly or indirectly or acting in concert with one or more other persons, or through one or more subsidiaries, owns, controls, or holds with power to vote, or holds proxies representing, more than 25 percent of the voting shares or rights of such other company, or controls in any manner the election or appointment of a majority of the directors or trustees of such other company, or is a general partner in or has contributed more than 25 percent of the capital of such other company;
(3) A trust if the person is a trustee thereof;
(4) A company if the Board determines, after reasonable notice and opportunity for hearing, that such person directly or indirectly exercises a controlling influence over the management or policies of such association or other company; or
(5) Voting securities or assets owned, controlled, or held, directly or indirectly:
(i) By the company, or by any subsidiary of the company;
(ii) That the company has power to vote or to dispose of;
(iii) In a fiduciary capacity for the benefit of the company or any of its subsidiaries;
(iv) In a fiduciary capacity (including by pension and profit-sharing trusts) for the benefit of the shareholders, members, or employees (or individuals serving in similar capacities) of the company or any of its subsidiaries; or
(v) According to the standards under § 238.9 of this part.
(f) Director means any director of a corporation or any individual who performs similar functions in respect of any company, including a trustee under a trust.
(g) Management official means any president, chief executive officer, chief operating officer, vice president, director, partner, or trustee, or any other person who performs or has a representative or nominee performing similar policymaking functions, including executive officers of principal business units or divisions or subsidiaries who perform policymaking functions, for a savings association or a company, whether or not incorporated.
(h) Multiple savings and loan holding company means any savings and loan holding company which directly or indirectly controls two or more savings associations.
(i) Officer means the chairman of the board, president, vice president, treasurer, secretary, or comptroller of any company, or any other person who participates in its major policy decisions.
(j) Person includes an individual, bank, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or any other form of entity.
(k) Qualified thrift lender means a financial institution that meets the appropriate qualified thrift lender test set forth in 12 U.S.C. 1467a(m).
(l) Savings Association means a Federal savings and loan association or a Federal savings bank chartered under section 5 of the Home Owners’ Loan Act, a building and loan, savings and loan or homestead association or a cooperative bank (other than a cooperative bank described in 12 U.S.C. 1813(a)(2)) the deposits of which are insured by the Federal Deposit Insurance Corporation, and any corporation (other than a bank) the deposits of which are insured by the Federal Deposit Insurance Corporation that the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation jointly determine to be operating in substantially the same manner as a savings association, and shall include any savings bank or any cooperative bank which is deemed by the Office of the Comptroller of the Currency to be a savings association under 12 U.S.C. 1467a(1).
(m) Savings and loan holding company means any company (including a savings association) that directly or indirectly controls a savings association, but does not include:
(1) Any company by virtue of its ownership or control of voting stock of a savings association acquired in connection with the underwriting of securities if such stock is held only for such period of time (not exceeding 120 days unless extended by the Board) as will permit the sale thereof on a reasonable basis;
(2) Any trust (other than a pension, profit-sharing, stockholders’, voting, or business trust) which controls a savings association if such trust by its terms must terminate within 25 years or not later than 21 years and 10 months after the death of individuals living on the effective date of the trust, and:
(i) Was in existence and in control of a savings association on June 26, 1967, or
(ii) Is a testamentary trust;
(3) A bank holding company that is registered under, and subject to, the Bank Holding Company Act of 1956, or any company directly or indirectly controlled by such company (other than a savings association);
(4) A company that controls a savings association that functions solely in a trust or fiduciary capacity as provided in section 2(c)(2)(D) of the Bank Holding Company Act; or
(5) A company described in section 10(c)(9)(C) of HOLA solely by virtue of such company’s control of an intermediate holding company established under section 10A of the Home Owners’ Loan Act.
(n) Shareholder – (1) Controlling shareholder means a person that owns or control, directly or indirectly, more than 25 percent of any class of voting securities of a savings association or other company.
(2) Principal shareholder means a person that owns or controls, directly or indirectly, 10 percent or more of any class of voting securities of a savings association or other company, or any person that the Board determines has the power, directly or indirectly, to exercise a controlling influence over the management or policies of a savings association or other company.
(o) Stock means common or preferred stock, general or limited partnership shares or interests, or similar interests.
(p) Subsidiary means any company which is owned or controlled directly or indirectly by a person, and includes any service corporation owned in whole or in part by a savings association, or a subsidiary of such service corporation.
(q) Uninsured institution means any financial institution the deposits of which are not insured by the Federal Deposit Insurance Corporation.
(r)(1) Voting securities means shares of common or preferred stock, general or limited partnership shares or interests, or similar interests if the shares or interest, by statute, charter, or in any manner, entitle the holder:
(i) To vote for or to select directors, trustees, or partners (or persons exercising similar functions of the issuing company); or
(ii) To vote on or to direct the conduct of the operations or other significant policies of the issuing company.
(2) Nonvoting securities. Common shares, preferred shares, limited partnership interests, limited liability company interests, or similar interests are not voting securities if:
(i) Any voting rights associated with the securities are limited solely to the type customarily provided by statute with regard to matters that would significantly and adversely affect the rights or preference of the security, such as the issuance of additional amounts or classes of senior securities, the modification of the terms of the security, the dissolution of the issuing company, or the payment of dividends by the issuing company when preferred dividends are in arrears;
(ii) The securities represent an essentially passive investment or financing device and do not otherwise provide the holder with control over the issuing company; and
(iii) The securities do not entitle the holder, by statute, charter, or in any manner, to select or to vote for the selection of directors, trustees, or partners (or persons exercising similar functions) of the issuing company; except that limited partnership interests or membership interests in limited liability companies are not voting securities due to voting rights that are limited solely to voting for the removal of a general partner or managing member (or persons exercising similar functions at the company) for cause, to replace a general partner or managing member (or persons exercising similar functions at the company) due to incapacitation or following the removal of such person, or to continue or dissolve the company after removal of the general partner or managing member (or persons exercising similar functions at the company).
(3) Class of voting shares. Shares of stock issued by a single issuer are deemed to be the same class of voting shares, regardless of differences in dividend rights or liquidation preference, if the shares are voted together as a single class on all matters for which the shares have voting rights other than matters described in paragraph (r)(2)(i) of this section that affect solely the rights or preferences of the shares.
(s) Well capitalized. (1) A savings and loan holding company is well capitalized if:
(i) Each of the savings and loan holding company’s depository institutions is well capitalized; and
(ii) The savings and loan holding company is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Board to meet and maintain a specific capital level for any capital measure.
(2) In the case of a savings association, “well capitalized” takes the meaning provided in § 225.2(r)(2) of this chapter.
(t) Well managed. The term “well managed” takes the meaning provided in § 225.2(s) of this chapter except that a “satisfactory rating for management” refers to a management rating, if such rating is given, or otherwise a risk-management rating, if such rating is given.
(u) Depository institution. For purposes of this part, the term “depository institution” has the same meaning as in section 3(c) of Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
(v) Applicable accounting standards means GAAP, international financial reporting standards, or such other accounting standards that a company uses in the ordinary course of its business in preparing its consolidated financial statements.
(w) Average cross-jurisdictional activity means the average of cross-jurisdictional activity for the four most recent calendar quarters or, if the banking organization has not reported cross-jurisdictional activity for each of the four most recent calendar quarters, the cross-jurisdictional activity for the most recent calendar quarter or average of the most recent calendar quarters, as applicable.
(x) Average off-balance sheet exposure means the average of off-balance sheet exposure for the four most recent calendar quarters or, if the banking organization has not reported total exposure and total consolidated assets for each of the four most recent calendar quarters, the off-balance sheet exposure for the most recent calendar quarter or average of the most recent quarters, as applicable.
(y) Average total consolidated assets means the average of total consolidated assets for the four most recent calendar quarters or, if the banking organization has not reported total consolidated assets for each of the four most recent calendar quarters, the total consolidated assets for the most recent calendar quarter or average of the most recent calendar quarters, as applicable.
(z) Average total nonbank assets means the average of total nonbank assets for the four most recent calendar quarters or, if the banking organization has not reported total nonbank assets for each of the four most recent calendar quarters, the total nonbank assets for the most recent calendar quarter or average of the most recent calendar quarters, as applicable.
(aa) Average weighted short-term wholesale funding means the average of weighted short-term wholesale funding for each of the four most recent calendar quarters or, if the banking organization has not reported weighted short-term wholesale funding for each of the four most recent calendar quarters, the weighted short-term wholesale funding for the most recent quarter or average of the most recent calendar quarters, as applicable.
(bb) Banking organization. Banking organization means a covered savings and loan holding company that is:
(1) Incorporated in or organized under the laws of the United States or any State; and
(2) Not a consolidated subsidiary of a covered savings and loan holding company that is incorporated in or organized under the laws of the United States or any State.
(cc) Category II savings and loan holding company means a covered savings and loan holding company identified as a Category II banking organization pursuant to § 238.10.
(dd) Category III savings and loan holding company means a covered savings and loan holding company identified as a Category III banking organization pursuant to § 238.10.
(ee) Category IV savings and loan holding company means a covered savings and loan holding company identified as a Category IV banking organization pursuant to § 238.10.
(ff) Covered savings and loan holding company means a savings and loan holding company other than:
(1) A top-tier savings and loan holding company that is:
(i) A grandfathered unitary savings and loan holding company as defined in section 10(c)(9)(C) of the Home Owners’ Loan Act (12 U.S.C. 1461 et seq.); and
(ii) As of June 30 of the previous calendar year, derived 50 percent or more of its total consolidated assets or 50 percent of its total revenues on an enterprise-wide basis (as calculated under GAAP) from activities that are not financial in nature under section 4(k) of the Bank Holding Company Act (12 U.S.C. 1843(k));
(2) A top-tier depository institution holding company that is an insurance underwriting company; or
(3)(i) A top-tier depository institution holding company that, as of June 30 of the previous calendar year, held 25 percent or more of its total consolidated assets in subsidiaries that are insurance underwriting companies (other than assets associated with insurance for credit risk); and
(ii) For purposes of paragraph (ff)(3)(i) of this section, the company must calculate its total consolidated assets in accordance with GAAP, or if the company does not calculate its total consolidated assets under GAAP for any regulatory purpose (including compliance with applicable securities laws), the company may estimate its total consolidated assets, subject to review and adjustment by the Board of Governors of the Federal Reserve System.
(gg) Cross-jurisdictional activity. The cross-jurisdictional activity of a banking organization is equal to the cross-jurisdictional activity of the banking organization as reported on the FR Y-15.
(hh) Foreign banking organization has the same meaning as in § 211.21(o) of this chapter.
(ii) FR Y-9C means the Consolidated Financial Statements for Holding Companies reporting form.
(jj) FR Y-9LP means the Parent Company Only Financial Statements of Large Holding Companies.
(kk) FR Y-15 means the Systemic Risk Report.
(ll) GAAP means generally accepted accounting principles as used in the United States.
(mm) Off-balance sheet exposure. The off-balance sheet exposure of a banking organization is equal to:
(1) The total exposure of the banking organization, as reported by the banking organization on the FR Y-15; minus
(2) The total consolidated assets of the banking organization for the same calendar quarter.
(nn) State means any state, commonwealth, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, or the United States Virgin Islands.
(oo) Total consolidated assets. Total consolidated assets of a banking organization are equal to its total consolidated assets calculated based on the average of the balances as of the close of business for each day for the calendar quarter or an average of the balances as of the close of business on each Wednesday during the calendar quarter, as reported on the FR Y-9C.
(pp) Total nonbank assets. Total nonbank assets of a banking organization is equal to the total nonbank assets of such banking organization, as reported on the FR Y-9LP.
(qq) U.S. government agency means an agency or instrumentality of the United States whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the United States.
(rr) U.S. government-sponsored enterprise means an entity originally established or chartered by the U.S. government to serve public purposes specified by the U.S. Congress, but whose obligations are not explicitly guaranteed by the full faith and credit of the United States.
(ss) Weighted short-term wholesale funding is equal to the weighted short-term wholesale funding of a banking organization, as reported on the FR Y-15.
(tt) Voting percentage. For purposes of this part, the percentage of a class of a company’s voting securities controlled by a person is the greater of:
(1) The quotient, expressed as a percentage, of the number of shares of the class of voting securities controlled by the person, divided by the number of shares of the class of voting securities that are issued and outstanding, both as adjusted by § 238.9 of this part; and
(2) The quotient, expressed as a percentage, of the number of votes that may be cast by the person on the voting securities controlled by the person, divided by the total votes that are legally entitled to be cast by the issued and outstanding shares of the class of voting securities, both as adjusted by § 238.9 of this part.
§ 238.3 Administration.
(a) Delegation of authority. Designated Board members and officers and the Federal Reserve Banks are authorized by the Board to exercise various functions prescribed in this regulation, in the Board’s Rules Regarding Delegation of Authority (12 CFR part 265), the Board’s Rules of Procedure (12 CFR part 262), and in Board orders.
(b) Appropriate Federal Reserve Bank. In administering this regulation, unless a different Federal Reserve Bank is designated by the Board, the appropriate Federal Reserve Bank is as follows:
(1) For a savings and loan holding company (or a company applying to become a savings and loan holding company): the Reserve Bank of the Federal Reserve district in which the company’s banking operations are principally conducted, as measured by total domestic deposits in its subsidiary savings association on the date it became (or will become) a savings and loan holding company;
(2) For an individual or company submitting a notice under subpart D of this part: The Reserve Bank of the Federal Reserve district in which the banking operations of the savings and loan holding company to be acquired are principally conducted, as measured by total domestic deposits on the date the notice is filed.
§ 238.4 Records, reports, and inspections.
(a) Records. Each savings and loan holding company shall maintain such books and records as may be prescribed by the Board. Each savings and loan holding company and its non-depository affiliates shall maintain accurate and complete records of all business transactions. Such records shall support and be readily reconcilable to any regulatory reports submitted to the Board and financial reports prepared in accordance with GAAP.
The records shall be maintained in the United States and be readily accessible for examination and other supervisory purposes within 5 business days upon request by the Board, at a location acceptable to the Board.
(b) Reports. Each savings and loan holding company and each subsidiary thereof, other than a savings association, shall file with the Board such reports as may be required by the Board. Such reports shall be made under oath or otherwise, and shall be in such form and for such periods, as the Board may prescribe. Each report shall contain information concerning the operations of such savings and loan holding company and its subsidiaries as the Board may require.
(c) Registration statement – (1) Filing of registration statement. Not later than 90 days after becoming a savings and loan holding company, each savings and loan holding company shall register with the Board by furnishing information in the manner and form prescribed by the Board.
(2) Date of registration. The date of registration of a savings and loan holding company shall be the date on which its registration statement is received by the Board.
(3) Extension of time for registration. For timely and good cause shown, the Board may extend the time within which a savings and loan holding company shall register.
(d) Release from registration. The Board may at any time, upon its own motion or upon application, release a registered savings and loan holding company from any registration theretofore made by such company, if the Board shall determine that such company no longer has control of any savings association or no longer qualifies as a savings and loan holding company.
(e) Examinations. Each savings and loan holding company and each subsidiary thereof shall be subject to such examinations as the Board may prescribe. The Board shall, to the extent deemed feasible, use for the purposes of this section reports filed with or examinations made by other Federal agencies or the appropriate State supervisory authority.
(f) Appointment of agent. The Board may require any savings and loan holding company, or persons connected therewith if it is not a corporation, to execute and file a prescribed form of irrevocable appointment of agent for service of process.
§ 238.5 Audit of savings association holding companies.
(a) General. The Board may require, at any time, an independent audit of the financial statements of, or the application of procedures agreed upon by the Board to a savings and loan holding company, or nondepository affiliate by qualified independent public accountants when needed for any safety and soundness reason identified by the Board.
(b) Audits required for safety and soundness purposes. (1) The Board requires an independent audit for safety and soundness purposes if, as of the beginning of its fiscal year, a savings and loan holding company controls savings association subsidiary(ies) with aggregate consolidated assets of $500 million or more.
(2) Except as provided in paragraph (b)(3) of this section, with regard to a savings and loan holding company’s fiscal year beginning in the calendar years 2020 or 2021, the applicability of the requirement in paragraph (b)(1) of this section shall be determined based on the lesser of:
(i) The aggregate consolidated assets of the savings and loan holding company as of December 31, 2019; and
(ii) The aggregate consolidated assets of the savings and loan holding company as of the end of its fiscal year ending in calendar year 2020.
(3) The relief provided under paragraph (b)(2) of this section does not apply to a savings and loan holding company if the Board determines that permitting the savings and loan holding company to determine its assets in accordance with that paragraph would not be commensurate with the risk profile of the savings and loan holding company. When making this determination, the Board will consider all relevant factors, including the extent of asset growth of the savings and loan holding company since December 31, 2019; the causes of such growth, including whether growth occurred as a result of mergers or acquisitions; whether such growth is likely to be temporary or permanent; whether the savings and loan holding company has become involved in any additional activities since December 31, 2019; the asset size of any parent companies; and the type of assets held by the savings and loan holding company. In making a determination pursuant to this paragraph (b)(3), the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202.
(c) Procedures. (1) When the Board requires an independent audit because such an audit is needed for safety and soundness purposes, the Board shall determine whether the audit was conducted and filed in a manner satisfactory to the Board.
(2) When the Board requires the application of procedures agreed upon by the Board for safety and soundness purposes, the Board shall identify the procedures to be performed. The Board shall also determine whether the agreed upon procedures were conducted and filed in a manner satisfactory to the Board.
(d) Qualifications for independent public accountants. The audit shall be conducted by an independent public accountant who:
(1) Is registered or licensed to practice as a public accountant, and is in good standing, under the laws of the state or other political subdivision of the United States in which the savings association’s or holding company’s principal office is located;
(2) Agrees in the engagement letter to provide the Board with access to and copies of any work papers, policies, and procedures relating to the services performed;
(3)(i) Is in compliance with the American Institute of Certified Public Accountants’ (AICPA) Code of Professional Conduct; and
(ii) Meets the independence requirements and interpretations of the Securities and Exchange Commission and its staff; and
(4) Has received, or is enrolled in, a peer review program that meets guidelines acceptable to the Board.
(e) Voluntary audits. When a savings and loan holding company or nondepository affiliate obtains an independent audit voluntarily, it must be performed by an independent public accountant who satisfies the requirements of paragraphs (d)(1), (d)(2), and (d)(3)(i) of this section.
§ 238.6 Penalties for violations.
(a) Criminal and civil penalties. (1) Section 10 of the HOLA provides criminal penalties for willful violation, and civil penalties for violation, by any company or individual, of HOLA or any regulation or order issued under it, or for making a false entry in any book, report, or statement of a savings and loan holding company.
(2) Civil money penalty assessments for violations of HOLA shall be made in accordance with subpart C of the Board’s Rules of Practice for Hearings (12 CFR part 263, subpart C). For any willful violation of the Bank Control Act or any regulation or order issued under it, the Board may assess a civil penalty as provided in 12 U.S.C. 1817(j)(15).
(b) Cease-and-desist proceedings. For any violation of HOLA, the Bank Control Act, this regulation, or any order or notice issued thereunder, the Board may institute a cease-and-desist proceeding in accordance with the Financial Institutions Supervisory Act of 1966, as amended (12 U.S.C. 1818(b) et seq.).
§ 238.7 Tying restriction exception.
(a) Safe harbor for combined-balance discounts. A savings and loan holding company or any savings association or any affiliate of either may vary the consideration for any product or package of products based on a customer’s maintaining a combined minimum balance in certain products specified by the company varying the consideration (eligible products), if:
(1) That company (if it is a savings association) or a savings association affiliate of that company (if it is not a savings association) offers deposits, and all such deposits are eligible products; and
(2) Balances in deposits count at least as much as non-deposit products toward the minimum balance.
(b) Limitations on exception. This exception shall terminate upon a finding by the Board that the arrangement is resulting in anti-competitive practices. The eligibility of a savings and loan holding company or savings association or affiliate of either to operate under this exception shall terminate upon a finding by the Board that its exercise of this authority is resulting in anti-competitive practices.
§ 238.8 Safe and sound operations, and Small Bank Holding Company Policy Statement.
(a) Savings and loan holding company policy and operations. (1) A savings and loan holding company shall serve as a source of financial and managerial strength to its subsidiary savings associations and shall not conduct its operations in an unsafe or unsound manner.
(2) Whenever the Board believes an activity of a savings and loan holding company or control of a nonbank subsidiary (other than a nonbank subsidiary of a savings association) constitutes a serious risk to the financial safety, soundness, or stability of a subsidiary savings association of the savings and loan holding company and is inconsistent with sound banking principles or the purposes of HOLA or the Financial Institutions Supervisory Act of 1966, as amended (12 U.S.C. 1818(b) et seq.), the Board may require the savings and loan holding company to terminate the activity or to terminate control of the subsidiary, as provided in section 10(g)(5) of the HOLA.
(b) The Board’s Small Bank Holding Company Policy Statement (12 CFR part 225, appendix C) (Policy Statement) applies to savings and loan holding companies as if they were bank holding companies. To qualify or rely on the Policy Statement, savings and loan holding companies must meet all qualifying requirements in the Policy Statement as if they were a bank holding company. For purposes of applying the Policy Statement, the term “nonbank subsidiary” as used in the Policy Statement refers to a subsidiary of a savings and loan holding company other than a savings association or a subsidiary of a savings association.
(c) The Board may exclude any savings and loan holding company, regardless of asset size, from the Policy Statement under paragraph (b) of this section if the Board determines that such action is warranted for supervisory purposes.
§ 238.9 Control over securities.
(a) Contingent rights, convertible securities, options, and warrants. (1) A person that controls a security, option, warrant, or other financial instrument that is convertible into, exercisable for, exchangeable for, or otherwise may become a security controls each security that could be acquired as a result of such conversion, exercise, exchange, or similar occurrence.
(2) If a financial instrument of the type described in paragraph (a)(1) of this section is convertible into, exercisable for, exchangeable for, or otherwise may become a number of securities that varies according to a formula, rate, or other variable metric, the number of securities controlled under paragraph (a)(1) of this section is the maximum number of securities that the financial instrument could be converted into, be exercised for, be exchanged for, or otherwise become under the formula, rate, or other variable metric.
(3) Notwithstanding paragraph (a)(1) of this section, a person does not control voting securities due to controlling a financial instrument if the financial instrument:
(i) By its terms is not convertible into, is not exercisable for, is not exchangeable for, and may not otherwise become voting securities in the hands of the person or an affiliate of the person; and
(ii) By its terms is only convertible into, exercisable for, exchangeable for, or may otherwise become voting securities in the hands of a transferee after a transfer:
(A) In a widespread public distribution;
(B) To the issuing company;
(C) In transfers in which no transferee (or group of associated transferees) would receive 2 percent or more of the outstanding securities of any class of voting securities of the issuing company; or
(D) To a transferee that would control more than 50 percent of every class of voting securities of the issuing company without any transfer from the person.
(4) Notwithstanding paragraph (a)(1) of this section, a person that has agreed to acquire securities or other financial instruments pursuant to a securities purchase agreement does not control such securities or financial instruments until the person acquires the securities or financial instruments.
(5) Notwithstanding paragraph (a)(1) of this section, a right that provides a person the ability to acquire securities in future issuances or to convert nonvoting securities into voting securities does not cause the person to control the securities that could be acquired under the right, so long as the right does not allow the person to acquire a higher percentage of the class of securities than the person controlled immediately prior to the future acquisition.
(6) Notwithstanding paragraph (a)(1) of this section, a preferred security that would be a nonvoting security but for a right to vote on directors that activates only after six or more quarters of unpaid dividends is not considered to be a voting security until the security holder is entitled to exercise the voting right.
(7) For purposes of determining the percentage of a class of voting securities of a company controlled by a person that controls a financial instrument of the type described in paragraph (a)(1) of this section:
(i) The securities controlled by the person under paragraphs (a)(1) through (6) of this section are deemed to be issued and outstanding; and
(ii) Any securities controlled by anyone other than the person under paragraphs (a)(1) through (6) of this section are not deemed to be issued and outstanding, unless by the terms of the financial instruments the securities controlled by the other persons must be issued and outstanding in order for the securities of the person to be issued and outstanding.
(b) Restriction on securities. A person that enters into an agreement or understanding with a second person under which the rights of the second person are restricted in any manner with respect to securities that are controlled by the second person, controls the securities of the second person, unless the restriction is:
(1) A requirement that the second person offer the securities for sale to the first person for a reasonable period of time prior to transferring the securities to a third party;
(2) A requirement that, if the second person agrees to sell the securities, the second person provide the first person with the opportunity to participate in the sale of the securities by the second person;
(3) A requirement under which the second person agrees to sell its securities to a third party if a majority of security holders agrees to sell their securities to the third party;
(4) Incident to a bona fide loan transaction in which the securities serve as collateral;
(5) A short-term and revocable proxy;
(6) A restriction on transferability that continues only for a reasonable amount of time necessary to complete an acquisition by the first person of the securities from the second person, including the time necessary to obtain required approval from an appropriate government authority with respect to the acquisition;
(7) A requirement that the second person vote the securities in favor of a specific acquisition of control of the issuing company, or against competing transactions, if the restriction continues only for a reasonable amount of time necessary to complete the transaction, including the time necessary to obtain required approval from an appropriate government authority with respect to an acquisition or merger; or
(8) An agreement among security holders of the issuing company intended to preserve the tax status or tax benefits of the company, such as qualification of the issuing company as a Subchapter S corporation, as defined in 26 U.S.C. 1361(a)(1) or any successor statute, or prevention of events that could impair deferred tax assets, such as net operating loss carryforwards, as described in 26 U.S.C. 382 or any successor statute.
(c) Securities held by senior management officials or controlling equity holders of a company. A company that controls 5 percent or more of any class of voting securities of another company controls all securities issued by the second company that are controlled by senior management officials, directors, or controlling shareholders of the first company, or by immediate family members of such persons, unless the first company controls less than 15 percent of each class of voting securities of the second company and the senior management officials, directors, and controlling shareholders of the first company, and immediate family members of such persons, control 50 percent or more of each class of voting securities of the second company.
(d) Reservation of authority. Notwithstanding paragraphs (a) through (c) of this section, the Board may determine that securities are or are not controlled by a company based on the facts and circumstances presented.
§ 238.10 Categorization of banking organizations.
(a) General. A banking organization with average total consolidated assets of $100 billion or more must determine its category among the three categories described in paragraphs (b) through (d) of this section at least quarterly.
(b) Category II. (1) A banking organization is a Category II banking organization if the banking organization has:
(i) $700 billion or more in average total consolidated assets; or
(ii)(A) $75 billion or more in average cross-jurisdictional activity; and
(B) $100 billion or more in average total consolidated assets.
(2) After meeting the criteria in paragraph (b)(1) of this section, a banking organization continues to be a Category II banking organization until the banking organization has:
(i)(A) Less than $700 billion in total consolidated assets for each of the four most recent calendar quarters; and
(B) Less than $75 billion in cross-jurisdictional activity for each of the four most recent calendar quarters; or
(ii) Less than $100 billion in total consolidated assets for each of the four most recent calendar quarters.
(c) Category III. (1) A banking organization is a Category III banking organization if the banking organization:
(i) Has:
(A) $250 billion or more in average total consolidated assets; or
(B) $100 billion or more in average total consolidated assets and at least:
(1) $75 billion in average total nonbank assets;
(2) $75 billion in average weighted short-term wholesale funding; or
(3) $75 billion in average off-balance sheet exposure; and
(ii) Is not a Category II banking organization.
(2) After meeting the criteria in paragraph (c)(1) of this section, a banking organization continues to be a Category III banking organization until the banking organization:
(i) Has:
(A) Less than $250 billion in total consolidated assets for each of the four most recent calendar quarters;
(B) Less than $75 billion in total nonbank assets for each of the four most recent calendar quarters;
(C) Less than $75 billion in weighted short-term wholesale funding for each of the four most recent calendar quarters; and
(D) Less than $75 billion in off-balance sheet exposure for each of the four most recent calendar quarters; or
(ii) Has less than $100 billion in total consolidated assets for each of the four most recent calendar quarters; or
(iii) Meets the criteria in paragraph (b)(1) of this section to be a Category II banking organization.
(d) Category IV. (1) A banking organization with average total consolidated assets of $100 billion or more is a Category IV banking organization if the banking organization:
(i) Is not a Category II banking organization; and
(ii) Is not a Category III banking organization.
(2) After meeting the criteria in paragraph (d)(1) of this section, a banking organization continues to be a Category IV banking organization until the banking organization:
(i) Has less than $100 billion in total consolidated assets for each of the four most recent calendar quarters;
(ii) Meets the criteria in paragraph (b)(1) of this section to be a Category II banking organization; or
(iii) Meets the criteria in paragraph (c)(1) of this section to be a Category III banking organization.
Subpart B – Acquisitions of Saving Association Securities or Assets
§ 238.11 Transactions requiring Board approval.
The following transactions require the Board’s prior approval under section 10 of HOLA except as exempted under § 238.12:
(a) Formation of savings and loan holding company. Any action that causes a savings association or other company to become a savings and loan holding company.
(b) Acquisition of subsidiary savings association. Any action that causes a savings association to become a subsidiary of a savings and loan holding company.
(c) Acquisition of control of savings association or savings and loan holding company securities. (1) The acquisition by a savings and loan holding company of direct or indirect ownership or control of any voting securities of a savings association or savings and loan holding company, that is not a subsidiary, if the acquisition results in the company’s control of more than 5 percent of the outstanding shares of any class of voting securities of the savings association or savings and loan holding company.
(2) An acquisition includes the purchase of additional securities through the exercise of preemptive rights, but does not include securities received in a stock dividend or stock split that does not alter the savings and loan holding company’s proportional share of any class of voting securities.
(3) In the case of a multiple savings and loan holding company, acquisition of direct or indirect ownership or control of any voting securities of a savings association or savings and loan holding company, that is not a subsidiary, if the acquisition results in the company’s control of more than 5 percent of the outstanding shares of any class of voting securities of the savings association or savings and loan holding company that is engaged in any business activity other than those specified in § 238.51 of this part.
(d) Acquisition of savings association or savings and loan holding company assets. The acquisition by a savings and loan holding company or by a subsidiary thereof (other than a savings association) of all or substantially all of the assets of a savings association, or savings and loan holding company.
(e) Merger of savings and loan holding companies. The merger or consolidation of savings and loan holding companies, and the acquisition of a savings association through a merger or consolidation.
(f) Acquisition of control by certain individuals. The acquisition, by a director or officer of a savings and loan holding company, or by any individual who owns, controls, or holds the power to vote (or holds proxies representing) more than 25 percent of the voting shares of such savings and loan holding company, of control of any savings association that is not a subsidiary of such savings and loan holding company.
§ 238.12 Transactions not requiring Board approval.
(a) The requirements of § 238.11(a), (b), (d), (e) and (f) do not apply to:
(1) Control of a savings association acquired by devise under the terms of a will creating a trust which is excluded from the definition of savings and loan holding company;
(2) Control of a savings association acquired in connection with a reorganization that involves solely the acquisition of control of that association by a newly formed company that is controlled by the same acquirors that controlled the savings association for the immediately preceding three years, and entails no other transactions, such as an assumption of the acquirors’ debt by the newly formed company: Provided, that the acquirors have filed the designated form with the appropriate Reserve Bank and have provided all additional information requested by the Board or Reserve Bank, and the Board nor the appropriate Reserve Bank object to the acquisition within 30 days of the filing date;
(3) Control of a savings association acquired by a bank holding company that is registered under and subject to, the Bank Holding Company Act of 1956, or any company controlled by such bank holding company;
(4) Control of a savings association acquired solely as a result of a pledge or hypothecation of stock to secure a loan contracted for in good faith or the liquidation of a loan contracted for in good faith, in either case where such loan was made in the ordinary course of the business of the lender: Provided, further, That acquisition of control pursuant to such pledge, hypothecation or liquidation is reported to the Board within 30 days, and Provided, further, That the acquiror shall not retain such control for more than one year from the date on which such control was acquired; however, the Board may, upon application by an acquiror, extend such one-year period from year to year, for an additional period of time not exceeding three years, if the Board finds such extension is warranted and would not be detrimental to the public interest;
(5) Control of a savings association acquired through a percentage increase in stock ownership following a pro rata stock dividend or stock split, if the proportional interests of the recipients remain substantially the same;
(6) Acquisitions of up to twenty-five percent (25%) of a class of stock by a tax-qualified employee stock benefit plan; and
(7) Acquisitions of up to 15 percent of the voting stock of any savings association by a savings and loan holding company (other than a bank holding company) in connection with a qualified stock issuance if such acquisition is approved by the Board pursuant to subpart E.
(b) The requirements of § 238.11(c) do not apply to voting shares of a savings association or of a savings and loan holding company –
(1) Held as a bona fide fiduciary (whether with or without the sole discretion to vote such shares);
(2) Held temporarily pursuant to an underwriting commitment in the normal course of an underwriting business;
(3) Held in an account solely for trading purposes or over which no control is held other than control of voting rights acquired in the normal course of a proxy solicitation;
(4) Acquired in securing or collecting a debt previously contracted in good faith, for two years after the date of acquisition or for such additional time (not exceeding three years) as the Board may permit if, in the Board’s judgment, such an extension would not be detrimental to the public interest;
(5) Acquired under section 13(k)(1)(A)(i) of the Federal Deposit Insurance Act (or section 408(m) of the National Housing Act as in effect immediately prior to the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989);
(6) Held by any insurance companies as defined in section 2(a)(17) of the Investment Company Act of 1940: Provided, That all shares held by all insurance company affiliates of such savings association or savings and loan holding company may not, in the aggregate, exceed five percent of all outstanding shares or of the voting power of the savings association or savings and loan holding company, and such shares are not acquired or retained with a view to acquiring, exercising, or transferring control of the savings association or savings and loan holding company; and
(7) Acquired pursuant to a qualified stock issuance if such a purchase is approved pursuant to subpart E of this part.
(c) The aggregate amount of shares held under paragraph (b) of this section (other than pursuant to paragraphs (b)(1) through (4) and (b)(6)) may not exceed 15 percent of all outstanding shares or the voting power of a savings association or savings and loan holding company.
(d) Acquisitions involving savings association mergers and internal corporate reorganizations. The requirements of § 238.11 do not apply to:
(1) Certain transactions subject to the Bank Merger Act. The acquisition by a savings and loan holding company of shares of a savings association or company controlling a savings association or the merger of a company controlling a savings association with the savings and loan holding company, if the transaction is part of the merger or consolidation of the savings association with a subsidiary savings association (other than a nonoperating subsidiary savings association) of the acquiring savings and loan holding company, or is part of the purchase of substantially all of the assets of the savings association by a subsidiary savings association (other than a nonoperating subsidiary savings association) of the acquiring savings and loan holding company, and if:
(i) The savings association merger, consolidation, or asset purchase occurs simultaneously with the acquisition of the shares of the savings association or savings and loan holding company or the merger of holding companies, and the savings association is not operated by the acquiring savings and loan holding company as a separate entity other than as the survivor of the merger, consolidation, or asset purchase;
(ii) The transaction requires the prior approval of a federal supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c));
(iii) The transaction does not involve the acquisition of any company that would require prior notice or approval under section 10(c) of the HOLA;
(iv) The transaction does not involve a depository institution organized in mutual form, a savings and loan holding company organized in mutual form, a subsidiary holding company of a savings and loan holding company organized in mutual form, or a bank holding company organized in mutual form;
(v) The transaction will not have a material adverse impact on the financial condition of the acquiring savings and loan holding company;
(vi) At least 10 days prior to the transaction, the acquiring savings and loan holding company has provided to the Reserve Bank written notice of the transaction that contains:
(A) A copy of the filing made to the appropriate federal banking agency under the Bank Merger Act; and
(B) A description of the holding company’s involvement in the transaction, the purchase price, and the source of funding for the purchase price; and
(vii) Prior to expiration of the period provided in paragraph (d)(1)(vi) of this section, neither the Board nor the Reserve Bank has informed the savings and loan holding company that an application under § 238.11 is required.
(2) Internal corporate reorganizations. (i) Subject to paragraph (d)(2)(ii) of this section, any of the following transactions performed in the United States by a savings and loan holding company:
(A) The merger of holding companies that are subsidiaries of the savings and loan holding company;
(B) The formation of a subsidiary holding company;
(C) The transfer of control or ownership of a subsidiary savings association or a subsidiary holding company between one subsidiary holding company and another subsidiary holding company or the savings and loan holding company.
(ii) A transaction described in paragraph (d)(2)(i) of this section qualifies for this exception if –
(A) The transaction represents solely a corporate reorganization involving companies and insured depository institutions that, both preceding and following the transaction, are lawfully controlled and operated by the savings and loan holding company;
(B) The transaction does not involve the acquisition of additional voting shares of an insured depository institution that, prior to the transaction, was less than majority owned by the savings and loan holding company;
(C) The transaction does not involve a savings and loan holding company organized in mutual form, a subsidiary holding company of a savings and loan holding company organized in mutual form, or a bank holding company organized in mutual form; and
(D) The transaction will not have a material adverse impact on the financial condition of the holding company.
§ 238.13 Prohibited acquisitions.
(a) No savings and loan holding company may, directly or indirectly, or through one or more subsidiaries or through one or more transactions, acquire control of an uninsured institution or retain, for more than one year after the date any savings association subsidiary becomes uninsured, control of such association.
(b) Control of mutual savings association. No savings and loan holding company or any subsidiary thereof, or any director, officer, or employee of a savings and loan holding company or subsidiary thereof, or person owning, controlling, or holding with power to vote, or holding proxies representing, more than 25 percent of the voting shares of such holding company or subsidiary, may hold, solicit, or exercise any proxies in respect of any voting rights in a mutual savings association.
§ 238.14 Procedural requirements.
(a) Filing application. An application for the Board’s prior approval under § 238.11 shall be governed by the provisions of this section and shall be filed with the appropriate Reserve Bank on the designated form.
(b) Request for confidential treatment. An applicant may request confidential treatment for portions of its application pursuant to 12 CFR 261.15.
(c) Public notice – (1) Newspaper publication – (i) Location of publication. In the case of each application, the applicant shall publish a notice in a newspaper of general circulation, in the form and at the locations specified in § 262.3 of the Rules of Procedure (12 CFR 262.3) in this chapter;
(ii) Contents of notice. A newspaper notice under this paragraph shall provide an opportunity for interested persons to comment on the proposal for a period of at least 30 calendar days;
(iii) Timing of publication. Each newspaper notice published in connection with a proposal under this paragraph shall be published no more than 15 calendar days before and no later than 7 calendar days following the date that an application is filed with the appropriate Reserve Bank.
(2)
(ii) Request for advance publication. An applicant may request that, during the 15-day period prior to filing an application, the Board publish notice of a proposal in the
(3) Waiver or shortening of notice. The Board may waive or shorten the required notice periods under this section if the Board determines that an emergency exists requiring expeditious action on the proposal, or if the Board finds that immediate action is necessary to prevent the probable failure of an insured depository institution.
(d) Public comment – (1) Timely comments. Interested persons may submit information and comments regarding a proposal filed under this subpart. A comment shall be considered timely for purposes of this subpart if the comment, together with all supplemental information, is submitted in writing in accordance with the Board’s Rules of Procedure and received by the Board or the appropriate Reserve Bank prior to the expiration of the latest public comment period provided in paragraph (c) of this section.
(2) Extension of comment period – (i) In general. The Board may, in its discretion, extend the public comment period regarding any proposal submitted under this subpart.
(ii) Requests in connection with obtaining application or notice. In the event that an interested person has requested a copy of a notice or application submitted under this subpart, the Board may, in its discretion and based on the facts and circumstances, grant such person an extension of the comment period for up to 15 calendar days.
(iii) Joint requests by interested person and applicant. The Board will grant a joint request by an interested person and the applicant for an extension of the comment period for a reasonable period for a purpose related to the statutory factors the Board must consider under this subpart.
(3) Substantive comment. A comment will be considered substantive for purposes of this subpart unless it involves individual complaints, or raises frivolous, previously-considered or wholly unsubstantiated claims or irrelevant issues.
(e) Hearings. The Board may order a formal or informal hearing or other proceeding on the application, as provided in § 262.3(i)(2) of this chapter. Any request for a hearing (other than from the primary supervisor) shall comply with § 262.3(e) in this chapter.
(f) Accepting application for processing. Within 7 calendar days after the Reserve Bank receives an application under this section, the Reserve Bank shall accept it for processing as of the date the application was filed or return the application if it is substantially incomplete. Upon accepting an application, the Reserve Bank shall immediately send copies to the Board and to the primary banking supervisor of the savings association to be acquired and to the Attorney General, and shall request from the Attorney General a report on the competitive factors involved. The Reserve Bank or the Board may request additional information necessary to complete the record of an application at any time after accepting the application for processing.
(g) Action on applications – (1) Action under delegated authority. Except as provided in paragraph (g)(4) of this section, unless the Reserve Bank, upon notice to the applicant, refers the application to the Board for decision because action under delegated authority is not appropriate, the Reserve Bank shall approve an application under this section:
(i) Not earlier than the third business day following the close of the public comment period; and
(ii) Not later than the later of the fifth business day following the close of the public comment period or the 30th calendar day after the acceptance date for the application.
(2) Board action. The Board shall act on an application under this section that is referred to it for decision within 60 calendar days after the acceptance date for the application, unless the Board notifies the applicant that the 60-day period is being extended for a specified period and states the reasons for the extension. The Board may, at any time, request additional information that it believes is necessary for its decision.
(3) Approval through failure to act – (i) Ninety-one day rule. An application shall be deemed approved if the Board fails to act on the application within 91 calendar days after the date of submission to the Board of the complete record on the application. For this purpose, the Board acts when it issues an order stating that the Board has approved or denied the application or notice, reflecting the votes of the members of the Board, and indicating that a statement of the reasons for the decision will follow promptly.
(ii) Complete record. For the purpose of computing the commencement of the 91-day period, the record is complete on the latest of:
(A) The date of receipt by the Board of an application that has been accepted by the Reserve Bank;
(B) The last day provided in any notice for receipt of comments and hearing requests on the application or notice;
(C) The date of receipt by the Board of the last relevant material regarding the application that is needed for the Board’s decision, if the material is received from a source outside of the Federal Reserve System; or
(D) The date of completion of any hearing or other proceeding.
(4) Expedited reorganization – (i) In general. The Board or the appropriate Reserve Bank shall act on an application of a reorganization that meets the requirements of § 238.15(f):
(A) Not earlier than the third business day following the close of the public comment period; and
(B) Not later than the fifth business day following the close of the public comment period, except that the Board may extend the period for action under this paragraph (g)(4) for up to 5 business days.
(ii) Acceptance of notice in event expedited procedure not available. In the event that the Board or the Reserve Bank determines that an application filed pursuant to § 238.15(f) does not meet one or more of the requirements of § 238.15(f), paragraph (g)(4) of this section shall not apply and the Board or Reserve Bank will act on the application according to the other provisions of paragraph (g) of this section.
§ 238.15 Factors considered in acting on applications.
(a) Generally. The Board may not approve any application under this subpart if:
(1) The transaction would result in a monopoly or would further any combination or conspiracy to monopolize, or to attempt to monopolize, the savings and loan business in any part of the United States;
(2) The effect of the transaction may be substantially to lessen competition in any section of the country, tend to create a monopoly, or in any other manner be in restraint of trade, unless the Board finds that the transaction’s anti-competitive effects are clearly outweighed by its probable effect in meeting the convenience and needs of the community;
(3) The applicant has failed to provide the Board with adequate assurances that it will make available such information on its operations or activities, and the operations or activities of any affiliate of the applicant, that the Board deems appropriate to determine and enforce compliance with HOLA and other applicable federal banking statutes, and any regulations thereunder; or
(4) In the case of an application involving a foreign banking organization, the foreign banking organization is not subject to comprehensive supervision or regulation on a consolidated basis by the appropriate authorities in its home country, as provided in § 211.24(c)(1)(ii) of the Board’s Regulation K (12 CFR 211.24(c)(1)(ii)).
(5) In the case of an application by a savings and loan holding company to acquire an insured depository institution, section 10(e)(2)(E) of HOLA prohibits the Board from approving the transaction.
(b) Other factors. In deciding applications under this subpart, the Board also considers the following factors with respect to the acquiror, its subsidiaries, any savings associations or banks related to the acquiror through common ownership or management, and the savings association or associations to be acquired:
(1) Financial condition. Their financial condition and future prospects, including whether current and projected capital positions and levels of indebtedness conform to standards and policies established by the Board.
(2) Managerial resources. The competence, experience, and integrity of the officers, directors, and principal shareholders of the acquiror, its subsidiaries, and the savings association and savings and loan holding companies concerned; their record of compliance with laws and regulations; and the record of the applicant and its affiliates of fulfilling any commitments to, and any conditions imposed by, the Board in connection with prior applications.
(3) Convenience and needs of community. In the case of an application required under § 238.11(c), (d), or (e), (or an application by a savings and loan holding company under § 238.11(b)), the convenience and needs of the communities to be served, including the record of performance under the Community Reinvestment Act of 1977 (12 U.S.C. 2901 et seq.) and regulations issued thereunder, including the Board’s Regulation BB (12 CFR part 228).
(c) Presumptive disqualifiers – (1) Integrity factors. The following factors shall give rise to a rebuttable presumption that an acquiror may fail to satisfy the managerial resources and future prospects tests of paragraph (b) of this section:
(i) During the 10-year period immediately preceding filing of the application or notice, criminal, civil or administrative judgments, consents or orders, and any indictments, formal investigations, examinations, or civil or administrative proceedings (excluding routine or customary audits, inspections and investigations) that terminated in any agreements, undertakings, consents or orders, issued against, entered into by, or involving the acquiror or affiliates of the acquiror by any federal or state court, any department, agency, or commission of the U.S. Government, any state or municipality, any Federal Home Loan Bank, any self-regulatory trade or professional organization, or any foreign government or governmental entity, which involve:
(A) Fraud, moral turpitude, dishonesty, breach of trust or fiduciary duties, organized crime or racketeering;
(B) Violation of securities or commodities laws or regulations;
(C) Violation of depository institution laws or regulations;
(D) Violation of housing authority laws or regulations; or
(E) Violation of the rules, regulations, codes of conduct or ethics of a self-regulatory trade or professional organization;
(ii) Denial, or withdrawal after receipt of formal or informal notice of an intent to deny, by the acquiror or affiliates of the acquiror, of
(A) Any application relating to the organization of a financial institution,
(B) An application to acquire any financial institution or holding company thereof under HOLA or the Bank Holding Company Act or otherwise,
(C) A notice relating to a change in control of any of the foregoing under the CIC Act; or
(D) An application or notice under a state holding company or change in control statute;
(iii) The acquiror or affiliates of the acquiror were placed in receivership or conservatorship during the preceding 10 years, or any management official of the acquiror was a management official or director (other than an official or director serving at the request of the Board, the Federal Deposit Insurance Corporation, the Resolution Trust Corporation, the former Federal Savings and Loan Insurance Corporation, or their predecessors) or principal shareholder of a company or savings association that was placed into receivership, conservatorship, or a management consignment program, or was liquidated during his or her tenure or control or within two years thereafter;
(iv) Felony conviction of the acquiror, an affiliate of the acquiror or a management official of the acquiror or an affiliate of the acquiror;
(v) Knowingly making any written or oral statement to the Board or any predecessor agency (or its delegate) in connection with an application, notice or other filing under this part that is false or misleading with respect to a material fact or omits to state a material fact with respect to information furnished or requested in connection with such an application, notice or other filing;
(vi) Acquisition and retention at the time of submission of an application or notice, of stock in the savings association by the acquiror in violation of this part or its predecessor regulations.
(2) Financial factors. The following shall give rise to a rebuttable presumption that an acquiror may fail to satisfy the financial-resources and future-prospects tests of paragraph (c) of this section:
(i) Liability for amounts of debt which, in the opinion of the Board, create excessive risks of default and pressure on the savings association to be acquired; or
(ii) Failure to furnish a business plan or furnishing a business plan projecting activities which are inconsistent with economical home financing.
(d) Competitive factor. Before approving any such acquisition, except a transaction under section 13(k) of the Federal Deposit Insurance Act, the Board shall consider any report rendered by the Attorney General within 30 days of such request under § 238.14(f) on the competitive factors involved.
(e) Expedited reorganizations. An application by a savings association solely for the purpose of obtaining approval for the creation of a savings and loan holding company by such savings association shall be eligible for expedited processing under § 238.14(g)(4) if it satisfies the following criteria:
(1) The holding company shall not be capitalized initially in an amount exceeding the amount the savings association is permitted to pay in dividends to its holding company as of the date of the reorganization pursuant to applicable regulations or, in the absence thereof, pursuant to the then current policy guidelines;
(2) The creation of the savings and loan holding company by the association is the sole transaction contained in the application, and there are no other transactions requiring approval incident to the creation of the holding company (other than the creation of an interim association that will disappear upon consummation of the reorganization and the merger of the savings association with such interim association to effect the reorganization), and the holding company is not also seeking any regulatory waivers, regulatory forbearances, or resolution of legal or supervisory issues;
(3) The board of directors and executive officers of the holding company are composed of persons who, at the time of acquisition, are executive officers and directors of the association;
(4) The acquisition raises no significant issues of law or policy;
(5) Prior to consummation of the reorganization transaction, the holding company shall enter into any dividend limitation, regulatory capital maintenance, or prenuptial agreement required by Board regulations, or in the absence thereof, required pursuant to policy guidelines issued by the Board; and
(f) Conditional approvals. The Board may impose conditions on any approval, including conditions to address competitive, financial, managerial, safety and soundness, convenience and needs, compliance or other concerns, to ensure that approval is consistent with the relevant statutory factors and other provisions of HOLA.
(g) No acquisition shall be approved by the Board pursuant to § 238.11 which would result in the formation by any company, through one or more subsidiaries or through one or more transactions, of a multiple savings and loan holding company controlling savings associations in more than one state where the acquisition causes a savings association to become an affiliate of another savings association with which it was not previously affiliated unless:
(1) Such company, or a savings association subsidiary of such company, is authorized to acquire control of a savings association subsidiary, or to operate a home or branch office, in the additional state or states pursuant to section 13(k) of the Federal Deposit Insurance Act, 12 U.S.C. 1823(k) (or section 408(m) of the National Housing Act as in effect immediately prior to enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989);
(2) Such company controls a savings association subsidiary which operated a home or branch office in the additional state or states as of March 5, 1987; or
(3) The statute laws of the state in which the savings association, control of which is to be acquired, is located are such that a savings association chartered by such state could be acquired by a savings association chartered by the state where the acquiring savings association or savings and loan holding company is located (or by a holding company that controls such a state chartered savings association), and such statute laws specifically authorize such an acquisition by language to that effect and not merely by implication.
Subpart C – Control Proceedings
§ 238.21 Control proceedings.
(a) Preliminary determination of control. (1) The Board in its sole discretion may issue a preliminary determination of control under the procedures set forth in this section in any case in which the Board determines, based on consideration of the facts and circumstances presented, that a first company has the power to exercise a controlling influence over the management or policies of a second company.
(2) If the Board makes a preliminary determination of control under this section, the Board shall send notice to the first company containing a statement of the facts upon which the preliminary determination is based.
(b) Response to preliminary determination of control. (1) Within 30 calendar days after issuance by the Board of a preliminary determination of control or such longer period permitted by the Board in its discretion, the first company against whom the preliminary determination has been made shall:
(i) Consent to the preliminary determination of control and either:
(A) Submit for the Board’s approval a specific plan for the prompt termination of the control relationship; or
(B) File an application or notice under this part, as applicable; or
(ii) Contest the preliminary determination by filing a response, setting forth the facts and circumstances in support of its position that no control exists, and, if desired, requesting a hearing or other proceeding.
(2) If the first company fails to respond to the preliminary determination of control within 30 days or such longer period permitted by the Board in its discretion, the first company will be deemed to have waived its right to present additional information to the Board or to request a hearing or other proceeding regarding the preliminary determination of control.
(c) Hearing and final determination. (1) The Board shall order a hearing or other appropriate proceeding upon the petition of a first company that contests a preliminary determination of control if the Board finds that material facts are in dispute. The Board may, in its discretion, order a hearing or other appropriate proceeding without a petition for such a proceeding by the first company.
(2) At a hearing or other proceeding, any applicable presumptions established under this subpart shall be considered in accordance with the Federal Rules of Evidence and the Board’s Rules of Practice for Formal Hearings (12 CFR part 263).
(3) After considering the submissions of the first company and other evidence, including the record of any hearing or other proceeding, the Board will issue a final order determining whether the first company has the power to exercise a controlling influence over the management or policies of the second company. If a controlling influence is found, the Board may direct the first company to terminate the control relationship or to file an application or notice for the Board’s approval to retain the control relationship.
(d) Submission of evidence. (1) In connection with contesting a preliminary determination of control under paragraph (b)(1)(ii) of this section, a first company may submit to the Board evidence or any other relevant information related to its control of a second company.
(2) Evidence or other relevant information submitted to the Board pursuant to paragraph (d)(1) of this section must be in writing and may include a description of all current and proposed relationships between the first company and the second company, including relationships of the type that are identified under any of the rebuttable presumptions in §§ 238.22 and 238.23 of this part, copies of any formal agreements related to such relationships, and a discussion regarding why the Board should not determine the first company to control the second company.
(e) Definitions. For purposes of this subpart:
(1) Board of directors means the board of directors of a company or a set of individuals exercising similar functions at a company.
(2) Director representative means any individual that represents the interests of a first company through service on the board of directors of a second company. For purposes of this paragraph (e)(2), examples of persons who are directors of a second company and generally would be considered director representatives of a first company include:
(i) A current officer, employee, or director of the first company;
(ii) An individual who was an officer, employee, or director of the first company within the prior two years; and
(iii) An individual who was nominated or proposed to be a director of the second company by the first company.
(iv) A director representative does not include a nonvoting observer.
(3) First company means the company whose potential control of a second company is the subject of determination by the Board under this subpart.
(4) Investment adviser means a company that:
(i) Is registered as an investment adviser with the Securities and Exchange Commission under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.);
(ii) Is registered as a commodity trading advisor with the Commodity Futures Trading Commission under the Commodity Exchange Act (7 U.S.C. 1 et seq.);
(iii) Is a foreign equivalent of an investment adviser or commodity trading advisor, as described in paragraph (e)(4)(i) or (ii) of this section; or
(iv) Engages in any of the activities set forth in 12 CFR 225.28(b)(6)(i) through (iv).
(5) Limiting contractual right means a contractual right of the first company that would allow the first company to restrict significantly, directly or indirectly, the discretion of the second company, including its senior management officials and directors, over operational and policy decisions of the second company.
(i) Examples of limiting contractual rights may include, but are not limited to, a right that allows the first company to restrict or to exert significant influence over decisions related to:
(A) Activities in which the second company may engage, including a prohibition on entering into new lines of business, making substantial changes to or discontinuing existing lines of business, or entering into a contractual arrangement with a third party that imposes significant financial obligations on the second company;
(B) How the second company directs the proceeds of the first company’s investment;
(C) Hiring, firing, or compensating one or more senior management officials of the second company, or modifying the second company’s policies or budget concerning the salary, compensation, employment, or benefits plan for its employees;
(D) The second company’s ability to merge or consolidate, or its ability to acquire, sell, lease, transfer, spin-off, recapitalize, liquidate, dissolve, or dispose of subsidiaries or assets;
(E) The second company’s ability to make investments or expenditures;
(F) The second company achieving or maintaining a financial target or limit, including, for example, a debt-to-equity ratio, a fixed charges ratio, a net worth requirement, a liquidity target, a working capital target, or a classified assets or nonperforming loans limit;
(G) The second company’s payment of dividends on any class of securities, redemption of senior instruments, or voluntary prepayment of indebtedness;
(H) The second company’s ability to authorize or issue additional junior equity or debt securities, or amend the terms of any equity or debt securities issued by the second company;
(I) The second company’s ability to engage in a public offering or to list or de-list securities on an exchange, other than a right that allows the securities of the first company to have the same status as other securities of the same class;
(J) The second company’s ability to amend its articles of incorporation or by-laws, other than in a way that is solely defensive for the first company;
(K) The removal or selection of any independent accountant, auditor, investment adviser, or investment banker employed by the second company; or
(L) The second company’s ability to significantly alter accounting methods and policies, or its regulatory, tax, or liability status (e.g., converting from a stock corporation to a limited liability company); and
(ii) A limiting contractual right does not include a contractual right that would not allow the first company to significantly restrict, directly or indirectly, the discretion of the second company over operational and policy decisions of the second company. Examples of contractual rights that are not limiting contractual rights may include:
(A) A right that allows the first company to restrict or to exert significant influence over decisions relating to the second company’s ability to issue securities senior to securities owned by the first company;
(B) A requirement that the first company receive financial reports or other information of the type ordinarily available to common stockholders;
(C) A requirement that the second company maintain its corporate existence;
(D) A requirement that the second company consult with the first company on a reasonable periodic basis;
(E) A requirement that the second company provide notices of the occurrence of material events affecting the second company;
(F) A requirement that the second company comply with applicable statutory and regulatory requirements;
(G) A market standard requirement that the first company receive similar contractual rights as those held by other investors in the second company;
(H) A requirement that the first company be able to purchase additional securities issued by the second company in order to maintain the first company’s percentage ownership in the second company;
(I) A requirement that the second company ensure that any security holder who intends to sell its securities of the second company provide other security holders of the second company or the second company itself the opportunity to purchase the securities before the securities can be sold to a third party; or
(J) A requirement that the second company take reasonable steps to ensure the preservation of tax status or tax benefits, such as status of the second company as a Subchapter S corporation or the protection of the value of net operating loss carry-forwards.
(6) Second company means the company whose potential control by a first company is the subject of determination by the Board under this subpart.
(7) Senior management official means any person who participates or has the authority to participate (other than in the capacity as a director) in major policymaking functions of a company.
(f) Reservation of authority. Nothing in this subpart shall limit the authority of the Board to take any supervisory or enforcement action otherwise permitted by law, including an action to address unsafe or unsound practices or conditions, or violations of law.
§ 238.22 Rebuttable presumptions of control of a company.
(a) General. (1) In any proceeding under § 238.21(b) or (c) of this part, a first company is presumed to control a second company in the situations described in paragraphs (b) through (h) of this section. The Board also may find that a first company controls a second company based on other facts and circumstances.
(2) For purposes of the presumptions in this section, any company that is a subsidiary of the first company and also a subsidiary of the second company is considered to be a subsidiary of the first company and not a subsidiary of the second company.
(b) Management contract or similar agreement. The first company enters into any agreement, understanding, or management contract (other than to serve as investment adviser) with the second company, under which the first company directs or exercises significant influence or discretion over the general management, overall operations, or core business or policy decisions of the second company. Examples of such agreements include where the first company is a managing member, trustee, or general partner of the second company, or exercises similar powers and functions.
(c) Ownership or control of 5 percent or more of voting securities. The first company controls 5 percent or more of the outstanding securities of any class of voting securities of the second company, and:
(1)(i) Director representatives of the first company or any of its subsidiaries comprise 25 percent or more of the board of directors of the second company or any of its subsidiaries; or
(ii) Director representatives of the first company or any of its subsidiaries are able to make or block the making of major operational or policy decisions of the second company or any of its subsidiaries;
(2) Two or more employees or directors of the first company or any of its subsidiaries serve as senior management officials of the second company or any of its subsidiaries;
(3) An employee or director of the first company or any of its subsidiaries serves as the chief executive officer, or serves in a similar capacity, of the second company or any of its subsidiaries;
(4) The first company or any of its subsidiaries enters into transactions or has business relationships with the second company or any of its subsidiaries that generate in the aggregate 10 percent or more of the total annual revenues or expenses of the second company, each on a consolidated basis; or
(5) The first company or any of its subsidiaries has any limiting contractual right with respect to the second company or any of its subsidiaries, unless such limiting contractual right is part of an agreement to merge with or make a controlling investment in the second company that is reasonably expected to close within one year and such limiting contractual right is designed to ensure that the second company continues to operate in the ordinary course until the merger or investment is consummated or such limiting contractual right requires the second company to take an action necessary for the merger or investment to be consummated.
(d) Ownership or control of 10 percent or more of voting securities. The first company controls 10 percent or more of the outstanding securities of any class of voting securities of the second company, and:
(1) The first company or any of its subsidiaries propose a number of director representatives to the board of directors of the second company or any of its subsidiaries in opposition to nominees proposed by the management or board of directors of the second company or any of its subsidiaries that, together with any director representatives of the first company or any of its subsidiaries on the board of directors of the second company or any of its subsidiaries, would comprise 25 percent or more of the board of directors of the second company or any of its subsidiaries;
(2) Director representatives of the first company and its subsidiaries comprise more than 25 percent of any committee of the board of directors of the second company or any of its subsidiaries that can take action that binds the second company or any of its subsidiaries; or
(3) The first company or any of its subsidiaries enters into transactions or has business relationships with the second company or any of its subsidiaries that:
(i) Are not on market terms; or
(ii) Generate in the aggregate 5 percent or more of the total annual revenues or expenses of the second company, each on a consolidated basis.
(e) Ownership or control of 15 percent or more of voting securities. The first company controls 15 percent or more of the outstanding securities of any class of voting securities of the second company, and:
(1) A director representative of the first company or of any of its subsidiaries serves as the chair of the board of directors of the second company or any of its subsidiaries;
(2) One or more employees or directors of the first company or any of its subsidiaries serves as a senior management official of the second company or any of its subsidiaries; or
(3) The first company or any of its subsidiaries enters into transactions or has business relationships with the second company or any of its subsidiaries that generate in the aggregate 2 percent or more of the total annual revenues or expenses of the second company, each on a consolidated basis.
(f) Accounting consolidation. The first company consolidates the second company on its financial statements prepared under U.S. generally accepted accounting principles.
(g) Control of an investment fund. (1) The first company serves as an investment adviser to the second company, the second company is an investment fund, and the first company, directly or indirectly, or acting through one or more other persons, controls 5 percent or more of the outstanding securities of any class of voting securities of the second company.
(2) The presumption of control in paragraph (g)(1) of this section does not apply if the first company organized and sponsored the second company within the preceding 12 months.
(h) Divestiture of control. (1) The first company controlled the second company under § 238.2(e)(1) or (2) of this part at any time during the prior two years and the first company controls 15 percent or more of the outstanding securities of any class of voting securities of the second company.
(2) Notwithstanding paragraph (h)(1) of this section, a first company will not be presumed to control a second company under this paragraph if 50 percent or more of the outstanding securities of each class of voting securities of the second company is controlled by a person that is not a senior management official or director of the first company, or by a company that is not an affiliate of the first company.
(i) Securities held in a fiduciary capacity. For purposes of the presumptions of control in this section, the first company does not control securities of the second company that the first company holds in a fiduciary capacity, except that if the second company is a depository institution or a depository institution holding company, this paragraph (i) only applies to securities held in a fiduciary capacity without sole discretionary authority to exercise the voting rights of the securities.
§ 238.23 Rebuttable presumption of noncontrol of a company.
(a) In any proceeding under § 238.21(b) or (c) of this part, a first company is presumed not to control a second company if:
(1) The first company controls less than 10 percent of the outstanding securities of each class of voting securities of the second company; and
(2) The first company is not presumed to control the second company under § 238.22 of this part.
(b) In any proceeding under this subpart, or judicial proceeding under the Home Owners’ Loan Act, other than a proceeding in which the Board has made a preliminary determination that a first company has the power to exercise a controlling influence over the management or policies of a second company, a first company may not be held to have had control over a second company at any given time, unless the first company, at the time in question, controlled 5 percent or more of the outstanding securities of any class of voting securities of the second company, or had already been found to have control on the basis of the existence of a controlling influence relationship.
Subpart D – Change in Bank Control
§ 238.31 Transactions requiring prior notice.
(a) Prior notice requirement. Any person acting directly or indirectly, or through or in concert with one or more persons, shall give the Board 60 days’ written notice, as specified in § 238.33 of this subpart, before acquiring control of a savings and loan holding company, unless the acquisition is exempt under § 238.32.
(b) Definitions. For purposes of this subpart:
(1) Acquisition includes a purchase, assignment, transfer, or pledge of voting securities, or an increase in percentage ownership of a savings and loan holding company resulting from a redemption of voting securities.
(2) Acting in concert includes knowing participation in a joint activity or parallel action towards a common goal of acquiring control of a savings and loan holding company whether or not pursuant to an express agreement.
(3) Immediate family includes a person’s father, mother, stepfather, stepmother, brother, sister, stepbrother, stepsister, son, daughter, stepson, stepdaughter, grandparent, grandson, granddaughter, father-in-law, mother-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law, the spouse of any of the foregoing, and the person’s spouse.
(c) Acquisitions requiring prior notice – (1) Acquisition of control. The acquisition of voting securities of a savings and loan holding company constitutes the acquisition of control under the Bank Control Act, requiring prior notice to the Board, if, immediately after the transaction, the acquiring person (or persons acting in concert) will own, control, or hold with power to vote 25 percent or more of any class of voting securities of the institution.
(2) Rebuttable presumption of control. The Board presumes that an acquisition of voting securities of a savings and loan holding company constitutes the acquisition of control under the Bank Control Act, requiring prior notice to the Board, if, immediately after the transaction, the acquiring person (or persons acting in concert) will own, control, or hold with power to vote 10 percent or more of any class of voting securities of the institution, and if:
(i) The institution has registered securities under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l); or
(ii) No other person will own, control, or hold the power to vote a greater percentage of that class of voting securities immediately after the transaction.
(d) Rebuttable presumption of concerted action. The following persons shall be presumed to be acting in concert for purposes of this subpart:
(1) A company and any principal shareholder, partner, trustee, or management official of the company, if both the company and the person own voting securities of the savings and loan holding company;
(2) An individual and the individual’s immediate family;
(3) Companies under common control;
(4) Persons that are parties to any agreement, contract, understanding, relationship, or other arrangement, whether written or otherwise, regarding the acquisition, voting, or transfer of control of voting securities of a savings and loan holding company, other than through a revocable proxy as described in § 238.32(a)(5) of this subpart;
(5) Persons that have made, or propose to make, a joint filing under sections 13 or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78n), and the rules promulgated thereunder by the Securities and Exchange Commission; and
(6) A person and any trust for which the person serves as trustee.
(e) Acquisitions of loans in default. The Board presumes an acquisition of a loan in default that is secured by voting securities of a savings and loan holding company to be an acquisition of the underlying securities for purposes of this section.
(f) Other transactions. Transactions other than those set forth in paragraph (c) of this section resulting in a person’s control of less than 25 percent of a class of voting securities of a savings and loan holding company are not deemed by the Board to constitute control for purposes of the Bank Control Act.
(g) Rebuttal of presumptions. Prior notice to the Board is not required for any acquisition of voting securities under the presumption of control set forth in this section, if the Board finds that the acquisition will not result in control. The Board shall afford any person seeking to rebut a presumption in this section an opportunity to present views in writing or, if appropriate, orally before its designated representatives at an informal conference.
§ 238.32 Transactions not requiring prior notice.
(a) Exempt transactions. The following transactions do not require notice to the Board under this subpart:
(1) Existing control relationships. The acquisition of additional voting securities of a savings and loan holding company by a person who:
(i) Continuously since March 9, 1979 (or since the institution commenced business, if later), held power to vote 25 percent or more of any class of voting securities of the institution; or
(ii) Is presumed, under § 238.31(c)(2), to have controlled the institution continuously since March 9, 1979, if the aggregate amount of voting securities held does not exceed 25 percent or more of any class of voting securities of the institution or, in other cases, where the Board determines that the person has controlled the institution continuously since March 9, 1979;
(2) Increase of previously authorized acquisitions. Unless the Board or the Reserve Bank otherwise provides in writing, the acquisition of additional shares of a class of voting securities of a savings and loan holding company by any person (or persons acting in concert) who has lawfully acquired and maintained control of the institution (for purposes of § 238.31(c)), after complying with the procedures and receiving approval to acquire voting securities of the institution under this subpart, or in connection with an application approved under section 10(e) of HOLA (12 U.S.C. 1467a(e) and § 238.11 or section 18(c) of the Federal Deposit Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c));
(3) Acquisitions subject to approval under HOLA or Bank Merger Act. Any acquisition of voting securities subject to approval under section 10(e) of HOLA (12 U.S.C. 1467a(e) and § 238.11), or section 18(c) of the Federal Deposit Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c));
(4) Transactions exempt under HOLA. Any transaction described in sections 10(a)(3)(A) or 10(e)(1)(B)(ii) of HOLA by a person described in those provisions;
(5) Proxy solicitation. The acquisition of the power to vote securities of a savings and loan holding company through receipt of a revocable proxy in connection with a proxy solicitation for the purposes of conducting business at a regular or special meeting of the institution, if the proxy terminates within a reasonable period after the meeting;
(6) Stock dividends. The receipt of voting securities of a savings and loan holding company through a stock dividend or stock split if the proportional interest of the recipient in the institution remains substantially the same; and
(7) Acquisition of foreign banking organization. The acquisition of voting securities of a qualifying foreign banking organization. (This exemption does not extend to the reports and information required under paragraphs 9, 10, and 12 of the Bank Control Act (12 U.S.C. 1817(j) (9), (10), and (12)) and § 238.34.)
(b) Prior notice exemption. (1) The following acquisitions of voting securities of a savings and loan holding company, which would otherwise require prior notice under this subpart, are not subject to the prior notice requirements if the acquiring person notifies the appropriate Reserve Bank within 90 calendar days after the acquisition and provides any relevant information requested by the Reserve Bank:
(i) Acquisition of voting securities through inheritance;
(ii) Acquisition of voting securities as a bona fide gift; and
(iii) Acquisition of voting securities in satisfaction of a debt previously contracted (DPC) in good faith.
(2) The following acquisitions of voting securities of a savings and loan holding company, which would otherwise require prior notice under this subpart, are not subject to the prior notice requirements if the acquiring person does not reasonably have advance knowledge of the transaction, and provides the written notice required under § 238.33 to the appropriate Reserve Bank within 90 calendar days after the transaction occurs:
(i) Acquisition of voting securities resulting from a redemption of voting securities by the issuing savings and loan holding company; and
(ii) Acquisition of voting securities as a result of actions (including the sale of securities) by any third party that is not within the control of the acquiror.
(3) Nothing in paragraphs (b)(1) or (b)(2) of this section limits the authority of the Board to disapprove a notice pursuant to § 238.33(h).
§ 238.33 Procedures for filing, processing, publishing, and acting on notices.
(a) Filing notice. (1) A notice required under this subpart shall be filed with the appropriate Reserve Bank and shall contain all the information required by paragraph 6 of the Bank Control Act (12 U.S.C. 1817(j)(6)), or prescribed in the designated Board form.
(2) The Board may waive any of the informational requirements of the notice if the Board determines that it is in the public interest.
(3) A notificant shall notify the appropriate Reserve Bank or the Board immediately of any material changes in a notice submitted to the Reserve Bank, including changes in financial or other conditions.
(4) When the acquiring person is an individual, or group of individuals acting in concert, the requirement to provide personal financial data may be satisfied by a current statement of assets and liabilities and an income summary, as required in the designated Board form, together with a statement of any material changes since the date of the statement or summary. The Reserve Bank or the Board, nevertheless, may request additional information, if appropriate.
(b) Acceptance of notice. The 60-day notice period specified in § 238.31 of this subpart begins on the date of receipt of a complete notice. The Reserve Bank shall notify the person or persons submitting a notice under this subpart in writing of the date the notice is or was complete and thereby accepted for processing. The Reserve Bank or the Board may request additional relevant information at any time after the date of acceptance.
(c) Publication – (1) Newspaper Announcement. Any person(s) filing a notice under this subpart shall publish, in a form prescribed by the Board, an announcement soliciting public comment on the proposed acquisition. The announcement shall be published in a newspaper of general circulation in the community in which the head office of the savings and loan holding company is located and in the community in which the head office of each of its subsidiary savings associations is located. The announcement shall be published no earlier than 15 calendar days before the filing of the notice with the appropriate Reserve Bank and no later than 10 calendar days after the filing date; and the publisher’s affidavit of a publication shall be provided to the appropriate Reserve Bank.
(2) Contents of newspaper announcement. The newspaper announcement shall state:
(i) The name of each person identified in the notice as a proposed acquiror of the savings and loan holding company;
(ii) The name of the savings and loan holding company to be acquired, including the name of each of the savings and loan holding company’s subsidiary savings association; and
(iii) A statement that interested persons may submit comments on the notice to the Board or the appropriate Reserve Bank for a period of 20 days, or such shorter period as may be provided, pursuant to paragraph (c)(5) of this section.
(3)
(4) Delay of publication. The Board may permit delay in the publication required under paragraphs (c)(1) and (c)(3) of this section if the Board determines, for good cause shown, that it is in the public interest to grant such delay. Requests for delay of publication may be submitted to the appropriate Reserve Bank.
(5) Shortening or waiving notice. The Board may shorten or waive the public comment or newspaper publication requirements of this paragraph, or act on a notice before the expiration of a public comment period, if it determines in writing that an emergency exists, or that disclosure of the notice, solicitation of public comment, or delay until expiration of the public comment period would seriously threaten the safety or soundness of the savings and loan holding company to be acquired.
(6) Consideration of public comments. In acting upon a notice filed under this subpart, the Board shall consider all public comments received in writing within the period specified in the newspaper or
(7) Standing. No person (other than the acquiring person) who submits comments or information on a notice filed under this subpart shall thereby become a party to the proceeding or acquire any standing or right to participate in the Board’s consideration of the notice or to appeal or otherwise contest the notice or the Board’s action regarding the notice.
(d) Time period for Board action – (1) Consummation of acquisition – (i) The notificant(s) may consummate the proposed acquisition 60 days after submission to the Reserve Bank of a complete notice under paragraph (a) of this section, unless within that period the Board disapproves the proposed acquisition or extends the 60-day period, as provided under paragraph (d)(2) of this section.
(ii) The notificant(s) may consummate the proposed transaction before the expiration of the 60-day period if the Board notifies the notificant(s) in writing of the Board’s intention not to disapprove the acquisition.
(2) Extensions of time period. (i) The Board may extend the 60-day period in paragraph (d)(1) of this section for an additional 30 days by notifying the acquiring person(s).
(ii) The Board may further extend the period during which it may disapprove a notice for two additional periods of not more than 45 days each, if the Board determines that:
(A) Any acquiring person has not furnished all the information required under paragraph (a) of this section;
(B) Any material information submitted is substantially inaccurate;
(C) The Board is unable to complete the investigation of an acquiring person because of inadequate cooperation or delay by that person; or
(D) Additional time is needed to investigate and determine that no acquiring person has a record of failing to comply with the requirements of the Bank Secrecy Act, subchapter II of Chapter 53 of title 31, United States Code.
(iii) If the Board extends the time period under this paragraph, it shall notify the acquiring person(s) of the reasons therefor and shall include a statement of the information, if any, deemed incomplete or inaccurate.
(e) Advice to bank supervisory agencies. The Reserve Bank shall send a copy of any notice to the Comptroller of the Currency and the Federal Deposit Insurance Corporation.
(f) Investigation and report. (1) After receiving a notice under this subpart, the Board or the appropriate Reserve Bank shall conduct an investigation of the competence, experience, integrity, and financial ability of each person by and for whom an acquisition is to be made. The Board shall also make an independent determination of the accuracy and completeness of any information required to be contained in a notice under paragraph (a) of this section. In investigating any notice accepted under this subpart, the Board or Reserve Bank may solicit information or views from any person, including any savings and loan holding company involved in the notice, and any appropriate state, federal, or foreign governmental authority.
(2) The Board or the appropriate Reserve Bank shall prepare a written report of its investigation, which shall contain, at a minimum, a summary of the results of the investigation.
(g) Factors considered in acting on notices. In reviewing a notice filed under this subpart, the Board shall consider the information in the record, the views and recommendations of the appropriate bank supervisor, and any other relevant information obtained during any investigation of the notice.
(h) Disapproval and hearing – (1) Disapproval of notice. The Board may disapprove an acquisition if it finds adverse effects with respect to any of the factors set forth in paragraph 7 of the Bank Control Act (12 U.S.C. 1817(j)(7)) (i.e., competitive, financial, managerial, banking, or incompleteness of information).
(2) Disapproval notification. Within three days after its decision to issue a notice of intent to disapprove any proposed acquisition, the Board shall notify the acquiring person in writing of the reasons for the action.
(3) Hearing. Within 10 calendar days of receipt of the notice of the Board’s intent to disapprove, the acquiring person may submit a written request for a hearing. Any hearing conducted under this paragraph shall be in accordance with the Rules of Practice for Formal Hearings (12 CFR part 263). At the conclusion of the hearing, the Board shall, by order, approve or disapprove the proposed acquisition on the basis of the record of the hearing. If the acquiring person does not request a hearing, the notice of intent to disapprove becomes final and unappealable.
Subpart E – Qualified Stock Issuances
§ 238.41 Qualified stock issuances by undercapitalized savings associations or holding companies.
(a) Acquisitions by savings and loan holding companies. No savings and loan holding company shall be deemed to control a savings association solely by reason of the purchase by such savings and loan holding company of shares issued by such savings association, or issued by any savings and loan holding company (other than a bank holding company) which controls such savings association, in connection with a qualified stock issuance if prior approval of such acquisition is granted by the Board under this subpart, unless the acquiring savings and loan holding company, directly or indirectly, or acting in concert with 1 or more other persons, or through one or more subsidiaries, owns, controls, or holds with power to vote, or holds proxies representing, more than 15 percent of the voting shares of such savings association or holding company.
(b) Qualification. For purposes of this section, any issuance of shares of stock shall be treated as a qualified stock issuance if the following conditions are met:
(1) The shares of stock are issued by –
(i) An undercapitalized savings association, which for purposes of this paragraph (b)(1)(i) shall mean any savings association –
(A) The assets of which exceed the liabilities of such association; and
(B) Which does not comply with one or more of the capital standards in effect under section 5(t) of HOLA; or
(ii) A savings and loan holding company which is not a bank holding company but which controls an undercapitalized savings association if, at the time of issuance, the savings and loan holding company is legally obligated to contribute the net proceeds from the issuance of such stock to the capital of an undercapitalized savings association subsidiary of such holding company.
(2) All shares of stock issued consist of previously unissued stock or treasury shares.
(3) All shares of stock issued are purchased by a savings and loan holding company that is registered, as of the date of purchase, with the Board in accordance with the provisions of section 10(b) of the HOLA and the Board’s regulations promulgated thereunder.
(4) Subject to paragraph (c) of this section, the Board approves the purchase of the shares of stock by the acquiring savings and loan holding company.
(5) The entire consideration for the stock issued is paid in cash by the acquiring savings and loan holding company.
(6) At the time of the stock issuance, each savings association subsidiary of the acquiring savings and loan holding company (other than an association acquired in a transaction pursuant to section 13(c) or 13(k) of the Federal Deposit Insurance Act, or section 408(m) of the National Housing Act, as in effect immediately prior to enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989) has capital (after deducting any subordinated debt, intangible assets, and deferred, unamortized gains or losses) of not less than 6
(7) Immediately after the stock issuance, the acquiring savings and loan holding company holds not more than 15 percent of the outstanding voting stock of the issuing undercapitalized savings association or savings and loan holding company.
(8) Not more than one of the directors of the issuing association or company is an officer, director, employee, or other representative of the acquiring company or any of its affiliates.
(9) Transactions between the savings association or savings and loan holding company that issues the shares pursuant to this section and the acquiring company and any of its affiliates shall be subject to the provisions of section 11 of HOLA and the Board’s regulations promulgated thereunder.
(c) Approval of acquisitions – (1) Criteria. The Board, in deciding whether to approve or deny an application filed on the basis that it is a qualified stock issuance, shall apply the application criteria set forth in § 238.15(a), (b), and (c).
(2) Additional capital commitments not required. The Board shall not disapprove any application for the purchase of stock in connection with a qualified stock issuance on the grounds that the acquiring savings and loan holding company has failed to undertake to make subsequent additional capital contributions to maintain the capital of the undercapitalized savings association at or above the minimum level required by the Board or any other Federal agency having jurisdiction.
(3) Other conditions. The Board shall impose such conditions on any approval of an application for the purchase of stock in connection with a qualified stock issuance as the Board determines to be appropriate, including –
(i) A requirement that any savings association subsidiary of the acquiring savings and loan holding company limit dividends paid to such holding company for such period of time as the Board may require; and
(ii) Such other conditions as the Board deems necessary or appropriate to prevent evasions of this section.
(4) Application deemed approved if not disapproved within 90 days. (i) An application for approval of a purchase of stock in connection with a qualified stock issuance shall be deemed to have been approved by the Board if such application has not been disapproved by the Board before the end of the 90-day period beginning on the date of submission to the Board of the complete record on the application as defined in § 238.14(g)(3)(ii).
(d) No limitation on class of stock issued. The shares of stock issued in connection with a qualified stock issuance may be shares of any class.
(e) Application form. A savings and loan holding company making application to acquire a qualified stock issuance pursuant to this subpart shall submit the appropriate form to the appropriate Reserve Bank.
Subpart F – Savings and Loan Holding Company Activities and Acquisitions
§ 238.51 Prohibited activities.
(a) Evasion of law or regulation. No savings and loan holding company or subsidiary thereof which is not a savings association shall, for or on behalf of a subsidiary savings association, engage in any activity or render any services for the purpose or with the effect of evading any law or regulation applicable to such savings association.
(b) Unrelated business activity. No savings and loan holding company or subsidiary thereof that is not a savings association shall commence any business activity at any time, or continue any business activity after the end of the two-year period beginning on the date on which such company received approval to become a savings and loan holding company that is subject to the limitations of this paragraph (b), except (in either case) the following:
(1) Furnishing or performing management services for a savings association subsidiary of such company;
(2) Conducting an insurance agency or an escrow business;
(3) Holding, managing, or liquidating assets owned by or acquired from a subsidiary savings association of such company;
(4) Holding or managing properties used or occupied by a subsidiary savings association of such company;
(5) Acting as trustee under deed of trust;
(6) Any other activity:
(i) That the Board of Governors of the Federal Reserve System has permitted for bank holding companies pursuant to regulations promulgated under section 4(c) of the Bank Holding Company Act; or
(ii) Is set forth in § 238.53, subject to the limitations therein; or
(7) (i) In the case of a savings and loan holding company, purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if prior approval for the acquisition of such stock by such savings and loan holding company is granted by the Board pursuant to § 238.41.
(ii) Notwithstanding the provisions of this paragraph (b), any savings and loan holding company that, between March 5, 1987 and August 10, 1987, received approval pursuant to 12 U.S.C. 1730a(e), as then in effect, to acquire control of a savings association shall not continue any business activity other than those activities set forth in this paragraph (b) after August 10, 1987.
(c) Treatment of certain holding companies. If a director or officer of a savings and loan holding company, or an individual who owns, controls, or holds with the power to vote (or proxies representing) more than 25 percent of the voting shares of a savings and loan holding company, directly or indirectly controls more than one savings association, any savings and loan holding company controlled by such individual shall be subject to the activities limitations contained in paragraph (b) of this section, to the same extent such limitations apply to multiple savings and loan holding companies pursuant to §§ 238.51, 238.52, 238.53, and 238.54.
§ 238.52 Exempt savings and loan holding companies and grandfathered activities.
(a) Exempt savings and loan holding companies. (1) The following savings and loan holding companies are exempt from the limitations of § 238.51(b):
(i) Any savings and loan holding company (or subsidiary of such company) that controls only one savings association, if the savings association subsidiary of such company is a qualified thrift lender as defined in § 238.2(k).
(ii) Any savings and loan holding company (or subsidiary thereof) that controls more than one savings association if all, or all but one of the savings association subsidiaries of such company were acquired pursuant to an acquisition under section 13(c) or 13(k) of the Federal Deposit Insurance Act, or section 408(m) of the National Housing Act, as in effect immediately prior to the date of enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, and all of the savings association subsidiaries of such company are qualified thrift lenders as defined in § 238.2(k).
(2) Any savings and loan holding company whose subsidiary savings association(s) fails to qualify as a qualified thrift lender pursuant to 12 U.S.C. 1467a(m) may not commence, or continue, any service or activity other than those permitted under § 238.51(b) of this part, except that, the Board may allow, for good cause shown, such company (or subsidiary of such company which is not a savings association) up to 3 years to comply with the limitations set forth in § 238.51(b) of this part: Provided, That effective August 9, 1990, any company that controls a savings association that should have become or ceases to be a qualified thrift lender, except a savings association that requalified as a qualified thrift lender pursuant to section 10(m)(3)(D) of the Home Owners’ Loan Act, shall within one year after the date on which the savings association fails to qualify as a qualified thrift lender, register as and be deemed to be a bank holding company, subject to all of the provisions of the Bank Holding Company Act, section 8 of the Federal Deposit Insurance Act, and other statutes applicable to bank holding companies in the same manner and to the same extent as if the company were a bank holding company and the savings association were a bank, as those terms are defined in the Bank Holding Company Act.
(b) Grandfathered activities for certain savings and loan holding companies. Notwithstanding § 238.51(b) and subject to paragraph (c) of this section, any savings and loan holding company that received approval prior to March 5, 1987 to acquire control of a savings association may engage, directly or indirectly or through any subsidiary (other than a subsidiary savings association of such company) in any activity in which it was lawfully engaged on March 5, 1987, provided, that:
(1) The holding company does not, after August 10, 1987, acquire control of a bank or an additional savings association, other than a savings association acquired pursuant to section 13(c) or 13(k) of the Federal Deposit Insurance Act, or section 406(f) or 408(m) of the National Housing Act, as in effect immediately prior to the date of enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989;
(2) Any savings association subsidiary of the holding company continues to qualify as a domestic building and loan association under section 7701(a)(19) of the Internal Revenue Code of 1986 after August 10, 1987;
(3) The holding company does not engage in any business activity other than those permitted under § 238.51(b) or in which it was engaged on March 5, 1987;
(4) Any savings association subsidiary of the holding company does not increase the number of locations from which such savings association conducts business after March 5, 1987, other than an increase due to a transaction under section 13(c) or 13(k) of the Federal Deposit Insurance Act, or under section 408(m) of the National Housing Act, as in effect immediately prior to the date of enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989; and
(5) Any savings association subsidiary of the holding company does not permit any overdraft (including an intra-day overdraft) or incur any such overdraft in its account at a Federal Reserve bank, on behalf of an affiliate, unless such overdraft results from an inadvertent computer or accounting error that is beyond the control of both the savings association subsidiary and the affiliate.
(c) Termination by the Board of grandfathered activities. Notwithstanding the provisions of paragraph (b) of this section, the Board may, after opportunity for hearing, terminate any activity engaged in under paragraph (b) of this section upon determination that such action is necessary:
(1) To prevent conflicts of interest;
(2) To prevent unsafe or unsound practices; or
(3) To protect the public interest.
(d) Foreign holding company. Any savings and loan holding company organized under the laws of a foreign country as of June 1, 1984 (including any subsidiary thereof that is not a savings association) that controlled a single savings association on August 10, 1987, shall not be subject to the restrictions set forth in § 238.51(b) with respect to any activities of such holding company that are conducted exclusively in a foreign country.
§ 238.53 Prescribed services and activities of savings and loan holding companies.
(a) General. For the purpose of § 238.51(b)(6)(ii), the activities set forth in paragraph (b) of this section are, and were as of March 5, 1987, permissible services and activities for savings and loan holding companies or subsidiaries thereof that are neither savings associations nor service corporation subsidiaries of subsidiary savings associations. Services and activities of service corporation subsidiaries of savings and loan holding company subsidiary savings associations are prescribed by paragraph (d) of this section.
(b) Prescribed services and activities. Subject to the provisions of paragraph (c) of this section, a savings and loan holding company subject to restrictions on its activities pursuant to § 238.51(b), or a subsidiary thereof which is neither a savings association nor a service corporation of a subsidiary savings association, may furnish or perform the following services and engage in the following activities to the extent that it has legal power to do so:
(1) Originating, purchasing, selling and servicing any of the following:
(i) Loans, and participation interests in loans, on a prudent basis and secured by real estate, including brokerage and warehousing of such real estate loans, except that such a company or subsidiary shall not invest in a loan secured by real estate as to which a subsidiary savings association of such company has a security interest;
(ii) Manufactured home chattel paper (written evidence of both a monetary obligation and a security interest of first priority in one or more manufactured homes, and any equipment installed or to be installed therein), including brokerage and warehousing of such chattel paper;
(iii) Loans, with or without security, for the altering, repairing, improving, equipping or furnishing of any residential real estate;
(iv) Educational loans; and
(v) Consumer loans, as defined in § 160.3 of this title, Provided, That, no subsidiary savings association of such holding company or service corporation of such savings association shall engage directly or indirectly, in any transaction with any affiliate involving the purchase or sale, in whole or in part, of any consumer loan.
(2) Subject to the provisions of 12 U.S.C. 1468, furnishing or performing clerical accounting and internal audit services primarily for its affiliates;
(3) Subject to the provisions of 12 U.S.C. 1468, furnishing or performing the following services primarily for its affiliates, and for any savings association and service corporation subsidiary thereof, and for other multiple holding companies and affiliates thereof:
(i) Data processing;
(ii) Credit information, appraisals, construction loan inspections, and abstracting;
(iii) Development and administration of personnel benefit programs, including life insurance, health insurance, and pension or retirement plans;
(iv) Research, studies, and surveys;
(v) Purchase of office supplies, furniture and equipment;
(vi) Development and operation of storage facilities for microfilm or other duplicate records; and
(vii) Advertising and other services to procure and retain both savings accounts and loans;
(4) Acquisition of unimproved real estate lots, and acquisition of other unimproved real estate for the purpose of prompt development and subdivision, for:
(i) Construction of improvements,
(ii) Resale to others for such construction, or
(iii) Use as mobile home sites;
(5) Development, subdivision and construction of improvements on real estate acquired pursuant to paragraph (b)(4) of this section, for sale or rental;
(6) Acquisition of improved real estate and mobile homes to be held for rental;
(7) Acquisition of improved real estate for remodeling, rehabilitation, modernization, renovation, or demolition and rebuilding for sale or for rental;
(8) Maintenance and management of improved real estate;
(9) Underwriting or reinsuring contract of credit life or credit health and accident insurance in connection with extensions of credit by the savings and loan holding company or any of its subsidiaries, or extensions of credit by any savings association or service corporation subsidiary thereof, or any other savings and loan holding company or subsidiary thereof;
(10) Preparation of State and Federal tax returns for accountholders of or borrowers from (including immediate family members of such accountholders or borrowers but not including an accountholder or borrower which is a corporation operated for profit) an affiliated savings association;
(11) Purchase and sale of gold coins minted and issued by the United States Treasury pursuant to Public Law 99-185, 99 Stat. 1177 (1985), and activities reasonably incident thereto; and
(12) Any services or activities approved by order of the former Federal Savings and Loan Insurance Corporation prior to March 5, 1987, pursuant to its authority under section 408(c)(2)(F) of the National Housing Act, as in effect at the time.
(c) Procedures for commencing services or activities. A notice to engage in or acquire a company engaged in a service or activity prescribed by paragraph (b) of this section (other than purchase or sale of a government debt security) shall be filed by a savings and loan holding company (including a company seeking to become a savings and loan holding company) with the appropriate Reserve Bank in accordance with this paragraph and the Board’s Rules of Procedure (12 CFR 262.3).
(1) Engaging de novo in services or activities. A savings and loan holding company seeking to commence or to engage de novo in a service or activity pursuant to this section, either directly or through a subsidiary, shall file a notice containing a description of the activities to be conducted and the identity of the company that will conduct the activity.
(2) Acquiring company engaged in services or activities. A savings and loan holding company seeking to acquire or control voting securities or assets of a company engaged in a service or activity pursuant to this section, shall file a notice containing the following:
(i) A description of the proposal, including a description of each proposed service or activity;
(ii) The identity of any entity involved in the proposal, and, if the notificant proposes to conduct the service or activity through an existing subsidiary, a description of the existing activities of the subsidiary;
(iii) If the savings and loan holding company has consolidated assets of $150 million or more:
(A) Parent company and consolidated pro forma balance sheets for the acquiring savings and loan holding company as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction;
(B) Consolidated pro forma risk-based capital and leverage ratio calculations for the acquiring savings and loan holding company as of the most recent quarter (or, in the case of a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), consolidated pro forma leverage ratio calculations for the acquiring savings and loan holding company as of the most recent quarter); and
(C) A description of the purchase price and the terms and sources of funding for the transaction;
(iv) If the savings and loan holding company has consolidated assets of less than $150 million:
(A) A pro forma parent-only balance sheet as of the most recent quarter showing credit and debit adjustments that reflect the proposed transaction; and
(B) A description of the purchase price and the terms and sources of funding for the transaction and, if the transaction is debt funded, one-year income statement and cash flow projections for the parent company, and the sources and schedule for retiring any debt incurred in the transaction;
(v)(A) For each insured depository institution (that is not a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter)) whose Tier 1 capital, total capital, total assets or risk-weighted assets change as a result of the transaction, the total risk-weighted assets, total assets, Tier 1 capital, and total capital of the institution on a pro forma basis; and
(B) For each insured depository institution that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), whose Tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter) or total assets change as a result of the transaction, the total assets and Tier 1 capital of the institution on a pro forma basis;
(vi) A description of the management expertise, internal controls and risk management systems that will be utilized in the conduct of the proposed service or activity; and
(vii) A copy of the purchase agreements, and balance sheet and income statements for the most recent quarter and year-end for any company to be acquired.
(3)(i) Except as provided in paragraph (c)(3)(ii) of this section, from December 2, 2020, until December 31, 2021, the determination of whether a savings and loan holding company must comply with the filing requirements in paragraph (c)(2)(iii) or (iv) of this section shall be made based on the lesser of:
(A) The consolidated assets of the savings and loan holding company as of December 31, 2019; and
(B) The consolidated assets of the savings and loan holding company as of the end of the most recent calendar quarter.
(ii) The relief provided under paragraph (c)(3)(i) of this section does not apply to a savings and loan holding company if the Board determines that permitting the savings and loan holding company to determine its assets in accordance with that paragraph would not be commensurate with the risk profile of the savings and loan holding company. When making this determination, the Board will consider all relevant factors, including the extent of asset growth of the savings and loan holding company since December 31, 2019; the causes of such growth, including whether growth occurred as a result of mergers or acquisitions; whether such growth is likely to be temporary or permanent; whether the savings and loan holding company has become involved in any additional activities since December 31, 2019; the asset size of any parent companies; and the type of assets held by the savings and loan holding company. In making a determination pursuant to this paragraph (c)(3)(ii), the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202.
(d) Notice provided to Board. The Reserve Bank shall immediately send to the Board a copy of any notice received under paragraphs (c)(1) or (c)(2) of this section.
(e) Notice to public. (1) The Reserve Bank shall notify the Board for publication in the
(i) A notice under paragraph (c) of this section or
(ii) A written request that notice of a proposal under paragraph (c) of this section be published in the
(2) The
(f) Action on notices – (1) Reserve Bank action – (i) In general. Within 30 calendar days after receipt by the Reserve Bank of a notice filed pursuant to paragraphs (c)(1) or (c)(2) of this section, the Reserve Banks shall:
(A) Approve the notice; or
(B) Refer the notice to the Board for decision because action under delegated authority is not appropriate.
(ii) Return of incomplete notice. Within 7 calendar days of receipt, the Reserve Bank may return any notice as informationally incomplete that does not contain all of the information required by this section. The return of such a notice shall be deemed action on the notice.
(iii) Notice of action. The Reserve Bank shall promptly notify the savings and loan holding company of any action or referral under this paragraph.
(iv) Close of public comment period. The Reserve Bank shall not approve any notice under this paragraph (e)(1) of this section prior to the third business day after the close of the public comment period, unless an emergency exists that requires expedited or immediate action.
(2) Board action; internal schedule. The Board seeks to act on every notice referred to it for decision within 60 days of the date that the notice is filed with the Reserve Bank. If the Board is unable to act within this period, the Board shall notify the notificant and explain the reasons and the date by which the Board expects to act.
(3)(i) Required time limit for System action. The Board or the Reserve Bank shall act on any notice under this section within 60 days after the submission of a complete notice.
(ii) Extension of required period for action. The Board may extend the 60-day period required for Board action under paragraph (e)(3)(i) of this section for an additional 30 days upon notice to the notificant.
(4) Requests for additional information. The Board or the Reserve Bank may modify the information requirements under this section or at any time request any additional information that either believes is needed for a decision on any notice under this section.
(5) Tolling of period. The Board or the Reserve Bank may at any time extend or toll the time period for action on a notice for any period with the consent of the notificant.
(g) Modification or termination of service or activity. The Board may require a savings and loan holding company or subsidiary thereof which has commenced a service or activity pursuant to this section to modify or terminate, in whole or in part, such service or activity as the Board finds necessary in order to ensure compliance with the provisions and purposes of this part and of section 10 of the Home Owners’ Loan Act, as amended, or to prevent evasions thereof.
(h) Alterations. Except as may be otherwise provided in a resolution by or on behalf of the Board in a particular case, a service or activity commenced pursuant to this section shall not be altered in any material respect from that described in the notice filed under paragraph (c)(1) of this section, unless before making such alteration notice of intent to do so is filed in compliance with the appropriate procedures of said paragraph (c)(1) of this section.
(i) Service corporation subsidiaries of savings associations. The Board hereby approves without application the furnishing or performing of such services or engaging in such activities as permitted by the OTS pursuant to § 545.74 of this title, as in effect on March 5, 1987, if such service or activity is conducted by a service corporation subsidiary of a subsidiary savings association of a savings and loan holding company and if such service corporation has legal power to do so.
§ 238.54 Permissible bank holding company activities of savings and loan holding companies.
(a) General. For purposes of § 238.51(b)(6)(i), the services and activities permissible for bank holding companies pursuant to regulations that the Board has promulgated pursuant to section 4(c) of the Bank Holding Company Act are permissible for savings and loan holding companies, or subsidiaries thereof that are neither savings associations nor service corporation subsidiaries of subsidiary savings associations: Provided, That no savings and loan holding company shall commence any activity described in this paragraph (a) without the prior approval of this Board pursuant to paragraph (b) of this section, unless –
(1) The holding company received a rating of satisfactory or above prior to January 1, 2008, or thereafter, either received a composite rating of “1” or “2” or be considered satisfactory under the applicable rating system in its most recent examination, and is not in a troubled condition as defined in § 238.72, and the holding company does not propose to commence the activity by an acquisition (in whole or in part) of a going concern; or
(2) The activity is permissible under authority other than section 10(c)(2)(F)(i) of the HOLA without prior notice or approval. Where an activity is within the scope of both § 238.53 and this section, the procedures of § 238.53 shall govern.
(b) Procedures for applications. Applications to commence any activity prescribed under paragraph (a) of this section shall be filed with the appropriate Reserve Bank on the designated form. The Board must act upon such application according to the procedures of § 238.53(d), (e), and (f).
(c) Factors considered in acting on applications. In evaluating an application filed under paragraph (b) of this section, the Board shall consider whether the performance by the applicant of the activity can reasonably be expected to produce benefits to the public (such as greater convenience, increased competition, or gains in efficiency) that outweigh possible adverse effects (such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound financial practices). This consideration includes an evaluation of the financial and managerial resources of the applicant, including its subsidiaries, and of any company to be acquired, and the effect of the proposed transaction on those resources.
Subpart G – Financial Holding Company Activities
§ 238.61 Scope.
Section 10(c)(2)(H) of the HOLA (12 U.S.C. 1467a(c)(2)(H)) permits a savings and loan holding company to engage in activities that are permissible for a financial holding company if the savings and holding company meets the criteria to qualify as a financial holding company and complies with all of the requirements applicable to a financial holding company under sections 4(l) and 4(m) of the BHC Act as if the savings and loan holding company was a bank holding company. This subpart provides the requirements and restrictions for a savings and holding company to be treated as a financial holding company for the purpose of engaging in financial holding company activities. This subpart does not apply to savings and loan holding companies described in section 10(c)(9)(C) of the HOLA (12 U.S.C. 1467a(c)(9)(C)).
§ 238.62 Definitions.
For the purposes of this subpart:
(a) Financial holding company activities refers to activities permissible under section 4(k) of the Bank Holding Company Act of 1956 (12 U.S.C. 1843(k)) and § 225.86 of this chapter.
(b) [Reserved]
§ 238.63 Requirements to engage in financial holding company activities.
(a) In general. In order for a savings and loan holding company to engage in financial holding company activities:
(1) The savings and loan holding company and all depository institutions controlled by the savings and loan holding company must be and remain well capitalized;
(2) The savings and loan holding company and all depository institutions controlled by the savings and loan company must be and remain well managed; and
(3) The savings and loan holding company must have made an effective election to be treated as a financial holding company.
§ 238.64 Election required.
(a) In general. Except as provided below, a savings and loan holding company that wishes to engage in financial holding company activities must have an effective election to be treated as a financial holding company.
(b) Activities performed under separate HOLA authority. A savings and loan holding company that conducts only the following activities is not required to elect to be treated as a financial holding company:
(1) BHC Act section 4(c)(8) activities. Activities permissible under section 10(c)(2)(F)(i) of the HOLA (12 U.S.C. 1467a(c)(2)(F)(i)).
(2) Insurance agency or escrow business activities. Activities permissible under section 10(c)(2)(B) of the HOLA (12 U.S.C. 1467a(c)(2)(B)).
(3) “1987 List” activities. Activities permissible under section 10(c)(2)(F)(ii) of the HOLA (12 U.S.C. 1467a(c)(2)(F)(ii)).
(c) Existing requirements apply. A savings and loan holding company that has not made an effective election to be treated as a financial holding company and that conducts the activities described in paragraphs (b)(1) through (3) of this section remains subject to any rules and requirements applicable to the conduct of such activities.
§ 238.65 Election procedures.
(a) Filing requirement. A savings and loan holding company may elect to be treated as a financial holding company by filing a written declaration with the appropriate Reserve Bank. A declaration by a savings and loan holding company is considered to be filed on the date that all information required by paragraph (b) of this section is received by the appropriate Reserve Bank.
(b) Contents of declaration. To be deemed complete, a declaration must:
(1) State that the savings and loan holding company elects to be treated as a financial holding company in order to engage in financial holding company activities;
(2) Provide the name and head office address of the savings and loan holding company and of each depository institution controlled by the savings and loan holding company;
(3) Certify that the savings and loan holding company and each depository institution controlled by the savings and loan holding company is well capitalized as of the date the savings and loan holding company submits its declaration;
(4) Certify that the savings and loan holding company and each savings association controlled by the savings and loan holding company is well managed as of the date the savings and loan holding company submits its declaration;
(c) Effectiveness of election. An election by a savings and loan holding company to be treated as a financial holding company shall not be effective if, during the period provided in paragraph (d) of this section, the Board finds that, as of the date the declaration was filed with the appropriate Reserve Bank:
(1) Any insured depository institution controlled by the savings and loan holding company (except an institution excluded under paragraph (d) of this section) has not achieved at least a rating of “satisfactory record of meeting community credit needs” under the Community Reinvestment Act at the savings association’s most recent examination; or
(2) Any depository institution controlled by the bank holding company is not both well capitalized and well managed.
(d) Consideration of the CRA performance of a recently acquired savings association. Except as provided in paragraph (f) of this section, a savings association will be excluded for purposes of the review of the Community Reinvestment Act rating provisions of paragraph (c)(1) of this section if:
(1) The savings and loan holding company acquired the savings association during the 12-month period preceding the filing of an election under paragraph (a) of this section;
(2) The savings and loan holding company has submitted an affirmative plan to the appropriate Federal banking agency for the savings association to take actions necessary for the institution to achieve at least a rating of “satisfactory record of meeting community credit needs” under the Community Reinvestment Act at the next examination of the savings association; and
(3) The appropriate Federal banking agency for the savings association has accepted the plan described in paragraph (d)(2) of this section.
(e) Effective date of election – (1) In general. An election filed by a savings and loan holding company under paragraph (a) of this section is effective on the 31st calendar day after the date that a complete declaration was filed with the appropriate Reserve Bank, unless the Board notifies the savings and loan holding company prior to that time that the election is ineffective.
(2) Earlier notification that an election is effective. The Board or the appropriate Reserve Bank may notify a savings and loan holding company that its election to be treated as a financial holding company is effective prior to the 31st day after the date that a complete declaration was filed with the appropriate Reserve Bank. Such a notification must be in writing.
(3) Special effective date rules for the OTS transfer date – (i) Deadline for filing declaration. For savings and loan holding companies that meet the requirements of § 238.63 and that are engaged in financial holding company activities pursuant to existing authority as of July 21, 2011, an election under paragraph (a) must be filed with the appropriate Reserve Bank by December 31, 2011. The election must be accompanied by a description of the financial holding company activities conducted by the savings and loan holding company.
(ii) Effective date of election. An election filed under paragraph (e)(3)(i) of this section is effective on the 61st calendar day after the date that a complete declaration was filed with the appropriate Reserve Bank, unless the Board notifies the savings and loan holding company prior to that time that the election is ineffective.
(iii) Earlier notification that an election is effective. The Board or the appropriate Reserve Bank may notify a savings and loan holding company that its election under paragraph (e)(3)(i) of this section to be treated as a financial holding company is effective prior to the 61st day after the date that a complete declaration was filed with the appropriate Reserve Bank. Such notification must be in writing.
(iv) Filings by savings and loan holding companies that do not meet requirements. (A) For savings and loan holding companies that are engaged in financial holding company activities as of July 21, 2011 but do not meet the requirements of § 238.63, a declaration must be filed with the appropriate Reserve Bank by December 31, 2011, specifying:
(1) The name and head office address of the savings and loan holding company and of each despoitory institution controlled by the savings and loan holding company;
(2) The financial holding company activities that the savings and loan holding company is engaged in;
(3) The requirements of § 238.63 that the savings and loan holding company does not meet; and
(4) A description of how the savings and loan holding company will achieve compliance with § 238.63 prior to June 30, 2012.
(B) A savings and loan holding company covered by this subparagraph will be subject to:
(1) The notice, remediation agreement, divestiture, and any other requirements described in § 225.83 of this chapter; or
(2) The activities limitations and any other requirements described in § 225.84 of this chapter, depending on which requirements of § 238.63 the savings and loan holding company does not meet.
(f) Requests to be treated as a financial holding company submitted as part of an application to become a savings and loan holding company. A company that is not a savings and loan holding company and has applied for the Board’s approval to become a savings and loan holding company under section 10(e) of the HOLA (12 U.S.C. 1467a(e)) may as part of that application submit a request to be treated as a financial holding company. Such requests shall be made and reviewed by the Board as described in § 225.82(f) of this chapter.
(g) Board’s authority to exercise supervisory authority over a savings and loan holding company treated as a financial holding company. An effective election to be treated as a financial holding company does not in any way limit the Board’s statutory authority under the HOLA, the Federal Deposit Insurance Act, or any other relevant Federal statute to take appropriate action, including imposing supervisory limitations, restrictions, or prohibitions on the activities and acquisitions of a savings and loan holding company that has elected to be treated as a financial holding company, or enforcing compliance with applicable law.
§ 238.66 Ongoing requirements.
(a) In general. A savings and loan holding company with an effective election to be treated as a financial holding company is subject to the same requirements applicable to a financial holding company, under sections 4(l) and 4(m) of the Bank Holding Company Act and section 804(c) of the Community Reinvestment Act of 1977 (12 U.S.C. 2903(c)) as if the savings and loan holding company was a bank holding company.
(b) Consequences of failing to continue to meet applicable capital and management requirements. A savings and loan holding company with an effective election to be treated as a financial holding company that fails to meet applicable capital and management requirements at § 238.63 is subject to the notice, remediation agreement, divestiture, and any other requirements described in § 225.83 of this chapter.
(c) Consequences of failing to continue to maintain a satisfactory or better rating under the Community Reinvestment Act at all insured depository institution subsidiaries. A savings and loan holding company with an effective election to be treated as a financial holding company that fails to maintain a satisfactory or better rating under the Community Reinvestment Act at all insured deposit institution subsidiaries is subject to the activities limitations and any other requirements described in § 225.84 of this chapter.
(d) Notice and approval requirements for conducting financial holding company activities; permissible activities. A savings and loan holding company with an effective election to be treated as a financial holding company may conduct the activities listed in § 225.86 of this chapter subject to the notice, approval, and any other requirements described in §§ 225.85 through 225.89 of this chapter.
Subpart H – Notice of Change of Director or Senior Executive Officer
§ 238.71 Purpose.
This subpart implements 12 U.S.C. 1831i, which requires certain savings and loan holding companies to notify the Board before appointing or employing directors and senior executive officers.
§ 238.72 Definitions.
The following definitions apply to this subpart:
(a) Director means an individual who serves on the board of directors of a savings and loan holding company. This term does not include an advisory director who:
(1) Is not elected by the shareholders;
(2) Is not authorized to vote on any matters before the board of directors or any committee of the board of directors;
(3) Provides only general policy advice to the board of directors or any committee of the board of directors; and
(4) Has not been identified by the Board or Reserve Bank in writing as an individual who performs the functions of a director, or who exercises significant influence over, or participates in, major policymaking decisions of the board of directors.
(b) Senior executive officer means an individual who holds the title or performs the function of one or more of the following positions (without regard to title, salary, or compensation): president, chief executive officer, chief operating officer, chief financial officer, chief lending officer, or chief investment officer. Senior executive officer also includes any other person identified by the Board or Reserve Bank in writing as an individual who exercises significant influence over, or participates in, major policymaking decisions, whether or not hired as an employee.
(c) Troubled condition means:
(1) A savings and loan holding company that has an unsatisfactory rating under the applicable holding company rating system, or that is informed in writing by the Board or Reserve Bank that it has an adverse effect on its subsidiary savings association.
(2) A savings and loan holding company that is subject to a capital directive, a cease-and-desist order, a consent order, a formal written agreement, or a prompt corrective action directive relating to the safety and soundness or financial viability of the savings association, unless otherwise informed in writing by the Board or Reserve Bank; or
(3) A savings and loan holding company that is informed in writing by the Board or Reserve Bank that it is in troubled condition based on information available to the Board or Reserve Bank.
§ 238.73 Prior notice requirements.
(a) Savings and loan holding company. Except as provided under § 238.78, a savings and loan holding company must give the Board 30 days’ written notice, as specified in § 238.74, before adding or replacing any member of its board of directors, employing any person as a senior executive officer, or changing the responsibilities of any senior executive officer so that the person would assume a different senior executive position if the savings and loan holding company is in troubled condition.
(b) Notice by individual. An individual seeking election to the board of directors of a savings and loan holding company described in paragraph (a) of this section that has not been nominated by management, must either provide the prior notice required under paragraph (a) of this section or follow the process under § 238.78(b).
§ 238.74 Filing and processing procedures.
(a) Filing notice – (1) Content. The notice required in § 238.73 shall be filed with the appropriate Reserve Bank and shall contain:
(i) The information required by paragraph 6(A) of the Change in Bank Control Act (12 U.S.C. 1817(j)(6)(A)) as may be prescribed in the designated Board form;
(ii) Additional information consistent with the Federal Financial Institutions Examination Council’s Joint Statement of Guidelines on Conducting Background Checks and Change in Control Investigations, as set forth in the designated Board form; and
(iii) Such other information as may be required by the Board or Reserve Bank.
(2) Modification. The Reserve Bank may modify or accept other information in place of the requirements of this section for a notice filed under this subpart.
(3) Acceptance and processing of notice. The 30-day notice period specified in section 238.73 shall begin on the date all information required to be submitted by the notificant pursuant to this section is received by the appropriate Reserve Bank. The Reserve Bank shall notify the savings and loan holding company or individual submitting the notice of the date on which all required information is received and the notice is accepted for processing, and of the date on which the 30-day notice period will expire. The Board or Reserve Bank may extend the 30-day notice period for an additional period of not more than 60 days by notifying the savings and loan holding company or individual filing the notice that the period has been extended and stating the reason for not processing the notice within the 30-day notice period.
(b) [Reserved]
§ 238.75 Standards for review.
(a) Notice of disapproval. The Board or Reserve Bank will disapprove a notice if, pursuant to the standard set forth in 12 U.S.C. 1831i(e), the Board or Reserve Bank finds that the competence, experience, character, or integrity of the proposed individual indicates that it would not be in the best interests of the depositors of the savings and loan holding company or of the public to permit the individual to be employed by, or associated with, the savings and loan holding company. If the Board or Reserve Bank disapproves a notice, it will issue a written notice that explains why the Board or Reserve Bank disapproved the notice. The Board or Reserve Bank will send the notice to the savings and loan holding company and the individual.
(b) Appeal of a notice of disapproval. (1) A disapproved individual or a regulated institution that has submitted a notice that is disapproved under this section may appeal the disapproval to the Board within 15 days of the effective date of the notice of disapproval. An appeal shall be in writing and explain the reasons for the appeal and include all facts, documents, and arguments that the appealing party wishes to be considered in the appeal, and state whether the appealing party is requesting an informal hearing.
(2) Written notice of the final decision of the Board shall be sent to the appealing party within 60 days of the receipt of an appeal, unless the appealing party’s request for an informal hearing is granted.
(3) The disapproved individual may not serve as a director or senior executive officer of the state member bank or bank holding company while the appeal is pending.
(c) Informal hearing. (1) An individual or regulated institution whose notice under this section has been disapproved may request an informal hearing on the notice. A request for an informal hearing shall be in writing and shall be submitted within 15 days of a notice of disapproval. The Board may, in its sole discretion, order an informal hearing if the Board finds that oral argument is appropriate or necessary to resolve disputes regarding material issues of fact.
(2) An informal hearing shall be held within 30 days of a request, if granted, unless the requesting party agrees to a later date.
(3) Written notice of the final decision of the Board shall be given to the individual and the regulated institution within 60 days of the conclusion of any informal hearing ordered by the Board, unless the requesting party agrees to a later date.
§ 238.76 Waiting period.
(a) At expiration of period. A proposed director or senior executive officer may begin service at the end of the 30-day period and any extension as provided under § 238.74 unless the Board or Reserve Bank notifies you that it has disapproved the notice before the end of the period.
(b) Prior to expiration of period. A proposed director or senior executive officer may begin service before the end of the 30-day period and any extension as provided under section 238.74 of this section, if the Board or the Reserve Bank notifies in writing the savings and loan holding company or individual submitting the notice of the Board’s or Reserve Bank’s intention not to disapprove the notice.
§ 238.77 Waiver of prior notice requirement.
(a) Waiver request. An individual may serve as a director or senior executive officer before filing a notice under this subpart if the Board or Reserve Bank finds that:
(1) Delay would threaten the safety or soundness of the savings and loan holding company;
(2) Delay would not be in the public interest; or
(3) Other extraordinary circumstances exist that justify waiver of prior notice.
(b) Automatic waiver. An individual may serve as a director upon election to the board of directors before filing a notice under this subpart, if the individual:
(1) Is not proposed by the management of the savings and loan holding company;
(2) Is elected as a new member of the board of directors at a meeting of the savings and loan holding company; and
(3) Provides to the appropriate Reserve Bank all the information required in § 238.74 within two (2) business days after the individual’s election.
(c) Subsequent Board or Reserve Bank action. The Board or Reserve Bank may disapprove a notice within 30 days after the Board or Reserve Bank issues a waiver under paragraph (a) of this section or within 30 days after the election of an individual who has filed a notice and is serving pursuant to an automatic waiver under paragraph (b) of this section.
Subpart I – Prohibited Service at Savings and Loan Holding Companies
§ 238.81 Purpose.
This subpart implements section 19(e)(1) of the Federal Deposit Insurance Act (FDIA), which prohibits persons who have been convicted of certain criminal offenses or who have agreed to enter into a pre-trial diversion or similar program in connection with a prosecution for such criminal offenses from occupying various positions with a savings and loan holding company. This part also implements section 19(e)(2) of the FDIA, which permits the Board to provide exemptions, by regulation or order, from the application of the prohibition. This subpart provides an exemption for savings and loan holding company employees whose activities and responsibilities are limited solely to agriculture, forestry, retail merchandising, manufacturing, or public utilities operations, and a temporary exemption for certain persons who held positions with respect to a savings and loan holding company as of October 13, 2006. The subpart also describes procedures for applying to the Board for an exemption.
§ 238.82 Definitions.
The following definitions apply to this subpart:
(a) Institution-affiliated party is defined at 12 U.S.C. 1813(u), except that the phrase “savings and loan holding company” is substituted for “insured depository institution” each place that it appears in that definition.
(b) Enforcement Counsel means any individual who files a notice of appearance to serve as counsel on behalf of the Board in the proceeding.
(c) Person means an individual and does not include a corporation, firm or other business entity.
(d) Savings and loan holding company is defined at § 238.2(m), but excludes a subsidiary of a savings and loan holding company that is not itself a savings and loan holding company.
§ 238.83 Prohibited actions.
(a) Person. If a person was convicted of a criminal offense described in § 238.84, or agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such a criminal offense, he or she may not:
(1) Become, or continue as, an institution-affiliated party with respect to any savings and loan holding company.
(2) Own or control, directly or indirectly, any savings and loan holding company. A person will own or control a savings and loan holding company if he or she owns or controls that company under subpart D of this part.
(3) Otherwise participate, directly or indirectly, in the conduct of the affairs of any savings and loan holding company.
(b) Savings and loan holding company. A savings and loan holding company may not permit any person described in paragraph (a) of this section to engage in any conduct or to continue any relationship prohibited under that paragraph.
§ 238.84 Covered convictions or agreements to enter into pre-trial diversions or similar programs.
(a) Covered convictions and agreements. Except as described in § 238.85, this subpart covers:
(1) Any conviction of a criminal offense involving dishonesty, breach of trust, or money laundering. Convictions do not cover arrests, pending cases not brought to trial, acquittals, convictions reversed on appeal, pardoned convictions, or expunged convictions.
(2) Any agreement to enter into a pretrial diversion or similar program in connection with a prosecution for a criminal offense involving dishonesty, breach of trust or money laundering. A pretrial diversion or similar program is a program involving a suspension or eventual dismissal of charges or of a criminal prosecution based upon an agreement for treatment, rehabilitation, restitution, or other non-criminal or non-punitive alternative.
(b) Dishonesty or breach of trust. A determination whether a criminal offense involves dishonesty or breach of trust is based on the statutory elements of the crime.
(1) “Dishonesty” means directly or indirectly to cheat or defraud, to cheat or defraud for monetary gain or its equivalent, or to wrongfully take property belonging to another in violation of any criminal statute. Dishonesty includes acts involving a want of integrity, lack of probity, or a disposition to distort, cheat, or act deceitfully or fraudulently, and may include crimes which federal, state or local laws define as dishonest.
(2) “Breach of trust” means a wrongful act, use, misappropriation, or omission with respect to any property or fund which has been committed to a person in a fiduciary or official capacity, or the misuse of one’s official or fiduciary position to engage in a wrongful act, use, misappropriation, or omission.
§ 238.85 Adjudications and offenses not covered.
(a) Youthful offender or juvenile delinquent. This subpart does not cover any adjudication by a court against a person as:
(1) A youthful offender under any youthful offender law; or
(2) A juvenile delinquent by a court with jurisdiction over minors as defined by state law.
(b) De minimis criminal offense. This subpart does not cover de minimis criminal offenses. A criminal offense is de minimis if:
(1) The person has only one conviction or pretrial diversion or similar program of record;
(2) The offense was punishable by imprisonment for a term of less than one year, a fine of less than $1,000, or both, and the person did not serve time in jail.
(3) The conviction or program was entered at least five years before the date the person first held a position described in § 238.83(a); and
(4) The offense did not involve an insured depository institution, insured credit union, or other banking organization (including a savings and loan holding company, bank holding company, or financial holding company).
(5) The person must disclose the conviction or pretrial diversion or similar program to all insured depository institutions and other banking organizations the affairs of which he or she participates.
(6) The person must be covered by a fidelity bond to the same extent as others in similar positions with the savings and loan holding company.
§ 238.86 Exemptions.
(a) Employees. An employee of a savings and loan holding company is exempt from the prohibition in § 238.83, if all of the following conditions are met:
(1) The employee’s responsibilities and activities are limited solely to agriculture, forestry, retail merchandising, manufacturing, or public utilities operations.
(2) The savings and loan holding company maintains a list of all policymaking positions and reviews this list annually.
(3) The employee’s position does not appear on the savings and loan holding company’s list of policymaking positions, and the employee does not, in fact, exercise any policymaking function with the savings and loan holding company.
(4) The employee:
(i) Is not an institution-affiliated party of the savings and loan holding company other than by virtue of the employment described in paragraph (a) of this section.
(ii) Does not own or control, directly or indirectly, the savings and loan holding company; and
(iii) Does not participate, directly or indirectly, in the conduct of the affairs of the savings and loan holding company.
(b) Temporary exemption. (1) Any prohibited person who was an institution affiliated party with respect to a savings and loan holding company, who owned or controlled, directly or indirectly a savings and loan holding company, or who otherwise participated directly or indirectly in the conduct of the affairs of a savings and loan holding company on October 13, 2006, may continue to hold the position with the savings and loan holding company.
(2) This exemption expires on December 31, 2012, unless the savings and loan holding company or the person files an application seeking a case-by-case exemption for the person under § 238.87 by that date. If the savings and loan holding company or the person files such an application, the temporary exemption expires on:
(i) The date of issuance of a Board approval of the application under § 238.89(a);
(ii) The expiration of the 20-day period for filing a request for hearing under § 238.90(a) provided there is no timely request for hearing following the issuance by the Board of a denial of the application under that section;
(iii) The date that the Board denies a timely request for hearing under § 238.90(b) following the issuance of a Board denial of the application under § 238.89(b);
(iv) The date that the Board issues a decision under § 238.90(d); or
(v) The date an applicant withdraws the application.
§ 238.87 Filing procedures.
(a) Who may file. (1) A savings and loan holding company or a person who was convicted of a criminal offense described in § 238.84 or who has agreed to enter into a pre-trial diversion or similar program in connection with a prosecution for such a criminal offense may file an application with the Board seeking an exemption from the prohibitions in this subpart.
(2) A savings and loan holding company or a person may seek an exemption only for a designated position (or positions) with respect to a named savings and loan holding company.
(3) A savings and loan holding company or a person may not file an application less than one year after the latter of the date of a denial of the same exemption under § 238.89(b), § 238.90(a) or § 238.90(d).
(b) Prohibition pending Board action. Unless a savings and loan holding company or a person is exempt under § 238.86(b), the prohibitions in § 238.83 continue to apply pending Board action on the application.
§ 238.88 Factors for review.
(a) Board review. (1) In determining whether to approve an exemption application filed under § 238.87, the Board will consider the extent to which the position that is the subject of the application enables a person to:
(i) Participate in the major policymaking functions of the savings and loan holding company; or
(ii) Threaten the safety and soundness of any insured depository institution that is controlled by the savings and loan holding company, the interests of its depositors, or the public confidence in the insured depository institution.
(2) The Board will also consider whether the applicant has demonstrated the person’s fitness to hold the described position. Some positions may be approved without an extensive review of a person’s fitness because the position does not enable a person to take the actions described in paragraph (a)(1) of this section.
(b) Factors. In making the determinations under paragraph (a) of this section, the Board will consider the following factors:
(1) The position;
(2) The amount of influence and control a person holding the position will be able to exercise over the affairs and operations of the savings and loan holding company and the insured depository institution;
(3) The ability of the management of the savings and loan holding company to supervise and control the activities of a person holding the position;
(4) The level of ownership that the person will have at the savings and loan holding company;
(5) The specific nature and circumstances of the criminal offense. The question whether a person who was convicted of a crime or who agreed to enter into a pretrial diversion or similar program for a crime was guilty of that crime is not relevant;
(6) Evidence of rehabilitation; and
(7) Any other relevant factor.
§ 238.89 Board action.
(a) Approval. The Board will notify an applicant if an application under this subpart is approved. An approval by the Board may include such conditions as the Board determines to be appropriate.
(b) Denial. If Board denies an application, the Board will notify an applicant promptly.
§ 238.90 Hearings.
(a) Hearing requests. Within 20 days of the date of issuance of a denial of an application filed under this subpart, a savings and loan holding company or a person whose application the Board has denied may file a written request demonstrating good cause for a hearing on the denial.
(b) Board review of hearing request. The Board will review the hearing request to determine if the savings and loan holding company or person has demonstrated good cause for a hearing on the application. Within 30 days after the filing of a timely request for a hearing, the Board will notify the savings and loan holding company or person in writing of its decision to grant or deny the hearing request. If the Board grants the request for a hearing, it will order a hearing to be commenced within 60 days of the issuance of the notification. Upon the request of a party, the Board may at its discretion order a later hearing date.
(c) Hearing procedures. The following procedures apply to hearings under this subpart.
(1) The hearing shall be held in Washington, DC, or at another designated place, before a presiding officer designated by the Board.
(2) An applicant may elect in writing to have the matter determined on the basis of written submissions, rather than an oral hearing.
(3) The parties to the hearing are Enforcement Counsel and the applicant.
(4) The provisions of §§ 263.2, 263.4, 263.6 through 263.12, and 263.16 of this chapter apply to the hearing.
(5) Discovery is not permitted.
(6) A party may introduce relevant and material documents and make oral argument at the hearing.
(7) At the discretion of the presiding officer, witnesses may be presented within specified time limits, provided that a list of witnesses is furnished to the presiding officer and to all other parties prior to the hearing. Witnesses must be sworn, unless otherwise directed by the presiding officer. The presiding officer may ask questions of any witness. Each party may cross-examine any witness presented by the opposing party. The Board will furnish a transcript of the proceedings upon an applicant’s request and upon the payment of the costs of the transcript.
(8) The presiding officer has the power to administer oaths and affirmations, to take or cause to be taken depositions of unavailable witnesses, and to issue, revoke, quash, or modify subpoenas and subpoenas duces tecum. If the presentation of witnesses is permitted, the presiding officer may require the attendance of witnesses from any state, territory, or other place subject to the jurisdiction of the United States at any location where the proceeding is being conducted. Witness fees are paid in accordance with section 263.14 of this chapter.
(9) Upon the request of a party, the record will remain open for five business days following the hearing for additional submissions to the record.
(10) Enforcement Counsel has the burden of proving a prima facie case that a person is prohibited from a position under section 19(e) of the FDIA. The applicant has the burden of proof on all other matters.
(11) The presiding officer must make recommendations to the Board, where possible, within 20 days after the last day for the parties to submit additions to the record.
(12) The presiding officer must forward his or her recommendation to the Board who shall promptly certify the entire record, including the presiding officer’s recommendations. The Board’s certification will close the record.
(d) Decision. After the certification of the record, the Board will notify the parties of its decision by issuing an order approving or denying the application.
(1) An approval order will require fidelity bond coverage for the position to the same extent as similar positions with the savings and loan holding company. The approval order may include such other conditions as may be appropriate.
(2) A denial order will include a summary of the relevant factors under § 238.88(b).
Subpart J – Management Official Interlocks
§ 238.91 Authority, purpose, and scope.
(a) Authority. This subpart is issued under the provisions of the Depository Institution Management Interlocks Act (Interlocks Act) (12 U.S.C. 3201 et seq.), as amended.
(b) Purpose. The purpose of the Interlocks Act and this subpart is to foster competition by generally prohibiting a management official from serving two nonaffiliated depository organizations in situations where the management interlock likely would have an anticompetitive effect.
(c) Scope. This subpart applies to management officials of savings and loan holding companies, and their affiliates.
§ 238.92 Definitions.
For purposes of this subpart, the following definitions apply:
(a) Affiliate. (1) The term affiliate has the meaning given in section 202 of the Interlocks Act (12 U.S.C. 3201). For purposes of that section 202, shares held by an individual include shares held by members of his or her immediate family. “Immediate family” means spouse, mother, father, child, grandchild, sister, brother, or any of their spouses, whether or not any of their shares are held in trust.
(2) For purposes of section 202(3)(B) of the Interlocks Act (12 U.S.C. 3201(3)(B)), an affiliate relationship involving a savings and loan holding company based on common ownership does not exist if the Board determines, after giving the affected persons the opportunity to respond, that the asserted affiliation was established in order to avoid the prohibitions of the Interlocks Act and does not represent a true commonality of interest between the depository organizations. In making this determination, the Board considers, among other things, whether a person, including members of his or her immediate family, whose shares are necessary to constitute the group owns a nominal percentage of the shares of one of the organizations and the percentage is substantially disproportionate to that person’s ownership of shares in the other organization.
(b) Area median income means:
(1) The median family income for the metropolitan statistical area (MSA), if a depository organization is located in an MSA; or
(2) The statewide nonmetropolitan median family income, if a depository organization is located outside an MSA.
(c) Community means a city, town, or village, and contiguous or adjacent cities, towns, or villages.
(d) Contiguous or adjacent cities, towns, or villages means cities, towns, or villages whose borders touch each other or whose borders are within 10 road miles of each other at their closest points. The property line of an office located in an unincorporated city, town, or village is the boundary line of that city, town, or village for the purpose of this definition.
(e) Depository holding company means a bank holding company or a savings and loan holding company (as more fully defined in section 202 of the Interlocks Act (12 U.S.C. 3201)) having its principal office located in the United States.
(f) Depository institution means a commercial bank (including a private bank), a savings bank, a trust company, a savings and loan association, a building and loan association, a homestead association, a cooperative bank, an industrial bank, or a credit union, chartered under the laws of the United States and having a principal office located in the United States. Additionally, a United States office, including a branch or agency, of a foreign commercial bank is a depository institution.
(g) Depository institution affiliate means a depository institution that is an affiliate of a depository organization.
(h) Depository organization means a depository institution or a depository holding company.
(i) Low- and moderate-income areas means census tracts (or, if an area is not in a census tract, block numbering areas delineated by the United States Bureau of the Census) where the median family income is less than 100 percent of the area median income.
(j) Management official. (1) The term management official means:
(i) A director;
(ii) An advisory or honorary director of a depository institution with total assets of $100 million or more;
(iii) A senior executive officer as that term is defined in § 225.71(c) of this chapter;
(iv) A branch manager;
(v) A trustee of a depository organization under the control of trustees; and
(vi) Any person who has a representative or nominee serving in any of the capacities in this paragraph (j)(1).
(2) The term management official does not include:
(i) A person whose management functions relate exclusively to the business of retail merchandising or manufacturing;
(ii) A person whose management functions relate principally to the business outside the United States of a foreign commercial bank; or
(iii) A person described in the provisos of section 202(4) of the Interlocks Act (12 U.S.C. 3201(4)) (referring to an officer of a State-chartered savings bank, cooperative bank, or trust company that neither makes real estate mortgage loans nor accepts savings).
(k) Office means a principal or branch office of a depository institution located in the United States. Office does not include a representative office of a foreign commercial bank, an electronic terminal, or a loan production office.
(l) Person means a natural person, corporation, or other business entity.
(m) Relevant metropolitan statistical area (RMSA) means an MSA, a primary MSA, or a consolidated MSA that is not comprised of designated Primary MSAs to the extent that these terms are defined and applied by the Office of Management and Budget.
(n) Representative or nominee means a natural person who serves as a management official and has an obligation to act on behalf of another person with respect to management responsibilities. The Board will find that a person has an obligation to act on behalf of another person only if the first person has an agreement, express or implied, to act on behalf of the second person with respect to management responsibilities. The Board will determine, after giving the affected persons an opportunity to respond, whether a person is a representative or nominee.
(o) Savings association means:
(1) Any Federal savings association (as defined in section 3(b)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(2)));
(2) Any state savings association (as defined in section 3(b)(3) of the Federal Deposit Insurance Act (12 U.S.C. 1813(b)(3))) the deposits of which are insured by the Federal Deposit Insurance Corporation; and
(3) Any corporation (other than a bank as defined in section 3(a)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(a)(1))) the deposits of which are insured by the Federal Deposit Insurance Corporation, that the Board of Directors of the Federal Deposit Insurance Corporation and the Comptroller of the Currency jointly determine to be operating in substantially the same manner as a savings association.
(p) Total assets. (1) The term total assets means assets measured on a consolidated basis and reported in the most recent fiscal year-end Consolidated Report of Condition and Income.
(2) The term total assets does not include:
(i) Assets of a diversified savings and loan holding company as defined by section 10(a)(1)(F) of the Home Owners’ Loan Act (12 U.S.C. 1467a(a)(1)(F)) other than the assets of its depository institution affiliate;
(ii) Assets of a bank holding company that is exempt from the prohibitions of section 4 of the Bank Holding Company Act of 1956 pursuant to an order issued under section 4(d) of that Act (12 U.S.C. 1843(d)) other than the assets of its depository institution affiliate; or
(iii) Assets of offices of a foreign commercial bank other than the assets of its United States branch or agency.
(3) Temporary relief for 2020 and 2021. Notwithstanding paragraph (p)(1) of this section, from December 2, 2020, through December 31, 2021, for purposes of this subpart J, the term total assets, with respect to a depository organization, means the lesser of assets of the depository organization reported on a consolidated basis as of December 31, 2019, and assets reported on a consolidated basis as of the end of the most recent fiscal year. The relief provided under this paragraph (p)(3) does not apply to a depository organization if the Board determines that permitting the depository organization to determine its assets in accordance with that paragraph would not be commensurate with the risk profile of the depository organization. When making this determination, the Board will consider all relevant factors, including the extent of asset growth of the depository organization since December 31, 2019; the causes of such growth, including whether growth occurred as a result of mergers or acquisitions; whether such growth is likely to be temporary or permanent; whether the depository organization has become involved in any additional activities since December 31, 2019; the asset size of any parent companies; and the type of assets held by the depository organization. In making a determination pursuant to this paragraph (p)(3), the Board will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 263.202.
(q) United States means the United States of America, any State or territory of the United States of America, the District of Columbia, Puerto Rico, Guam, American Samoa, and the Virgin Islands.
§ 238.93 Prohibitions.
(a) Community. A management official of a depository organization may not serve at the same time as a management official of an unaffiliated depository organization if the depository organizations in question (or a depository institution affiliate thereof) have offices in the same community.
(b) RMSA. A management official of a depository organization may not serve at the same time as a management official of an unaffiliated depository organization if the depository organizations in question (or a depository institution affiliate thereof) have offices in the same RMSA and each depository organization has total assets of $50 million or more.
(c) Major assets. A management official of a depository organization with total assets exceeding $10 billion (or any affiliate of such an organization) may not serve at the same time as a management official of an unaffiliated depository organization with total assets exceeding $10 billion (or any affiliate of such an organization), regardless of the location of the two depository organizations. The Board will adjust these thresholds, as necessary, based on the year-to-year change in the average of the Consumer Price Index for the Urban Wage Earners and Clerical Workers, not seasonally adjusted, with rounding to the nearest $100 million. The Board will announce the revised thresholds by publishing a final rule without notice and comment in the
§ 238.94 Interlocking relationships permitted by statute.
The prohibitions of § 238.93 do not apply in the case of any one or more of the following organizations or to a subsidiary thereof:
(a) A depository organization that has been placed formally in liquidation, or which is in the hands of a receiver, conservator, or other official exercising a similar function;
(b) A corporation operating under section 25 or section 25A of the Federal Reserve Act (12 U.S.C. 601 et seq. and 12 U.S.C. 611 et seq., respectively) (Edge Corporations and Agreement Corporations);
(c) A credit union being served by a management official of another credit union;
(d) A depository organization that does not do business within the United States except as an incident to its activities outside the United States;
(e) A State-chartered savings and loan guaranty corporation;
(f) A Federal Home Loan Bank or any other bank organized solely to serve depository institutions (a bankers’ bank) or solely for the purpose of providing securities clearing services and services related thereto for depository institutions and securities companies;
(g) A depository organization that is closed or is in danger of closing as determined by the appropriate Federal depository institutions regulatory agency and is acquired by another depository organization. This exemption lasts for five years, beginning on the date the depository organization is acquired;
(h)(1) A diversified savings and loan holding company (as defined in section 10(a)(1)(F) of the Home Owners’ Loan Act (12 U.S.C. 1467a(a)(1)(F)) with respect to the service of a director of such company who also is a director of an unaffiliated depository organization if:
(i) Both the diversified savings and loan holding company and the unaffiliated depository organization notify their appropriate Federal depository institutions regulatory agency at least 60 days before the dual service is proposed to begin; and
(ii) The appropriate regulatory agency does not disapprove the dual service before the end of the 60-day period.
(2) The Board may disapprove a notice of proposed service if it finds that:
(i) The service cannot be structured or limited so as to preclude an anticompetitive effect in financial services in any part of the United States;
(ii) The service would lead to substantial conflicts of interest or unsafe or unsound practices; or
(iii) The notificant failed to furnish all the information required by the Board.
(3) The Board may require that any interlock permitted under this paragraph (h) be terminated if a change in circumstances occurs with respect to one of the interlocked depository organizations that would have provided a basis for disapproval of the interlock during the notice period; and
(i) Any savings association or any savings and loan holding company (as defined in section 10(a)(1)(D) of the Home Owners’ Loan Act) which has issued stock in connection with a qualified stock issuance pursuant to section 10(q) of such Act, except that this paragraph (i) shall apply only with regard to service by a single management official of such savings association or holding company, or any subsidiary of such savings association or holding company, by a single management official of the savings and loan holding company which purchased the stock issued in connection with such qualified stock issuance, and shall apply only when the Board has determined that such service is consistent with the purposes of the Interlocks Act and the Home Owners’ Loan Act.
(a) Exemption. A management interlock that is prohibited by § 238.93 is permissible, if:
(1) The interlock is not prohibited by § 238.93(c); and
(2) The depository organizations (and their depository institution affiliates) hold, in the aggregate, no more than 20 percent of the deposits in each RMSA or community in which both depository organizations (or their depository institution affiliates) have offices. The amount of deposits shall be determined by reference to the most recent annual Summary of Deposits published by the FDIC for the RMSA or community.
(b) Confirmation and records. Each depository organization must maintain records sufficient to support its determination of eligibility for the exemption under paragraph (a) of this section, and must reconfirm that determination on an annual basis.
§ 238.96 General exemption.
(a) Exemption. The Board may by agency order exempt an interlock from the prohibitions in § 238.93 if the Board finds that the interlock would not result in a monopoly or substantial lessening of competition and would not present safety and soundness concerns. A depository organization may apply to the Board for an exemption.
(b) Presumptions. In reviewing an application for an exemption under this section, the Board will apply a rebuttable presumption that an interlock will not result in a monopoly or substantial lessening of competition if the depository organization seeking to add a management official:
(1) Primarily serves low- and moderate-income areas;
(2) Is controlled or managed by persons who are members of a minority group, or women;
(3) Is a depository institution that has been chartered for less than two years; or
(4) Is deemed to be in “troubled condition” as defined in § 238.72.
(c) Duration. Unless a shorter expiration period is provided in the Board approval, an exemption permitted by paragraph (a) of this section may continue so long as it does not result in a monopoly or substantial lessening of competition, or is unsafe or unsound. If the Board grants an interlock exemption in reliance upon a presumption under paragraph (b) of this section, the interlock may continue for three years, unless otherwise provided by the Board in writing.
§ 238.97 Change in circumstances.
(a) Termination. A management official shall terminate his or her service or apply for an exemption if a change in circumstances causes the service to become prohibited. A change in circumstances may include an increase in asset size of an organization, a change in the delineation of the RMSA or community, the establishment of an office, an increase in the aggregate deposits of the depository organization, or an acquisition, merger, consolidation, or reorganization of the ownership structure of a depository organization that causes a previously permissible interlock to become prohibited.
(b) Transition period. A management official described in paragraph (a) of this section may continue to serve the depository organization involved in the interlock for 15 months following the date of the change in circumstances. The Board may shorten this period under appropriate circumstances.
§ 238.98 Enforcement.
Except as provided in this section, the Board administers and enforces the Interlocks Act with respect to savings and loan holding companies and its affiliates, and may refer any case of a prohibited interlocking relationship involving these entities to the Attorney General of the United States to enforce compliance with the Interlocks Act and this part. If an affiliate of a savings and loan holding company is subject to the primary regulation of another Federal depository organization supervisory agency, then the Board does not administer and enforce the Interlocks Act with respect to that affiliate.
§ 238.99 Interlocking relationships permitted pursuant to Federal Deposit Insurance Act.
A management official or prospective management official of a depository organization may enter into an otherwise prohibited interlocking relationship with another depository organization for a period of up to 10 years if such relationship is approved by the Federal Deposit Insurance Corporation pursuant to section 13(k)(1)(A)(v) of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1823(k)(1)(A)(v)).
Subpart K – Dividends by Subsidiary Savings Associations
§ 238.101 Authority and purpose.
This subpart implements section 10(f) of HOLA which requires savings associations with holding companies to provide the Board not less than 30 days’ notice of a proposed declaration of a dividend. This subpart applies to all declarations of dividends by a subsidiary savings association of a savings and loan holding company.
§ 238.102 Definitions.
The following definitions apply to this subpart:
(a) Appropriate Federal banking agency has the same meaning as in 12 U.S.C. 1813(q) and includes, with respect to agreements entered into and conditions imposed prior to July 21, 2011, the Office of Thrift Supervision.
(b) Dividend means:
(1) A distribution of cash or other property to owners of a savings association made on account of their ownership, but not any dividend consisting only of shares or rights to purchase shares; or
(2) Any transaction that the Board determines, by order or regulation, to be in substance a dividend.
(c) Shares means common and preferred stock, and any options, warrants, or other rights for the acquisition of such stock. The term “share” also includes convertible securities upon their conversion into common or preferred stock. The term does not include convertible debt securities prior to their conversion into common or preferred stock or other securities that are not equity securities at the time of a dividend.
§ 238.103 Filing requirement.
(a) Filing. A subsidiary savings association of a savings and loan holding company must file a notice with the appropriate Reserve Bank on the designated form at least 30 days before the proposed declaration of a dividend by its board of directors.
(b) Schedules. A notice may include a schedule proposing dividends over a specified period, not to exceed 12 months.
§ 238.104 Board action and criteria for review.
(a) Board action. (1) A subsidiary savings association of a savings and loan holding company may declare a proposed dividend after the end of a 30-day review period commencing on the date of submission to the Federal Reserve System of the complete record on the notice, unless the Board or Reserve Bank disapproves the notice before the end of the period.
(2) A subsidiary savings association of a savings and loan holding company may declare a proposed dividend before the end of the 30-day period if the Board or Reserve Bank notifies the applicant in writing of the Board’s or Reserve Bank’s intention not to disapprove the notice.
(b) Criteria. The Board or Reserve Bank may disapprove a notice, in whole or in part, if the Board or Reserve Bank makes any of the following determinations.
(1) Following the dividend the subsidiary savings association will be undercapitalized, significantly undercapitalized, or critically undercapitalized as set forth in applicable regulations under 12 U.S.C. 1831o.
(2) The proposed dividend raises safety or soundness concerns.
(3) The proposed dividend violates a prohibition contained in any statute, regulation, enforcement action, or agreement between the subsidiary savings association or any savings and loan holding company of which it is a subsidiary and an appropriate Federal banking agency, a condition imposed on the subsidiary savings association or any savings and loan holding company of which it is a subsidiary in an application or notice approved by an appropriate Federal banking agency, or any formal or informal enforcement action involving the subsidiary savings association or any savings and loan holding company of which it is a subsidiary. If so, the Board will determine whether it may permit the dividend notwithstanding the prohibition, condition, or enforcement action.
Subpart L – Investigative Proceedings and Formal Examination Proceedings
§ 238.111 Scope.
This part prescribes rules of practice and procedure applicable to the conduct of investigative proceedings under section 10(g)(2) of the Home Owners’ Loan Act, as amended, 12 U.S.C. 1467a(g)(2) (“HOLA”) and to the conduct of formal examination proceedings with respect to savings and loan holding companies and their affiliates under section 5(d)(1)(B) of the HOLA, as amended, 12 U.S.C. 1464(d)(1)(B) or section 7(j)(15) of the Federal Deposit Insurance Act, as amended, 12 U.S.C. 1817(j)(15) (“FDIA”), section 8(n) of the FDIA, 12 U.S.C. 1818(n), or section 10(c) of the FDIA, 12 U.S.C. 1820(c). This part does not apply to adjudicatory proceedings as to which hearings are required by statute, the rules for which are contained in part 262 of this chapter.
§ 238.112 Definitions.
As used in this part:
(a) Investigative proceeding means an investigation conducted under section 10(g)(2) of the HOLA;
(b) Formal examination proceeding means the administration of oaths and affirmations, taking and preserving of testimony, requiring the production of books, papers, correspondence, memoranda, and all other records, the issuance of subpoenas, and all related activities in connection with examination of savings and loan holding companies and their affiliates conducted pursuant to section 5(d)(1)(B) of the HOLA, section 7(j)(15) of the FDIA, section 8(n) of the FDIA or section 10(c) of the FDIA; and
(c) Designated representative means the person or persons empowered by the Board to conduct an investigative proceeding or a formal examination proceeding.
§ 238.113 Confidentiality of proceedings.
All formal examination proceedings shall be private and, unless otherwise ordered by the Board, all investigative proceedings shall also be private. Unless otherwise ordered or permitted by the Board, or required by law, and except as provided in §§ 238.114 and 238.115, the entire record of any investigative proceeding or formal examination proceeding, including the resolution of the Board or its delegate(s) authorizing the proceeding, the transcript of such proceeding, and all documents and information obtained by the designated representative(s) during the course of said proceedings shall be confidential.
§ 238.114 Transcripts.
Transcripts or other recordings, if any, of investigative proceedings or formal examination proceedings shall be prepared solely by an official reporter or by any other person or means authorized by the designated representative. A person who has submitted documentary evidence or given testimony in an investigative proceeding or formal examination proceeding may procure a copy of his own documentary evidence or transcript of his own testimony upon payment of the cost thereof; provided, that a person seeking a transcript of his own testimony must file a written request with the Board stating the reason he desires to procure such transcript, and the Board may for good cause deny such request. In any event, any witness (or his counsel) shall have the right to inspect the transcript of the witness’ own testimony.
§ 238.115 Rights of witnesses.
(a) Any person who is compelled or requested to furnish documentary evidence or give testimony at an investigative proceeding or formal examination proceeding shall have the right to examine, upon request, the Board resolution authorizing such proceeding. Copies of such resolution shall be furnished, for their retention, to such persons only with the written approval of the Board.
(b) Any witness at an investigative proceeding or formal examination proceeding may be accompanied and advised by an attorney personally representing that witness.
(1) Such attorney shall be a member in good standing of the bar of the highest court of any state, Commonwealth, possession, territory, or the District of Columbia, who has not been suspended or debarred from practice by the bar of any such political entity or before the Board in accordance with the provisions of part 263 of this chapter and has not been excluded from the particular investigative proceeding or formal examination proceeding in accordance with paragraph (b)(3) of this section.
(2) Such attorney may advise the witness before, during, and after the taking of his testimony and may briefly question the witness, on the record, at the conclusion of his testimony, for the sole purpose of clarifying any of the answers the witness has given. During the taking of the testimony of a witness, such attorney may make summary notes solely for his use in representing his client. All witnesses shall be sequestered, and, unless permitted in the discretion of the designated representative, no witness or accompanying attorney may be permitted to be present during the taking of testimony of any other witness called in such proceeding. Neither attorney(s) for the association(s) that are the subjects of the investigative proceedings or formal examination proceedings, nor attorneys for any other interested persons, shall have any right to be present during the testimony of any witness not personally being represented by such attorney.
(3) The Board, for good cause, may exclude a particular attorney from further participation in any investigation in which the Board has found the attorney to have engaged in dilatory, obstructionist, egregious, contemptuous or contumacious conduct. The person conducting an investigation may report to the Board instances of apparently dilatory, obstructionist, egregious, contemptuous or contumacious conduct on the part of an attorney. After due notice to the attorney, the Board may take such action as the circumstances warrant based upon a written record evidencing the conduct of the attorney in that investigation or such other or additional written or oral presentation as the Board may permit or direct.
§ 238.116 Obstruction of proceedings.
The designated representative shall report to the Board any instances where any witness or counsel has engaged in dilatory, obstructionist, or contumacious conduct or has otherwise violated any provision of this part during the course of an investigative proceeding or formal examination proceeding; and the Board may take such action as the circumstances warrant, including the exclusion of counsel from further participation in such proceeding.
§ 238.117 Subpoenas.
(a) Service. Service of a subpoena in connection with any investigative proceeding or formal examination proceeding shall be effected in the following manner:
(1) Service upon a natural person. Service of a subpoena upon a natural person may be effected by handing it to such person; by leaving it at his office with the person in charge thereof, or, if there is no one in charge, by leaving it in a conspicuous place therein; by leaving it at his dwelling place or usual place of abode with some person of suitable age and discretion then residing therein; by mailing it to him by registered or certified mail or by an express delivery service at his last known address; or by any method whereby actual notice is given to him.
(2) Service upon other persons. When the person to be served is not a natural person, service of the subpoena may be effected by handing the subpoena to a registered agent for service, or to any officer, director, or agent in charge of any office of such person; by mailing it to any such representative by registered or certified mail or by an express delivery service at his last known address; or by any method whereby actual notice is given to such person.
(b) Motions to quash. Any person to whom a subpoena is directed may, prior to the time specified therein for compliance, but in no event more than 10 days after the date of service of such subpoena, apply to the Board or its designee to quash or modify such subpoena, accompanying such application with a statement of the reasons therefore. The Board or its designee, as appropriate, may:
(1) Deny the application;
(2) Quash or revoke the subpoena;
(3) Modify the subpoena; or
(4) Condition the granting of the application on such terms as the Board or its designee determines to be just, reasonable, and proper.
(c) Attendance of witnesses. Subpoenas issued in connection with an investigative proceeding or formal examination proceeding may require the attendance and/or testimony of witnesses from any State or territory of the United States and the production by such witnesses of documentary or other tangible evidence at any designated place where the proceeding is being (or is to be) conducted. Foreign nationals are subject to such subpoenas if such service is made upon a duly authorized agent located in the United States.
(d) Witness fees and mileage. Witnesses summoned in any proceeding under this part shall be paid the same fees and mileage that are paid witnesses in the district courts of the United States. Such fees and mileage need not be tendered when the subpoena is issued on behalf of the Board by any of its designated representatives.
Subpart M – Risk Committee Requirement for Covered Savings and Loan Holding Companies With Total Consolidated Assets of $50 Billion or More and Less Than $100 Billion
§ 238.118 Applicability.
(a) General applicability. A covered savings and loan bank holding company must comply with the risk-committee requirements set forth in this subpart beginning on the first day of the ninth quarter following the date on which its average total consolidated assets equal or exceed $50 billion.
(b) Cessation of requirements. A covered savings and loan holding company will remain subject to the requirements of this subpart until the earlier of the date on which:
(1) Its total consolidated assets are below $50 billion for each of four consecutive calendar quarters; and
(2) It becomes subject to the requirements of subpart N of this part.
§ 238.119 Risk committee requirement for covered savings and loan holding companies with total consolidated assets of $50 billion or more.
(a) Risk committee – (1) General. A covered savings and loan holding company subject to this subpart must maintain a risk committee that approves and periodically reviews the risk-management policies of the covered savings and loan holding company’s global operations and oversees the operation of the company’s global risk-management framework.
(2) Risk-management framework. The covered savings and loan holding company’s global risk-management framework must be commensurate with its structure, risk profile, complexity, activities, and size and must include:
(i) Policies and procedures establishing risk-management governance, risk-management procedures, and risk-control infrastructure for its global operations; and
(ii) Processes and systems for implementing and monitoring compliance with such policies and procedures, including:
(A) Processes and systems for identifying and reporting risks and risk-management deficiencies, including regarding emerging risks, and ensuring effective and timely implementation of actions to address emerging risks and risk-management deficiencies for its global operations;
(B) Processes and systems for establishing managerial and employee responsibility for risk management;
(C) Processes and systems for ensuring the independence of the risk-management function; and
(D) Processes and systems to integrate risk management and associated controls with management goals and its compensation structure for its global operations.
(3) Corporate governance requirements. The risk committee must:
(i) Have a formal, written charter that is approved by the covered savings and loan holding company’s board of directors;
(ii) Be an independent committee of the board of directors that has, as its sole and exclusive function, responsibility for the risk-management policies of the covered savings and loan holding company’s global operations and oversight of the operation of the company’s global risk-management framework;
(iii) Report directly to the covered savings and loan holding company’s board of directors;
(iv) Receive and review regular reports on a not less than a quarterly basis from the covered savings and loan holding company’s chief risk officer provided pursuant to paragraph (b)(3)(ii) of this section; and
(v) Meet at least quarterly, or more frequently as needed, and fully document and maintain records of its proceedings, including risk-management decisions.
(4) Minimum member requirements. The risk committee must:
(i) Include at least one member having experience in identifying, assessing, and managing risk exposures of large, complex financial firms; and
(ii) Be chaired by a director who:
(A) Is not an officer or employee of the covered savings and loan holding company and has not been an officer or employee of the covered savings and loan holding company during the previous three years;
(B) Is not a member of the immediate family, as defined in § 238.31(b)(3), of a person who is, or has been within the last three years, an executive officer of the covered savings and loan holding company, as defined in § 215.2(e)(1) of this chapter; and
(C)(1) Is an independent director under Item 407 of the Securities and Exchange Commission’s Regulation S-K (17 CFR 229.407(a)), if the covered savings and loan holding company has an outstanding class of securities traded on an exchange registered with the U.S. Securities and Exchange Commission as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) (national securities exchange); or
(2) Would qualify as an independent director under the listing standards of a national securities exchange, as demonstrated to the satisfaction of the Board, if the covered savings and loan holding company does not have an outstanding class of securities traded on a national securities exchange.
(b) Chief risk officer – (1) General. A covered savings and loan holding company subject to this subpart must appoint a chief risk officer with experience in identifying, assessing, and managing risk exposures of large, complex financial firms.
(2) Responsibilities. (i) The chief risk officer is responsible for overseeing:
(A) The establishment of risk limits on an enterprise-wide basis and the monitoring of compliance with such limits;
(B) The implementation of and ongoing compliance with the policies and procedures set forth in paragraph (a)(2)(i) of this section and the development and implementation of the processes and systems set forth in paragraph (a)(2)(ii) of this section; and
(C) The management of risks and risk controls within the parameters of the company’s risk control framework, and monitoring and testing of the company’s risk controls.
(ii) The chief risk officer is responsible for reporting risk-management deficiencies and emerging risks to the risk committee and resolving risk-management deficiencies in a timely manner.
(3) Corporate governance requirements. (i) The covered savings and loan holding company must ensure that the compensation and other incentives provided to the chief risk officer are consistent with providing an objective assessment of the risks taken by the company; and
(ii) The chief risk officer must report directly to both the risk committee and chief executive officer of the company.
Subpart N – Risk Committee, Liquidity Risk Management, and Liquidity Buffer Requirements for Covered Savings and Loan Holding Companies With Total Consolidated Assets of $100 Billion or More
§ 238.120 Scope.
This subpart applies to covered savings and loan holding companies with average total consolidated assets of $100 billion or more.
§ 238.121 Applicability.
(a) Applicability – (1) Initial applicability. A covered savings and loan holding company must comply with the risk-management and risk-committee requirements set forth in § 238.122 and the liquidity risk-management and liquidity stress test requirements set forth in §§ 238.123 and 238.124 no later than the first day of the fifth quarter following the date on which its average total consolidated assets equal or exceed $100 billion.
(2) Changes in requirements following a change in category. A covered savings and loan holding company with average total consolidated assets of $100 billion or more that changes from one category of covered savings and loan holding company described in § 238.10(b) through (d) to another such category must comply with the requirements applicable to the new category no later than on the first day of the second calendar quarter following the change in the covered savings and loan holding company’s category.
(b) Cessation of requirements. A covered savings and loan holding company is subject to the risk-management and risk committee requirements set forth in § 238.122 and the liquidity risk-management and liquidity stress test requirements set forth in §§ 238.123 and 238.124 until its total consolidated assets are below $100 billion for each of four consecutive calendar quarters.
§ 238.122 Risk-management and risk committee requirements.
(a) Risk committee – (1) General. A covered savings and loan holding subject to this subpart must maintain a risk committee that approves and periodically reviews the risk-management policies of the covered savings and loan holding company’s global operations and oversees the operation of the covered savings and loan holding company’s global risk-management framework. The risk committee’s responsibilities include liquidity risk-management as set forth in § 238.123(b).
(2) Risk-management framework. The covered savings and loan holding company’s global risk-management framework must be commensurate with its structure, risk profile, complexity, activities, and size and must include:
(i) Policies and procedures establishing risk-management governance, risk-management procedures, and risk-control infrastructure for its global operations; and
(ii) Processes and systems for implementing and monitoring compliance with such policies and procedures, including:
(A) Processes and systems for identifying and reporting risks and risk-management deficiencies, including regarding emerging risks, and ensuring effective and timely implementation of actions to address emerging risks and risk-management deficiencies for its global operations;
(B) Processes and systems for establishing managerial and employee responsibility for risk management;
(C) Processes and systems for ensuring the independence of the risk-management function; and
(D) Processes and systems to integrate risk management and associated controls with management goals and its compensation structure for its global operations.
(3) Corporate governance requirements. The risk committee must:
(i) Have a formal, written charter that is approved by the covered savings and loan holding company’s board of directors;
(ii) Be an independent committee of the board of directors that has, as its sole and exclusive function, responsibility for the risk-management policies of the covered savings and loan holding company’s global operations and oversight of the operation of the covered savings and loan holding company’s global risk-management framework;
(iii) Report directly to the covered savings and loan holding company’s board of directors;
(iv) Receive and review regular reports on not less than a quarterly basis from the covered savings and loan holding company’s chief risk officer provided pursuant to paragraph (b)(3)(ii) of this section; and
(v) Meet at least quarterly, or more frequently as needed, and fully document and maintain records of its proceedings, including risk-management decisions.
(4) Minimum member requirements. The risk committee must:
(i) Include at least one member having experience in identifying, assessing, and managing risk exposures of large, complex financial firms; and
(ii) Be chaired by a director who:
(A) Is not an officer or employee of the covered savings and loan holding company and has not been an officer or employee of the covered savings and loan holding company during the previous three years;
(B) Is not a member of the immediate family, as defined in § 238.31(b)(3), of a person who is, or has been within the last three years, an executive officer of the covered savings and loan holding company, as defined in § 215.2(e)(1) of this chapter; and
(C)(1) Is an independent director under Item 407 of the Securities and Exchange Commission’s Regulation S-K (17 CFR 229.407(a)), if the covered savings and loan holding company has an outstanding class of securities traded on an exchange registered with the U.S. Securities and Exchange Commission as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) (national securities exchange); or
(2) Would qualify as an independent director under the listing standards of a national securities exchange, as demonstrated to the satisfaction of the Board, if the covered savings and loan holding company does not have an outstanding class of securities traded on a national securities exchange.
(b) Chief risk officer – (1) General. A covered savings and loan holding company subject to this subpart must appoint a chief risk officer with experience in identifying, assessing, and managing risk exposures of large, complex financial firms.
(2) Responsibilities. (i) The chief risk officer is responsible for overseeing:
(A) The establishment of risk limits on an enterprise-wide basis and the monitoring of compliance with such limits;
(B) The implementation of and ongoing compliance with the policies and procedures set forth in paragraph (a)(2)(i) of this section and the development and implementation of the processes and systems set forth in paragraph (a)(2)(ii) of this section; and
(C) The management of risks and risk controls within the parameters of the company’s risk control framework, and monitoring and testing of the company’s risk controls.
(ii) The chief risk officer is responsible for reporting risk-management deficiencies and emerging risks to the risk committee and resolving risk-management deficiencies in a timely manner.
(3) Corporate governance requirements. (i) The covered savings and loan holding company must ensure that the compensation and other incentives provided to the chief risk officer are consistent with providing an objective assessment of the risks taken by the covered savings and loan holding company; and
(ii) The chief risk officer must report directly to both the risk committee and chief executive officer of the company.
§ 238.123 Liquidity risk-management requirements.
(a) Responsibilities of the board of directors – (1) Liquidity risk tolerance. The board of directors of a covered savings and loan holding company subject to this subpart must:
(i) Approve the acceptable level of liquidity risk that the covered savings and loan holding company may assume in connection with its operating strategies (liquidity risk tolerance) at least annually, taking into account the covered savings and loan holding company’s capital structure, risk profile, complexity, activities, and size; and
(ii) Receive and review at least semi-annually information provided by senior management to determine whether the covered savings and loan holding company is operating in accordance with its established liquidity risk tolerance.
(2) Liquidity risk-management strategies, policies, and procedures. The board of directors must approve and periodically review the liquidity risk-management strategies, policies, and procedures established by senior management pursuant to paragraph (c)(1) of this section.
(b) Responsibilities of the risk committee. The risk committee (or a designated subcommittee of such committee composed of members of the board of directors) must approve the contingency funding plan described in paragraph (f) of this section at least annually, and must approve any material revisions to the plan prior to the implementation of such revisions.
(c) Responsibilities of senior management – (1) Liquidity risk. (i) Senior management of a covered savings and loan holding company subject to this subpart must establish and implement strategies, policies, and procedures designed to effectively manage the risk that the covered savings and loan holding company’s financial condition or safety and soundness would be adversely affected by its inability or the market’s perception of its inability to meet its cash and collateral obligations (liquidity risk). The board of directors must approve the strategies, policies, and procedures pursuant to paragraph (a)(2) of this section.
(ii) Senior management must oversee the development and implementation of liquidity risk measurement and reporting systems, including those required by this section and § 238.124.
(iii) Senior management must determine at least quarterly whether the covered savings and loan holding company is operating in accordance with such policies and procedures and whether the covered savings and loan holding company is in compliance with this section and § 238.124 (or more often, if changes in market conditions or the liquidity position, risk profile, or financial condition warrant), and establish procedures regarding the preparation of such information.
(2) Liquidity risk tolerance. Senior management must report to the board of directors or the risk committee regarding the covered savings and loan holding company’s liquidity risk profile and liquidity risk tolerance at least quarterly (or more often, if changes in market conditions or the liquidity position, risk profile, or financial condition of the company warrant).
(3) Business lines or products. (i) Senior management must approve new products and business lines and evaluate the liquidity costs, benefits, and risks of each new business line and each new product that could have a significant effect on the company’s liquidity risk profile. The approval is required before the company implements the business line or offers the product. In determining whether to approve the new business line or product, senior management must consider whether the liquidity risk of the new business line or product (under both current and stressed conditions) is within the company’s established liquidity risk tolerance.
(ii) Senior management must review at least annually significant business lines and products to determine whether any line or product creates or has created any unanticipated liquidity risk, and to determine whether the liquidity risk of each strategy or product is within the company’s established liquidity risk tolerance.
(4) Cash-flow projections. Senior management must review the cash-flow projections produced under paragraph (e) of this section at least quarterly (or more often, if changes in market conditions or the liquidity position, risk profile, or financial condition of the covered savings and loan holding company warrant) to ensure that the liquidity risk is within the established liquidity risk tolerance.
(5) Liquidity risk limits. Senior management must establish liquidity risk limits as set forth in paragraph (g) of this section and review the company’s compliance with those limits at least quarterly (or more often, if changes in market conditions or the liquidity position, risk profile, or financial condition of the company warrant).
(6) Liquidity stress testing. Senior management must:
(i) Approve the liquidity stress testing practices, methodologies, and assumptions required in § 238.124(a) at least quarterly, and whenever the covered savings and loan holding company materially revises its liquidity stress testing practices, methodologies or assumptions;
(ii) Review the liquidity stress testing results produced under § 238.124(a) at least quarterly;
(iii) Review the independent review of the liquidity stress tests under § 238.123(d) periodically; and
(iv) Approve the size and composition of the liquidity buffer established under § 238.124(b) at least quarterly.
(d) Independent review function. (1) A covered savings and loan holding company subject to this subpart must establish and maintain a review function that is independent of management functions that execute funding to evaluate its liquidity risk management.
(2) The independent review function must:
(i) Regularly, but no less frequently than annually, review and evaluate the adequacy and effectiveness of the company’s liquidity risk management processes, including its liquidity stress test processes and assumptions;
(ii) Assess whether the company’s liquidity risk-management function complies with applicable laws and regulations, and sound business practices; and
(iii) Report material liquidity risk management issues to the board of directors or the risk committee in writing for corrective action, to the extent permitted by applicable law.
(e) Cash-flow projections. (1) A covered savings and loan holding company subject to this subpart must produce comprehensive cash-flow projections that project cash flows arising from assets, liabilities, and off-balance sheet exposures over, at a minimum, short- and long-term time horizons. The covered savings and loan holding company must update short-term cash-flow projections daily and must update longer-term cash-flow projections at least monthly.
(2) The covered savings and loan holding company must establish a methodology for making cash-flow projections that results in projections that:
(i) Include cash flows arising from contractual maturities, intercompany transactions, new business, funding renewals, customer options, and other potential events that may impact liquidity;
(ii) Include reasonable assumptions regarding the future behavior of assets, liabilities, and off-balance sheet exposures;
(iii) Identify and quantify discrete and cumulative cash flow mismatches over these time periods; and
(iv) Include sufficient detail to reflect the capital structure, risk profile, complexity, currency exposure, activities, and size of the covered savings and loan holding company and include analyses by business line, currency, or legal entity as appropriate.
(3) The covered savings and loan holding company must adequately document its methodology for making cash flow projections and the included assumptions and submit such documentation to the risk committee.
(f) Contingency funding plan – (1) General. A covered savings and loan holding company subject to this subpart must establish and maintain a contingency funding plan that sets out the company’s strategies for addressing liquidity needs during liquidity stress events. The contingency funding plan must be commensurate with the company’s capital structure, risk profile, complexity, activities, size, and established liquidity risk tolerance. The company must update the contingency funding plan at least annually, and when changes to market and idiosyncratic conditions warrant.
(2) Components of the contingency funding plan – (i) Quantitative assessment. The contingency funding plan must:
(A) Identify liquidity stress events that could have a significant impact on the covered savings and loan holding company’s liquidity;
(B) Assess the level and nature of the impact on the covered savings and loan holding company’s liquidity that may occur during identified liquidity stress events;
(C) Identify the circumstances in which the covered savings and loan holding company would implement its action plan described in paragraph (f)(2)(ii)(A) of this section, which circumstances must include failure to meet any minimum liquidity requirement imposed by the Board;
(D) Assess available funding sources and needs during the identified liquidity stress events;
(E) Identify alternative funding sources that may be used during the identified liquidity stress events; and
(F) Incorporate information generated by the liquidity stress testing required under § 238.124(a).
(ii) Liquidity event management process. The contingency funding plan must include an event management process that sets out the covered savings and loan holding company’s procedures for managing liquidity during identified liquidity stress events. The liquidity event management process must:
(A) Include an action plan that clearly describes the strategies the company will use to respond to liquidity shortfalls for identified liquidity stress events, including the methods that the company will use to access alternative funding sources;
(B) Identify a liquidity stress event management team that would execute the action plan described in paragraph (f)(2)(ii)(A) of this section;
(C) Specify the process, responsibilities, and triggers for invoking the contingency funding plan, describe the decision-making process during the identified liquidity stress events, and describe the process for executing contingency measures identified in the action plan; and
(D) Provide a mechanism that ensures effective reporting and communication within the covered savings and loan holding company and with outside parties, including the Board and other relevant supervisors, counterparties, and other stakeholders.
(iii) Monitoring. The contingency funding plan must include procedures for monitoring emerging liquidity stress events. The procedures must identify early warning indicators that are tailored to the company’s capital structure, risk profile, complexity, activities, and size.
(iv) Testing. The covered savings and loan holding company must periodically test:
(A) The components of the contingency funding plan to assess the plan’s reliability during liquidity stress events;
(B) The operational elements of the contingency funding plan, including operational simulations to test communications, coordination, and decision-making by relevant management; and
(C) The methods the covered savings and loan holding company will use to access alternative funding sources to determine whether these funding sources will be readily available when needed.
(g) Liquidity risk limits – (1) General. A covered savings and loan holding company subject to this subpart must monitor sources of liquidity risk and establish limits on liquidity risk that are consistent with the company’s established liquidity risk tolerance and that reflect the company’s capital structure, risk profile, complexity, activities, and size.
(2) Liquidity risk limits established by a Category II savings and loan holding company, or Category III savings and loan holding company. If the covered savings and loan holding company is a Category II savings and loan holding company or Category III savings and loan holding company, liquidity risk limits established under paragraph (g)(1) of this section by must include limits on:
(i) Concentrations in sources of funding by instrument type, single counterparty, counterparty type, secured and unsecured funding, and as applicable, other forms of liquidity risk;
(ii) The amount of liabilities that mature within various time horizons; and
(iii) Off-balance sheet exposures and other exposures that could create funding needs during liquidity stress events.
(h) Collateral, legal entity, and intraday liquidity risk monitoring. A covered savings and loan holding company subject to this subpart must establish and maintain procedures for monitoring liquidity risk as set forth in this paragraph.
(1) Collateral. The covered savings and loan holding company must establish and maintain policies and procedures to monitor assets that have been, or are available to be, pledged as collateral in connection with transactions to which it or its affiliates are counterparties. These policies and procedures must provide that the covered savings and loan holding company:
(i) Calculates all of its collateral positions according to the frequency specified in paragraphs (h)(1)(i)(A) and (B) of this section or as directed by the Board, specifying the value of pledged assets relative to the amount of security required under the relevant contracts and the value of unencumbered assets available to be pledged:
(A) If the covered savings and loan holding company is not a Category IV savings and loan holding company, on at least a weekly basis;
(B) If the covered savings and loan holding company is a Category IV savings and loan holding company, on at least a monthly basis;
(ii) Monitors the levels of unencumbered assets available to be pledged by legal entity, jurisdiction, and currency exposure;
(iii) Monitors shifts in the covered savings and loan holding company’s funding patterns, such as shifts between intraday, overnight, and term pledging of collateral; and
(iv) Tracks operational and timing requirements associated with accessing collateral at its physical location (for example, the custodian or securities settlement system that holds the collateral).
(2) Legal entities, currencies and business lines. The covered savings and loan holding company must establish and maintain procedures for monitoring and controlling liquidity risk exposures and funding needs within and across significant legal entities, currencies, and business lines, taking into account legal and regulatory restrictions on the transfer of liquidity between legal entities.
(3) Intraday exposures. The covered savings and loan holding company must establish and maintain procedures for monitoring intraday liquidity risk exposures that are consistent with the covered savings and loan holding company’s capital structure, risk profile, complexity, activities, and size. If the covered savings and loan holding company is a Category II savings and loan holding company or a Category III savings and loan holding company, these procedures must address how the management of the covered savings and loan holding company will:
(i) Monitor and measure expected daily gross liquidity inflows and outflows;
(ii) Manage and transfer collateral to obtain intraday credit;
(iii) Identify and prioritize time-specific obligations so that the covered savings and loan holding company can meet these obligations as expected and settle less critical obligations as soon as possible;
(iv) Manage the issuance of credit to customers where necessary; and
(v) Consider the amounts of collateral and liquidity needed to meet payment systems obligations when assessing the covered savings and loan holding company’s overall liquidity needs.
§ 238.124 Liquidity stress testing and buffer requirements.
(a) Liquidity stress testing requirement – (1) General. A covered savings and loan holding company subject to this subpart must conduct stress tests to assess the potential impact of the liquidity stress scenarios set forth in paragraph (a)(3) of this section on its cash flows, liquidity position, profitability, and solvency, taking into account its current liquidity condition, risks, exposures, strategies, and activities.
(i) The covered savings and loan holding company must take into consideration its balance sheet exposures, off-balance sheet exposures, size, risk profile, complexity, business lines, organizational structure, and other characteristics of the covered savings and loan holding company that affect its liquidity risk profile in conducting its stress test.
(ii) In conducting a liquidity stress test using the scenarios described in paragraphs (a)(3)(i) and (ii) of this section, the covered savings and loan holding company must address the potential direct adverse impact of associated market disruptions on the covered savings and loan holding company and incorporate the potential actions of other market participants experiencing liquidity stresses under the market disruptions that would adversely affect the covered savings and loan holding company.
(2) Frequency. The covered savings and loan holding company must perform the liquidity stress tests required under paragraph (a)(1) of this section according to the frequency specified in paragraph (a)(2)(i) or (ii) of this section or as directed by the Board:
(i) If the covered savings and loan holding company is not a Category IV savings and loan holding company, at least monthly; or
(ii) If the covered savings and loan holding company is a Category IV savings and loan holding company, at least quarterly.
(3) Stress scenarios. (i) Each stress test conducted under paragraph (a)(1) of this section must include, at a minimum:
(A) A scenario reflecting adverse market conditions;
(B) A scenario reflecting an idiosyncratic stress event for the covered savings and loan holding company; and
(C) A scenario reflecting combined market and idiosyncratic stresses.
(ii) The covered savings and loan holding company must incorporate additional liquidity stress scenarios into its liquidity stress test, as appropriate, based on its financial condition, size, complexity, risk profile, scope of operations, or activities. The Board may require the covered savings and loan holding company to vary the underlying assumptions and stress scenarios.
(4) Planning horizon. Each stress test conducted under paragraph (a)(1) of this section must include an overnight planning horizon, a 30-day planning horizon, a 90-day planning horizon, a one-year planning horizon, and any other planning horizons that are relevant to the covered savings and loan holding company’s liquidity risk profile. For purposes of this section, a “planning horizon” is the period over which the relevant stressed projections extend. The covered savings and loan holding company must use the results of the stress test over the 30-day planning horizon to calculate the size of the liquidity buffer under paragraph (b) of this section.
(5) Requirements for assets used as cash-flow sources in a stress test. (i) To the extent an asset is used as a cash flow source to offset projected funding needs during the planning horizon in a liquidity stress test, the fair market value of the asset must be discounted to reflect any credit risk and market volatility of the asset.
(ii) Assets used as cash-flow sources during a planning horizon must be diversified by collateral, counterparty, borrowing capacity, and other factors associated with the liquidity risk of the assets.
(iii) A line of credit does not qualify as a cash flow source for purposes of a stress test with a planning horizon of 30 days or less. A line of credit may qualify as a cash flow source for purposes of a stress test with a planning horizon that exceeds 30 days.
(6) Tailoring. Stress testing must be tailored to, and provide sufficient detail to reflect, a covered savings and loan holding company’s capital structure, risk profile, complexity, activities, and size.
(7) Governance – (i) Policies and procedures. A covered savings and loan holding company subject to this subpart must establish and maintain policies and procedures governing its liquidity stress testing practices, methodologies, and assumptions that provide for the incorporation of the results of liquidity stress tests in future stress testing and for the enhancement of stress testing practices over time.
(ii) Controls and oversight. A covered savings and loan holding subject to this subpart must establish and maintain a system of controls and oversight that is designed to ensure that its liquidity stress testing processes are effective in meeting the requirements of this section. The controls and oversight must ensure that each liquidity stress test appropriately incorporates conservative assumptions with respect to the stress scenario in paragraph (a)(3) of this section and other elements of the stress test process, taking into consideration the covered savings and loan holding company’s capital structure, risk profile, complexity, activities, size, business lines, legal entity or jurisdiction, and other relevant factors. The assumptions must be approved by the chief risk officer and be subject to the independent review under § 238.123(d).
(iii) Management information systems. The covered savings and loan holding company must maintain management information systems and data processes sufficient to enable it to effectively and reliably collect, sort, and aggregate data and other information related to liquidity stress testing.
(8) Notice and response. If the Board determines that a covered savings and loan holding company must conduct liquidity stress tests according to a frequency other than the frequency provided in paragraphs (a)(2)(i) and (ii) of this section, the Board will notify the covered savings and loan holding company before the change in frequency takes effect, and describe the basis for its determination. Within 14 calendar days of receipt of a notification under this paragraph, the covered savings and loan holding company may request in writing that the Board reconsider the requirement. The Board will respond in writing to the company’s request for reconsideration prior to requiring that the company conduct liquidity stress tests according to a frequency other than the frequency provided in paragraphs (a)(2)(i) and (ii) of this section.
(b) Liquidity buffer requirement. (1) A covered savings and loan holding company subject to this subpart must maintain a liquidity buffer that is sufficient to meet the projected net stressed cash-flow need over the 30-day planning horizon of a liquidity stress test conducted in accordance with paragraph (a) of this section under each scenario set forth in paragraph (a)(3)(i) through (ii) of this section.
(2) Net stressed cash-flow need. The net stressed cash-flow need for a covered savings and loan holding company is the difference between the amount of its cash-flow need and the amount of its cash flow sources over the 30-day planning horizon.
(3) Asset requirements. The liquidity buffer must consist of highly liquid assets that are unencumbered, as defined in paragraph (b)(3)(ii) of this section:
(i) Highly liquid asset. A highly liquid asset includes:
(A) Cash;
(B) Assets that meet the criteria for high quality liquid assets as defined in 12 CFR 249.20; or
(C) Any other asset that the covered savings and loan holding company demonstrates to the satisfaction of the Board:
(1) Has low credit risk and low market risk;
(2) Is traded in an active secondary two-way market that has committed market makers and independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined within one day and settled at that price within a reasonable time period conforming with trade custom; and
(3) Is a type of asset that investors historically have purchased in periods of financial market distress during which market liquidity has been impaired.
(ii) Unencumbered. An asset is unencumbered if it:
(A) Is free of legal, regulatory, contractual, or other restrictions on the ability of such company promptly to liquidate, sell or transfer the asset; and
(B) Is either:
(1) Not pledged or used to secure or provide credit enhancement to any transaction; or
(2) Pledged to a central bank or a U.S. government-sponsored enterprise, to the extent potential credit secured by the asset is not currently extended by such central bank or U.S. government-sponsored enterprise or any of its consolidated subsidiaries.
(iii) Calculating the amount of a highly liquid asset. In calculating the amount of a highly liquid asset included in the liquidity buffer, the covered savings and loan holding company must discount the fair market value of the asset to reflect any credit risk and market price volatility of the asset.
(iv) Operational requirements. With respect to the liquidity buffer, the bank holding company must:
(A) Establish and implement policies and procedures that require highly liquid assets comprising the liquidity buffer to be under the control of the management function in the covered savings and loan holding company that is charged with managing liquidity risk; and
(B) Demonstrate the capability to monetize a highly liquid asset under each scenario required under § 238.124(a)(3).
(v) Diversification. The liquidity buffer must not contain significant concentrations of highly liquid assets by issuer, business sector, region, or other factor related to the covered savings and loan holding company’s risk, except with respect to cash and securities issued or guaranteed by the United States, a U.S. government agency, or a U.S. government-sponsored enterprise.
Subpart O – Supervisory Stress Test Requirements for Covered Savings and Loan Holding Companies
§ 238.130 Definitions.
For purposes of this subpart, the following definitions apply:
Advanced approaches means the risk-weighted assets calculation methodologies at 12 CFR part 217, subpart E, as applicable.
Baseline scenario means a set of conditions that affect the U.S. economy or the financial condition of a covered company and that reflect the consensus views of the economic and financial outlook.
Covered company means a covered savings and loan holding company (other than a foreign banking organization) subject to this subpart.
Planning horizon means the period of at least nine consecutive quarters, beginning on the first day of a stress test cycle over which the relevant projections extend.
Pre-provision net revenue means the sum of net interest income and non-interest income less expenses before adjusting for loss provisions.
Provision for credit losses means:
(1) With respect to a covered company that has adopted the current expected credit losses methodology under GAAP, the provision for credit losses, as would be reported by the covered company on the FR Y-9C in the current stress test cycle; and,
(2) With respect to a covered company that has not adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses as would be reported by the covered company on the FR Y-9C in the current stress test cycle.
Regulatory capital ratio means a capital ratio for which the Board has established minimum requirements for the covered savings and loan holding company by regulation or order, including, as applicable, the company’s regulatory capital ratios calculated under 12 CFR part 217 and the deductions required under 12 CFR 248.12; except that the company shall not use the advanced approaches to calculate its regulatory capital ratios.
Scenarios are those sets of conditions that affect the U.S. economy or the financial condition of a covered company that the Board determines are appropriate for use in the supervisory stress tests, including, but not limited to, baseline and severely adverse scenarios.
Severely adverse scenario means a set of conditions that affect the U.S. economy or the financial condition of a covered company and that overall are significantly more severe than those associated with the baseline scenario and may include trading or other additional components.
Stress test cycle means the period beginning on January 1 of a calendar year and ending on December 31 of that year.
Subsidiary has the same meaning as in § 225.2(o) of this chapter.
§ 238.131 Applicability.
(a) Scope – (1) Applicability. Except as provided in paragraph (b) of this section, this subpart applies to any covered savings and loan holding company with average total consolidated assets of $100 billion or more.
(2) Ongoing applicability. A covered savings and loan holding company (including any successor company) that is subject to any requirement in this subpart shall remain subject to any such requirement unless and until its total consolidated assets fall below $100 billion for each of four consecutive quarters, effective on the as-of date of the fourth consecutive FR Y-9C.
(b) Transitional arrangements. (1) A covered savings and loan holding company that becomes a covered company on or before September 30 of a calendar year must comply with the requirements of this subpart beginning on January 1 of the second calendar year after the covered savings and loan holding company becomes a covered company, unless that time is extended by the Board in writing.
(2) A covered savings and loan holding company that becomes a covered company after September 30 of a calendar year must comply with the requirements of this subpart beginning on January 1 of the third calendar year after the covered savings and loan holding company becomes a covered company, unless that time is extended by the Board in writing.
§ 238.132 Analysis conducted by the Board.
(a) In general. (1) The Board will conduct an analysis of each covered company’s capital, on a total consolidated basis, taking into account all relevant exposures and activities of that covered company, to evaluate the ability of the covered company to absorb losses in specified economic and financial conditions.
(2) The analysis will include an assessment of the projected losses, net income, and pro forma capital levels and regulatory capital ratios and other capital ratios for the covered company and use such analytical techniques that the Board determines are appropriate to identify, measure, and monitor risks of the covered company.
(3) In conducting the analyses, the Board will coordinate with the appropriate primary financial regulatory agencies and the Federal Insurance Office, as appropriate.
(4) In conducting the analysis, the Board will not incorporate changes to a firm’s business plan that are likely to have a material impact on the covered company’s capital adequacy and funding profile in its projections of losses, net income, pro forma capital levels, and capital ratios.
(b) Economic and financial scenarios related to the Board’s analysis. The Board will conduct its analysis using a minimum of two different scenarios, including a baseline scenario and a severely adverse scenario. The Board will notify covered companies of the scenarios that the Board will apply to conduct the analysis for each stress test cycle to which the covered company is subject by no later than February 15 of that year, except with respect to trading or any other components of the scenarios and any additional scenarios that the Board will apply to conduct the analysis, which will be communicated by no later than March 1 of that year.
(c) Frequency of analysis conducted by the Board – (1) General. Except as provided in paragraph (c)(2) of this section, the Board will conduct its analysis of a covered company according to the frequency in Table 1 to § 238.132(c)(1).
Table 1 to § 238.132(
| If the covered company is a | Then the Board will conduct its analysis |
|---|---|
| Category II savings and loan holding company | Annually. |
| Category III savings and loan holding company | Annually. |
| Category IV savings and loan holding company | Biennially, occurring in each year ending in an even number. |
(2) Change in frequency. (i) The Board may conduct a stress test of a covered company on a more or less frequent basis than would be required under paragraph (c)(1) of this section based on the company’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy.
(ii) A Category IV savings and loan holding company may elect to have the Board conduct a stress test with respect to the company in a year ending in an odd number by providing notice to the Board and the appropriate Federal Reserve Bank by January 15 of that year.
(3) Notice and response – (i) Notification of change in frequency. If the Board determines to change the frequency of the stress test under paragraph (c)(2), the Board will notify the company in writing and provide a discussion of the basis for its determination.
(ii) Request for reconsideration and Board response. Within 14 calendar days of receipt of a notification under paragraph (c)(2) of this section, a covered company may request in writing that the Board reconsider the requirement to conduct a stress test on a more or less frequent basis than would be required under paragraph (c)(1) of this section. A covered company’s request for reconsideration must include an explanation as to why the request for reconsideration should be granted. The Board will respond in writing within 14 calendar days of receipt of the company’s request.
(d) Capital Action Assumptions. In conducting a stress test under this section, the Board will make the following assumptions regarding a covered company’s capital actions over the planning horizon:
(1) The covered company will not pay any dividends on any instruments that qualify as common equity tier 1 capital;
(2) The covered company will make payments on instruments that qualify as additional tier 1 capital or tier 2 capital equal to the stated dividend, interest, or principal due on such instrument;
(3) The covered company will not make a redemption or repurchase of any capital instrument that is eligible for inclusion in the numerator of a regulatory capital ratio; and
(4) The covered company will not make any issuances of common stock or preferred stock.
§ 238.133 Data and information required to be submitted in support of the Board’s analyses.
(a) Regular submissions. Each covered company must submit to the Board such data, on a consolidated basis, that the Board determines is necessary in order for the Board to derive the relevant pro forma estimates of the covered company over the planning horizon under the scenarios described in § 238.132(b).
(b) Additional submissions required by the Board. The Board may require a covered company to submit any other information on a consolidated basis that the Board deems necessary in order to:
(1) Ensure that the Board has sufficient information to conduct its analysis under this subpart; and
(2) Project a company’s pre-provision net revenue, losses, provision for credit losses, and net income; and pro forma capital levels, regulatory capital ratios, and any other capital ratio specified by the Board under the scenarios described in § 238.132(b).
(c) Confidential treatment of information submitted. The confidentiality of information submitted to the Board under this subpart and related materials shall be determined in accordance with the Freedom of Information Act (5 U.S.C. 552(b)) and the Board’s Rules Regarding Availability of Information (12 CFR part 261).
§ 238.134 Review of the Board’s analysis; publication of summary results.
(a) Review of results. Based on the results of the analysis conducted under this subpart, the Board will conduct an evaluation to determine whether the covered company has the capital, on a total consolidated basis, necessary to absorb losses and continue its operation by maintaining ready access to funding, meeting its obligations to creditors and other counterparties, and continuing to serve as a credit intermediary under baseline and severely adverse scenarios, and any additional scenarios.
(b) Publication of results by the Board. (1) The Board will publicly disclose a summary of the results of the Board’s analyses of a covered company by June 30 of the calendar year in which the stress test was conducted pursuant to § 238.132.
(2) The Board will notify companies of the date on which it expects to publicly disclose a summary of the Board’s analyses pursuant to paragraph (b)(1) of this section at least 14 calendar days prior to the expected disclosure date.
§ 238.135 Corporate use of stress test results.
The board of directors and senior management of each covered company must consider the results of the analysis conducted by the Board under this subpart, as appropriate:
(a) As part of the covered company’s capital plan and capital planning process, including when making changes to the covered company’s capital structure (including the level and composition of capital); and
(b) When assessing the covered company’s exposures, concentrations, and risk positions.
Subpart P – Company-Run Stress Test Requirements for Savings and Loan Holding Companies
§ 238.140 Authority and purpose.
(a) Authority. 12 U.S.C. 1467; 1467a, 1818, 5361, 5365.
(b) Purpose. This subpart establishes the requirement for a covered company to conduct stress tests. This subpart also establishes definitions of stress test and related terms, methodologies for conducting stress tests, and reporting and disclosure requirements.
§ 238.141 Definitions.
For purposes of this subpart, the following definitions apply:
Advanced approaches means the risk-weighted assets calculation methodologies at 12 CFR part 217, subpart E, as applicable.
Baseline scenario means a set of conditions that affect the U.S. economy or the financial condition of a covered company and that reflect the consensus views of the economic and financial outlook.
Capital action means any issuance or redemption of a debt or equity capital instrument, any capital distribution, and any similar action that the Federal Reserve determines could impact a savings and loan holding company’s consolidated capital.
Covered company means:
(1) A Category II savings and loan holding company;
(2) A Category III savings and loan holding company; or
(3) A savings and loan holding company with average total consolidated assets of greater than $250 billion.
Planning horizon means the period of at least nine consecutive quarters, beginning on the first day of a stress test cycle over which the relevant projections extend.
Pre-provision net revenue means the sum of net interest income and non-interest income less expenses before adjusting for loss provisions.
Provision for credit losses means:
(1) With respect to a covered company that has adopted the current expected credit losses methodology under GAAP, the provision for credit losses, as would be reported by the covered company on the FR Y-9C in the current stress test cycle; and
(2) With respect to a covered company that has not adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses as would be reported by the covered company on the FR Y-9C in the current stress test cycle.
Regulatory capital ratio means a capital ratio for which the Board has established minimum requirements for the savings and loan holding company by regulation or order, including, as applicable, the company’s regulatory capital ratios calculated under 12 CFR part 217 and the deductions required under 12 CFR 248.12; except that the company shall not use the advanced approaches to calculate its regulatory capital ratios.
Scenarios are those sets of conditions that affect the U.S. economy or the financial condition of a covered company that the Board determines are appropriate for use in the company-run stress tests, including, but not limited to, baseline and severely adverse scenarios.
Severely adverse scenario means a set of conditions that affect the U.S. economy or the financial condition of a covered company and that overall are significantly more severe than those associated with the baseline scenario and may include trading or other additional components.
Stress test means a process to assess the potential impact of scenarios on the consolidated earnings, losses, and capital of a covered company over the planning horizon, taking into account its current condition, risks, exposures, strategies, and activities.
Stress test cycle means the period beginning on January 1 of a calendar year and ending on December 31 of that year.
§ 238.142 Applicability.
(a) Scope – (1) Applicability. Except as provided in paragraph (b) of this section, this subpart applies to any covered company, which includes:
(i) Any Category II savings and loan holding company;
(ii) Any Category III savings and loan holding company; and
(iii) Any savings and loan holding company with average total consolidated assets of greater than $250 billion.
(2) Ongoing applicability. A savings and loan holding company (including any successor company) that is subject to any requirement in this subpart shall remain subject to any such requirement unless and until the savings and loan holding company:
(i) Is not a Category II savings and loan holding company;
(ii) Is not a Category III savings and loan holding company; and
(iii) Has $250 billion or less in total consolidated assets in each of four consecutive calendar quarters.
(b) Transitional arrangements. (1) A savings and loan holding company that is subject to minimum capital requirements and that becomes a covered company on or before September 30 of a calendar year must comply with the requirements of this subpart beginning on January 1 of the second calendar year after the savings and loan holding company becomes a covered company, unless that time is extended by the Board in writing.
(2) A savings and loan holding company that is subject to minimum capital requirements and that becomes a covered company after September 30 of a calendar year must comply with the requirements of this subpart beginning on January 1 of the third calendar year after the savings and loan holding company becomes a covered company, unless that time is extended by the Board in writing.
§ 238.143 Stress test.
(a) Stress test requirement – (1) In general. A covered company must conduct a stress test as required under this subpart.
(2) Frequency – (i) General. Except as provided in paragraph (a)(2)(ii) of this section, a covered company must conduct a stress test according to the frequency in Table 1 of § 238.143(a)(2)(i).
Table 1 of § 238.143(
| If the covered company is a | Then the stress test must be conducted |
|---|---|
| Category II savings and loan holding company | Annually, by April 5 of each calendar year based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. |
| Category III savings and loan holding company | Biennially, by April 5 of each calendar year ending in an even number, based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. |
| Savings and loan holding company that is not: | Periodically, as determined by rule or order. |
| (A) A Category II savings and loan holding company; or | |
| (B) A Category III savings and loan holding company. |
(ii) Change in frequency. The Board may require a covered company to conduct a stress test on a more or less frequent basis than would be required under paragraphs (a)(2)(i) of this section based on the company’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy.
(3) Notice and response – (i) Notification of change in frequency. If the Board requires a covered company to change the frequency of the stress test under paragraph (a)(2)(ii) of this section, the Board will notify the company in writing and provide a discussion of the basis for its determination.
(ii) Request for reconsideration and Board response. Within 14 calendar days of receipt of a notification under this paragraph (a)(3), a covered company may request in writing that the Board reconsider the requirement to conduct a stress test on a more or less frequent basis than would be required under paragraph (a)(2)(i) of this section. A covered company’s request for reconsideration must include an explanation as to why the request for reconsideration should be granted. The Board will respond in writing within 14 calendar days of receipt of the company’s request.
(b) Scenarios provided by the Board – (1) In general. In conducting a stress test under this section, a covered company must, at a minimum, use the scenarios provided by the Board. Except as provided in paragraphs (b)(2) and (3) of this section, the Board will provide a description of the scenarios to each covered company no later than February 15 of the calendar year in which the stress test is performed pursuant to this section.
(2) Additional components. (i) The Board may require a covered company with significant trading activity, as determined by the Board and specified in the Capital Assessments and Stress Testing report (FR Y-14), to include a trading and counterparty component in its severely adverse scenario in the stress test required by this section. The data used in this component must be as-of a date selected by the Board between October 1 of the previous calendar year and March 1 of the calendar year in which the stress test is performed pursuant to this section, and the Board will communicate the as-of date and a description of the component to the company no later than March 1 of the calendar year in which the stress test is performed pursuant to this section.
(ii) The Board may require a covered company to include one or more additional components in its severely adverse scenario in the stress test required by this section based on the company’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy.
(3) Additional scenarios. The Board may require a covered company to use one or more additional scenarios in the stress test required by this section based on the company’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy.
(4) Notice and response – (i) Notification of additional component. If the Board requires a covered company to include one or more additional components in its severely adverse scenario under paragraph (b)(2) of this section or to use one or more additional scenarios under paragraph (b)(3) of this section, the Board will notify the company in writing and include a discussion of the basis for its determination. The Board will provide such notification no later than December 31 of the preceding calendar year. The notification will include a general description of the additional component(s) or additional scenario(s) and the basis for requiring the company to include the additional component(s) or additional scenario(s).
(ii) Request for reconsideration and Board response. Within 14 calendar days of receipt of a notification under this paragraph, the covered company may request in writing that the Board reconsider the requirement that the company include the additional component(s) or additional scenario(s), including an explanation as to why the request for reconsideration should be granted. The Board will respond in writing within 14 calendar days of receipt of the company’s request.
(iii) Description of component. The Board will provide the covered company with a description of any additional component(s) or additional scenario(s) by March 1 of the calendar year in which the stress test is performed pursuant to this section.
§ 238.144 Methodologies and practices.
(a) Potential impact on capital. In conducting a stress test under § 238.143, for each quarter of the planning horizon, a covered company must estimate the following for each scenario required to be used:
(1) Losses, pre-provision net revenue, provision for credit losses, and net income; and
(2) The potential impact on pro forma regulatory capital levels and pro forma capital ratios (including regulatory capital ratios and any other capital ratios specified by the Board), and in so doing must:
(i) Incorporate the effects of any capital actions over the planning horizon and maintenance of an allowance for credit losses appropriate for credit exposures throughout the planning horizon; and
(ii) Exclude the impacts of changes to a firm’s business plan that are likely to have a material impact on the covered company’s capital adequacy and funding profile.
(b) Assumptions regarding capital actions. In conducting a stress test under § 238.143, a covered company is required to make the following assumptions regarding its capital actions over the planning horizon:
(1) The covered company will not pay any dividends on any instruments that qualify as common equity tier 1 capital;
(2) The covered company will make payments on instruments that qualify as additional tier 1 capital or tier 2 capital equal to the stated dividend, interest, or principal due on such instrument;
(3) The covered company will not make a redemption or repurchase of any capital instrument that is eligible for inclusion in the numerator of a regulatory capital ratio; and
(4) The covered company will not make any issuances of common stock or preferred stock.
(c) Controls and oversight of stress testing processes – (1) In general. The senior management of a covered company must establish and maintain a system of controls, oversight, and documentation, including policies and procedures, that are designed to ensure that its stress testing processes are effective in meeting the requirements in this subpart. These policies and procedures must, at a minimum, describe the covered company’s stress testing practices and methodologies, and processes for validating and updating the company’s stress test practices and methodologies consistent with applicable laws and regulations.
(2) Oversight of stress testing processes. The board of directors, or a committee thereof, of a covered company must review and approve the policies and procedures of the stress testing processes as frequently as economic conditions or the condition of the covered company may warrant, but no less than each year a stress test is conducted. The board of directors and senior management of the covered company must receive a summary of the results of any stress test conducted under this subpart.
(3) Role of stress testing results. The board of directors and senior management of each covered company must consider the results of the analysis it conducts under this subpart, as appropriate:
(i) As part of the covered company’s capital plan and capital planning process, including when making changes to the covered company’s capital structure (including the level and composition of capital); and
(ii) When assessing the covered company’s exposures, concentrations, and risk positions.
§ 238.145 Reports of stress test results.
(a) Reports to the Board of stress test results. A covered company must report the results of the stress test required under § 238.143 to the Board in the manner and form prescribed by the Board. Such results must be submitted by April 5 of the calendar year in which the stress test is performed pursuant to § 238.143, unless that time is extended by the Board in writing.
(b) Confidential treatment of information submitted. The confidentiality of information submitted to the Board under this subpart and related materials shall be determined in accordance with applicable exemptions under the Freedom of Information Act (5 U.S.C. 552(b)) and the Board’s Rules Regarding Availability of Information (12 CFR part 261).
§ 238.146 Disclosure of stress test results.
(a) Public disclosure of results – (1) In general. (i) A covered company that is subject to a supervisory stress test under 12 CFR 238.132 must publicly disclose a summary of the results of the stress test required under § 238.143 within the period that is 15 calendar days after the Board publicly discloses the results of its supervisory stress test of the covered company pursuant to § 238.134, unless that time is extended by the Board in writing; and
(ii) A covered company that is not subject to a supervisory stress test under § 238.132 must publicly disclose a summary of the results of the stress test required under § 238.143 in the period beginning on June 15 and ending on June 30 in the year in which the stress test is conducted, unless that time is extended by the Board in writing.
(2) Disclosure method. The summary required under this section may be disclosed on the website of a covered company, or in any other forum that is reasonably accessible to the public.
(b) Summary of results. The summary results must, at a minimum, contain the following information regarding the severely adverse scenario:
(1) A description of the types of risks included in the stress test;
(2) A general description of the methodologies used in the stress test, including those employed to estimate losses, revenues, provision for credit losses, and changes in capital positions over the planning horizon;
(3) Estimates of –
(i) Pre-provision net revenue and other revenue;
(ii) Provision for credit losses, realized losses or gains on available-for-sale and held-to-maturity securities, trading and counterparty losses, and other losses or gains;
(iii) Net income before taxes;
(iv) Loan losses (dollar amount and as a percentage of average portfolio balance) in the aggregate and by subportfolio, including: Domestic closed-end first-lien mortgages; domestic junior lien mortgages and home equity lines of credit; commercial and industrial loans; commercial real estate loans; credit card exposures; other consumer loans; and all other loans; and
(v) Pro forma regulatory capital ratios and any other capital ratios specified by the Board; and
(4) An explanation of the most significant causes for the changes in regulatory capital ratios; and
(5) With respect to any depository institution subsidiary that is subject to stress testing requirements pursuant to 12 U.S.C. 5365(i)(2), 12 CFR part 46 (OCC), or 12 CFR part 325, subpart C (FDIC), changes over the planning horizon in regulatory capital ratios and any other capital ratios specified by the Board and an explanation of the most significant causes for the changes in regulatory capital ratios.
(c) Content of results. (1) The following disclosures required under paragraph (b) of this section must be on a cumulative basis over the planning horizon:
(i) Pre-provision net revenue and other revenue;
(ii) Provision for credit losses, realized losses or gains on available-for-sale and held-to-maturity securities, trading and counterparty losses, and other losses or gains;
(iii) Net income before taxes; and
(iv) Loan losses in the aggregate and by subportfolio.
(2) The disclosure of pro forma regulatory capital ratios and any other capital ratios specified by the Board that is required under paragraph (b) of this section must include the beginning value, ending value, and minimum value of each ratio over the planning horizon.
Subpart Q – Single Counterparty Credit Limits for Covered Savings and Loan Holding Companies
§ 238.150 Applicability and general provisions.
(a) In general. This subpart establishes single counterparty credit limits for a covered company. For purposes of this subpart, covered company means:
(i) A Category II savings and loan holding company; or
(ii) A Category III savings and loan holding company.
(b) Credit exposure limits. (1) Section 238.152 establishes credit exposure limits for a covered company.
(2) A covered company is required to calculate its aggregate net credit exposure, gross credit exposure, and net credit exposure to a counterparty using the methods in this subpart.
(c) Applicability of this subpart. (1) A covered company that becomes subject to this subpart must comply with the requirements of this subpart beginning on the first day of the ninth calendar quarter after it becomes a covered company, unless that time is accelerated or extended by the Board in writing.
(2) [Reserved]
(d) Cessation of requirements. Any company that becomes a covered company will remain subject to the requirements of this subpart unless and until it is not a Category II savings and loan holding company or a Category III savings and loan holding company.
§ 238.151 Definitions.
Unless defined in this section, terms that are set forth in § 238.2 and used in this subpart have the definitions assigned in § 238.2. For purposes of this subpart:
(a) Adjusted market value means:
(1) With respect to the value of cash, securities, or other eligible collateral transferred by the covered company to a counterparty, the sum of:
(i) The market value of the cash, securities, or other eligible collateral; and
(ii) The product of the market value of the securities or other eligible collateral multiplied by the applicable collateral haircut in table 1 to § 217.132 of this chapter; and
(2) With respect to cash, securities, or other eligible collateral received by the covered company from a counterparty:
(i) The market value of the cash, securities, or other eligible collateral; minus
(ii) The market value of the securities or other eligible collateral multiplied by the applicable collateral haircut in table 1 to § 217.132 of this chapter.
(3) Prior to calculating the adjusted market value pursuant to paragraphs (a)(1) and (2) of this section, with regard to a transaction that meets the definition of “repo-style transaction” in § 217.2 of this chapter, the covered company would first multiply the applicable collateral haircuts in table 1 to § 217.132 of this chapter by the square root of 1/2.
(b) Affiliate means, with respect to a company:
(1) Any subsidiary of the company and any other company that is consolidated with the company under applicable accounting standards; or
(2) For a company that is not subject to principles or standards referenced in paragraph (b)(1) of this section, any subsidiary of the company and any other company that would be consolidated with the company, if consolidation would have occurred if such principles or standards had applied.
(c) Aggregate net credit exposure means the sum of all net credit exposures of a covered company and all of its subsidiaries to a single counterparty as calculated under this subpart.
(d) Bank-eligible investments means investment securities that a national bank is permitted to purchase, sell, deal in, underwrite, and hold under 12 U.S.C. 24 (Seventh) and 12 CFR part 1.
(e) Counterparty means, with respect to a credit transaction:
(1) With respect to a natural person, the natural person, and, if the credit exposure of the covered company to such natural person exceeds 5 percent of the covered company’s tier 1 capital, the natural person and members of the person’s immediate family collectively;
(2) With respect to any company that is not a subsidiary of the covered company, the company and its affiliates collectively;
(3) With respect to a State, the State and all of its agencies, instrumentalities, and political subdivisions (including any municipalities) collectively;
(4) With respect to a foreign sovereign entity that is not assigned a zero percent risk weight under the standardized approach in 12 CFR part 217, subpart D, the foreign sovereign entity and all of its agencies and instrumentalities (but not including any political subdivision) collectively; and
(5) With respect to a political subdivision of a foreign sovereign entity such as a state, province, or municipality, any political subdivision of the foreign sovereign entity and all of such political subdivision’s agencies and instrumentalities, collectively.
(f) Covered company is defined in § 238.150(a)
(g) Credit derivative has the same meaning as in § 217.2 of this chapter.
(h) Credit transaction means, with respect to a counterparty:
(1) Any extension of credit to the counterparty, including loans, deposits, and lines of credit, but excluding uncommitted lines of credit;
(2) Any repurchase agreement or reverse repurchase agreement with the counterparty;
(3) Any securities lending or securities borrowing transaction with the counterparty;
(4) Any guarantee, acceptance, or letter of credit (including any endorsement, confirmed letter of credit, or standby letter of credit) issued on behalf of the counterparty;
(5) Any purchase of securities issued by or other investment in the counterparty;
(6) Any credit exposure to the counterparty in connection with a derivative transaction between the covered company and the counterparty;
(7) Any credit exposure to the counterparty in connection with a credit derivative or equity derivative between the covered company and a third party, the reference asset of which is an obligation or equity security of, or equity investment in, the counterparty; and
(8) Any transaction that is the functional equivalent of the above, and any other similar transaction that the Board, by regulation or order, determines to be a credit transaction for purposes of this subpart.
(i) Depository institution has the same meaning as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
(j) Derivative transaction means any transaction that is a contract, agreement, swap, warrant, note, or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices, or other assets.
(k) Eligible collateral means collateral in which, notwithstanding the prior security interest of any custodial agent, the covered company has a perfected, first priority security interest (or the legal equivalent thereof, if outside of the United States), with the exception of cash on deposit, and is in the form of:
(1) Cash on deposit with the covered company or a subsidiary of the covered company (including cash in foreign currency or U.S. dollars held for the covered company by a custodian or trustee, whether inside or outside of the United States);
(2) Debt securities (other than mortgage- or asset-backed securities and resecuritization securities, unless those securities are issued by a U.S. government-sponsored enterprise) that are bank-eligible investments and that are investment grade, except for any debt securities issued by the covered company or any subsidiary of the covered company;
(3) Equity securities that are publicly traded, except for any equity securities issued by the covered company or any subsidiary of the covered company;
(4) Convertible bonds that are publicly traded, except for any convertible bonds issued by the covered company or any subsidiary of the covered company; or
(5) Gold bullion.
(l) Eligible credit derivative means a single-name credit derivative or a standard, non-tranched index credit derivative, provided that:
(1) The contract meets the requirements of an eligible guarantee and has been confirmed by the protection purchaser and the protection provider;
(2) Any assignment of the contract has been confirmed by all relevant parties;
(3) If the credit derivative is a credit default swap, the contract includes the following credit events:
(i) Failure to pay any amount due under the terms of the reference exposure, subject to any applicable minimal payment threshold that is consistent with standard market practice and with a grace period that is closely in line with the grace period of the reference exposure; and
(ii) Receivership, insolvency, liquidation, conservatorship, or inability of the reference exposure issuer to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and similar events;
(4) The terms and conditions dictating the manner in which the contract is to be settled are incorporated into the contract;
(5) If the contract allows for cash settlement, the contract incorporates a robust valuation process to estimate loss reliably and specifies a reasonable period for obtaining post-credit event valuations of the reference exposure;
(6) If the contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of at least one of the exposures that is permitted to be transferred under the contract provide that any required consent to transfer may not be unreasonably withheld; and
(7) If the credit derivative is a credit default swap, the contract clearly identifies the parties responsible for determining whether a credit event has occurred, specifies that this determination is not the sole responsibility of the protection provider, and gives the protection purchaser the right to notify the protection provider of the occurrence of a credit event.
(m) Eligible equity derivative means an equity derivative, provided that:
(1) The derivative contract has been confirmed by all relevant parties;
(2) Any assignment of the derivative contract has been confirmed by all relevant parties; and
(3) The terms and conditions dictating the manner in which the derivative contract is to be settled are incorporated into the contract.
(n) Eligible guarantee has the same meaning as in § 217.2 of this chapter.
(o) Eligible guarantor has the same meaning as in § 217.2 of this chapter.
(p) Equity derivative has the same meaning as “equity derivative contract” in § 217.2 of this chapter.
(q) Exempt counterparty means an entity that is identified as exempt from the requirements of this subpart under § 238.157, or that is otherwise excluded from this subpart, including any sovereign entity assigned a zero percent risk weight under the standardized approach in 12 CFR part 217, subpart D.
(r) Financial entity means:
(1)(i) A bank holding company or an affiliate thereof; a savings and loan holding company; a U.S. intermediate holding company established or designated pursuant to 12 CFR 252.153; or a nonbank financial company supervised by the Board;
(ii) A depository institution as defined in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States; a federal credit union or state credit union as defined in section 2 of the Federal Credit Union Act (12 U.S.C. 1752(1) and (6)); a national association, state member bank, or state nonmember bank that is not a depository institution; an institution that functions solely in a trust or fiduciary capacity as described in section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(D)); an industrial loan company, an industrial bank, or other similar institution described in section 2(c)(2)(H) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(H));
(iii) An entity that is state-licensed or registered as:
(A) A credit or lending entity, including a finance company; money lender; installment lender; consumer lender or lending company; mortgage lender, broker, or bank; motor vehicle title pledge lender; payday or deferred deposit lender; premium finance company; commercial finance or lending company; or commercial mortgage company; except entities registered or licensed solely on account of financing the entity’s direct sales of goods or services to customers;
(B) A money services business, including a check casher; money transmitter; currency dealer or exchange; or money order or traveler’s check issuer;
(iv) Any person registered with the Commodity Futures Trading Commission as a swap dealer or major swap participant pursuant to the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or an entity that is registered with the U.S. Securities and Exchange Commission as a security-based swap dealer or a major security-based swap participant pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.);
(v) A securities holding company as defined in section 618 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 1850a); a broker or dealer as defined in sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)-(5)); an investment adviser as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or a company that has elected to be regulated as a business development company pursuant to section 54(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-53(a));
(vi) A private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is deemed not to be an investment company under section 3 of the Investment Company Act of 1940 pursuant to Investment Company Act Rule 3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange Commission;
(vii) A commodity pool, a commodity pool operator, or a commodity trading advisor as defined, respectively, in sections 1a(10), 1a(11), and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10), 1a(11), and 1a(12)); a floor broker, a floor trader, or introducing broker as defined, respectively, in sections 1a(22), 1a(23) and 1a(31) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined in section 1a(28) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28));
(viii) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974 (29 U.S.C. 1002);
(ix) An entity that is organized as an insurance company, primarily engaged in writing insurance or reinsuring risks underwritten by insurance companies, or is subject to supervision as such by a State insurance regulator or foreign insurance regulator;
(x) Any designated financial market utility, as defined in section 803 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5462); and
(xi) An entity that would be a financial entity described in paragraphs (r)(1)(i) through (x) of this section, if it were organized under the laws of the United States or any State thereof; and
(2) Provided that, for purposes of this subpart, “financial entity” does not include any counterparty that is a foreign sovereign entity or multilateral development bank.
(s) Foreign sovereign entity means a sovereign entity other than the United States government and the entity’s agencies, departments, ministries, and central bank collectively.
(t) Gross credit exposure means, with respect to any credit transaction, the credit exposure of the covered company before adjusting, pursuant to § 238.154, for the effect of any eligible collateral, eligible guarantee, eligible credit derivative, eligible equity derivative, other eligible hedge, and any unused portion of certain extensions of credit.
(u) Immediate family means the spouse of an individual, the individual’s minor children, and any of the individual’s children (including adults) residing in the individual’s home.
(v) Intraday credit exposure means credit exposure of a covered company to a counterparty that by its terms is to be repaid, sold, or terminated by the end of its business day in the United States.
(w) Investment grade has the same meaning as in § 217.2 of this chapter.
(x) Multilateral development bank has the same meaning as in § 217.2 of this chapter.
(y) Net credit exposure means, with respect to any credit transaction, the gross credit exposure of a covered company and all of its subsidiaries calculated under § 238.153, as adjusted in accordance with § 238.154.
(z) Qualifying central counterparty has the same meaning as in § 217.2 of this chapter.
(aa) Qualifying master netting agreement has the same meaning as in § 217.2 of this chapter.
(bb) Securities financing transaction means any repurchase agreement, reverse repurchase agreement, securities borrowing transaction, or securities lending transaction.
(cc) Short sale means any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller.
(dd) Sovereign entity means a central national government (including the U.S. government) or an agency, department, ministry, or central bank, but not including any political subdivision such as a state, province, or municipality.
(ee) Subsidiary. A company is a subsidiary of another company if:
(1) The company is consolidated by the other company under applicable accounting standards; or
(2) For a company that is not subject to principles or standards referenced in paragraph (ee)(1) of this section, consolidation would have occurred if such principles or standards had applied.
(ff) Tier 1 capital means common equity tier 1 capital and additional tier 1 capital, as defined in 12 CFR part 217 and as reported by the covered savings and loan holding company on the most recent FR Y-9C report on a consolidated basis.
(gg) Total consolidated assets. A company’s total consolidated assets are determined based on:
(1) The average of the company’s total consolidated assets in the four most recent consecutive quarters as reported quarterly on the FR Y-9C; or
(2) If the company has not filed an FR Y-9C for each of the four most recent consecutive quarters, the average of the company’s total consolidated assets, as reported on the company’s FR Y-9C, for the most recent quarter or consecutive quarters, as applicable.
§ 238.152 Credit exposure limits.
General limit on aggregate net credit exposure. No covered company may have an aggregate net credit exposure to any counterparty that exceeds 25 percent of the tier 1 capital of the covered company.
§ 238.153 Gross credit exposure.
(a) Calculation of gross credit exposure. The amount of gross credit exposure of a covered company to a counterparty with respect to a credit transaction is, in the case of:
(1) A deposit of the covered company held by the counterparty, loan by a covered company to the counterparty, and lease in which the covered company is the lessor and the counterparty is the lessee, equal to the amount owed by the counterparty to the covered company under the transaction.
(2) A debt security or debt investment held by the covered company that is issued by the counterparty, equal to:
(i) The market value of the securities, for trading and available-for-sale securities; and
(ii) The amortized purchase price of the securities or investments, for securities or investments held to maturity.
(3) An equity security held by the covered company that is issued by the counterparty, equity investment in a counterparty, and other direct investments in a counterparty, equal to the market value.
(4) A securities financing transaction must be valued using any of the methods that the covered company is authorized to use under 12 CFR part 217, subparts D and E to value such transactions:
(i)(A) As calculated for each transaction, in the case of a securities financing transaction between the covered company and the counterparty that is not subject to a bilateral netting agreement or does not meet the definition of “repo-style transaction” in § 217.2 of this chapter; or
(B) As calculated for a netting set, in the case of a securities financing transaction between the covered company and the counterparty that is subject to a bilateral netting agreement with that counterparty and meets the definition of “repo-style transaction” in § 217.2 of this chapter;
(ii) For purposes of paragraph (a)(4)(i) of this section, the covered company must:
(A) Assign a value of zero to any security received from the counterparty that does not meet the definition of “eligible collateral” in § 238.151; and
(B) Include the value of securities that are eligible collateral received by the covered company from the counterparty (including any exempt counterparty), calculated in accordance with paragraphs (a)(4)(i) through (iv) of this section, when calculating its gross credit exposure to the issuer of those securities;
(iii) Notwithstanding paragraphs (a)(4)(i) and (ii) of this section and with respect to each credit transaction, a covered company’s gross credit exposure to a collateral issuer under this paragraph (a)(4) is limited to the covered company’s gross credit exposure to the counterparty on the credit transaction; and
(iv) In cases where the covered company receives eligible collateral from a counterparty in addition to the cash or securities received from that counterparty, the counterparty may reduce its gross credit exposure to that counterparty in accordance with § 238.154(b).
(5) A committed credit line extended by a covered company to a counterparty, equal to the face amount of the committed credit line.
(6) A guarantee or letter of credit issued by a covered company on behalf of a counterparty, equal to the maximum potential loss to the covered company on the transaction.
(7) A derivative transaction must be valued using any of the methods that the covered company is authorized to use under 12 CFR part 217, subparts D and E to value such transactions:
(i)(A) As calculated for each transaction, in the case of a derivative transaction between the covered company and the counterparty, including an equity derivative but excluding a credit derivative described in paragraph (a)(8) of this section, that is not subject to a qualifying master netting agreement; or
(B) As calculated for a netting set, in the case of a derivative transaction between the covered company and the counterparty, including an equity derivative but excluding a credit derivative described in paragraph (a)(8) of this section, that is subject to a qualifying master netting agreement.
(ii) In cases where a covered company is required to recognize an exposure to an eligible guarantor pursuant to § 238.154(d), the covered company must exclude the relevant derivative transaction when calculating its gross exposure to the original counterparty under this section.
(8) A credit derivative between the covered company and a third party where the covered company is the protection provider and the reference asset is an obligation or debt security of the counterparty, equal to the maximum potential loss to the covered company on the transaction.
(b) Investments in and exposures to securitization vehicles, investment funds, and other special purpose vehicles that are not subsidiaries. Notwithstanding paragraph (a) of this section, a covered company must calculate pursuant to § 238.155 its gross credit exposure due to any investment in the debt or equity of, and any credit derivative or equity derivative between the covered company and a third party where the covered company is the protection provider and the reference asset is an obligation or equity security of, or equity investment in, a securitization vehicle, investment fund, and other special purpose vehicle that is not a subsidiary of the covered company.
(c) Attribution rule. Notwithstanding any other requirement in this subpart, a covered company must treat any transaction with any natural person or entity as a credit transaction with another party, to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, the other party.
§ 238.154 Net credit exposure.
(a) In general. For purposes of this subpart, a covered company must calculate its net credit exposure to a counterparty by adjusting its gross credit exposure to that counterparty in accordance with the rules set forth in this section.
(b) Eligible collateral. (1) In computing its net credit exposure to a counterparty for any credit transaction other than a securities financing transaction, a covered company must reduce its gross credit exposure on the transaction by the adjusted market value of any eligible collateral.
(2) A covered company that reduces its gross credit exposure to a counterparty as required under paragraph (b)(1) of this section must include the adjusted market value of the eligible collateral, when calculating its gross credit exposure to the collateral issuer.
(3) Notwithstanding paragraph (b)(2) of this section, a covered company’s gross credit exposure to a collateral issuer under this paragraph (b) is limited to:
(i) Its gross credit exposure to the counterparty on the credit transaction, or
(ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction if valued in accordance with § 238.153(a).
(c) Eligible guarantees. (1) In calculating net credit exposure to a counterparty for any credit transaction, a covered company must reduce its gross credit exposure to the counterparty by the amount of any eligible guarantee from an eligible guarantor that covers the transaction.
(2) A covered company that reduces its gross credit exposure to a counterparty as required under paragraph (c)(1) of this section must include the amount of eligible guarantees when calculating its gross credit exposure to the eligible guarantor.
(3) Notwithstanding paragraph (c)(2) of this section, a covered company’s gross credit exposure to an eligible guarantor with respect to an eligible guarantee under this paragraph (c) is limited to:
(i) Its gross credit exposure to the counterparty on the credit transaction prior to recognition of the eligible guarantee, or
(ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction prior to recognition of the eligible guarantee if valued in accordance with § 238.153(a).
(d) Eligible credit and equity derivatives. (1) In calculating net credit exposure to a counterparty for a credit transaction under this section, a covered company must reduce its gross credit exposure to the counterparty by:
(i) In the case of any eligible credit derivative from an eligible guarantor, the notional amount of the eligible credit derivative; or
(ii) In the case of any eligible equity derivative from an eligible guarantor, the gross credit exposure amount to the counterparty (calculated in accordance with § 238.153(a)(7)).
(2)(i) A covered company that reduces its gross credit exposure to a counterparty as provided under paragraph (d)(1) of this section must include, when calculating its net credit exposure to the eligible guarantor, including in instances where the underlying credit transaction would not be subject to the credit limits of § 238.152 (for example, due to an exempt counterparty), either
(A) In the case of any eligible credit derivative from an eligible guarantor, the notional amount of the eligible credit derivative; or
(B) In the case of any eligible equity derivative from an eligible guarantor, the gross credit exposure amount to the counterparty (calculated in accordance with § 238.153(a)(7)).
(ii) Notwithstanding paragraph (d)(2)(i) of this section, in cases where the eligible credit derivative or eligible equity derivative is used to hedge covered positions that are subject to the Board’s market risk rule (12 CFR part 217, subpart F) and the counterparty on the hedged transaction is not a financial entity, the amount of credit exposure that a company must recognize to the eligible guarantor is the amount that would be calculated pursuant to § 238.153(a).
(3) Notwithstanding paragraph (d)(2) of this section, a covered company’s gross credit exposure to an eligible guarantor with respect to an eligible credit derivative or an eligible equity derivative this paragraph (d) is limited to:
(i) Its gross credit exposure to the counterparty on the credit transaction prior to recognition of the eligible credit derivative or the eligible equity derivative, or
(ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction prior to recognition of the eligible credit derivative or the eligible equity derivative if valued in accordance with § 238.153(a).
(e) Other eligible hedges. In calculating net credit exposure to a counterparty for a credit transaction under this section, a covered company may reduce its gross credit exposure to the counterparty by the face amount of a short sale of the counterparty’s debt security or equity security, provided that:
(1) The instrument in which the covered company has a short position is junior to, or pari passu with, the instrument in which the covered company has the long position; and
(2) The instrument in which the covered company has a short position and the instrument in which the covered company has the long position are either both treated as trading or available-for-sale exposures or both treated as held-to-maturity exposures.
(f) Unused portion of certain extensions of credit. (1) In computing its net credit exposure to a counterparty for a committed credit line or revolving credit facility under this section, a covered company may reduce its gross credit exposure by the amount of the unused portion of the credit extension to the extent that the covered company does not have any legal obligation to advance additional funds under the extension of credit and the used portion of the credit extension has been fully secured by eligible collateral.
(2) To the extent that the used portion of a credit extension has been secured by eligible collateral, the covered company may reduce its gross credit exposure by the adjusted market value of any eligible collateral received from the counterparty, even if the used portion has not been fully secured by eligible collateral.
(3) To qualify for the reduction in net credit exposure under this paragraph, the credit contract must specify that any used portion of the credit extension must be fully secured by the adjusted market value of any eligible collateral.
(g) Credit transactions involving exempt counterparties. (1) A covered company’s credit transactions with an exempt counterparty are not subject to the requirements of this subpart, including but not limited to § 238.152.
(2) Notwithstanding paragraph (g)(1) of this section, in cases where a covered company has a credit transaction with an exempt counterparty and the covered company has obtained eligible collateral from that exempt counterparty or an eligible guarantee or eligible credit or equity derivative from an eligible guarantor, the covered company must include (for purposes of this subpart) such exposure to the issuer of such eligible collateral or the eligible guarantor, as calculated in accordance with the rules set forth in this section, when calculating its gross credit exposure to that issuer of eligible collateral or eligible guarantor.
(h) Currency mismatch adjustments. For purposes of calculating its net credit exposure to a counterparty under this section, a covered company must apply, as applicable:
(1) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible collateral and calculating its gross credit exposure to an issuer of eligible collateral, pursuant to paragraph (b) of this section, the currency mismatch adjustment approach of § 217.37(c)(3)(ii) of this chapter; and
(2) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible guarantee, eligible equity derivative, or eligible credit derivative from an eligible guarantor and calculating its gross credit exposure to an eligible guarantor, pursuant to paragraphs (c) and (d) of this section, the currency mismatch adjustment approach of § 217.36(f) of this chapter.
(i) Maturity mismatch adjustments. For purposes of calculating its net credit exposure to a counterparty under this section, a covered company must apply, as applicable, the maturity mismatch adjustment approach of § 217.36(d) of this chapter:
(1) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible collateral or any eligible guarantees, eligible equity derivatives, or eligible credit derivatives from an eligible guarantor, pursuant to paragraphs (b) through (d) of this section, and
(2) In calculating its gross credit exposure to an issuer of eligible collateral, pursuant to paragraph (b) of this section, or to an eligible guarantor, pursuant to paragraphs (c) and (d) of this section; provided that
(3) The eligible collateral, eligible guarantee, eligible equity derivative, or eligible credit derivative subject to paragraph (i)(1) of this section:
(i) Has a shorter maturity than the credit transaction;
(ii) Has an original maturity equal to or greater than one year;
(iii) Has a residual maturity of not less than three months; and
(iv) The adjustment approach is otherwise applicable.
§ 238.155 Investments in and exposures to securitization vehicles, investment funds, and other special purpose vehicles that are not subsidiaries of the covered company.
(a) In general. (1) For purposes of this section, the following definitions apply:
(i) SPV means a securitization vehicle, investment fund, or other special purpose vehicle that is not a subsidiary of the covered company.
(ii) SPV exposure means an investment in the debt or equity of an SPV, or a credit derivative or equity derivative between the covered company and a third party where the covered company is the protection provider and the reference asset is an obligation or equity security of, or equity investment in, an SPV.
(2)(i) A covered company must determine whether the amount of its gross credit exposure to an issuer of assets in an SPV, due to an SPV exposure, is equal to or greater than 0.25 percent of the covered company’s tier 1 capital using one of the following two methods:
(A) The sum of all of the issuer’s assets (with each asset valued in accordance with § 238.153(a)) in the SPV; or
(B) The application of the look-through approach described in paragraph (b) of this section.
(ii) With respect to the determination required under paragraph (a)(2)(i) of this section, a covered company must use the same method to calculate gross credit exposure to each issuer of assets in a particular SPV.
(iii) In making a determination under paragraph (a)(2)(i) of this section, the covered company must consider only the credit exposure to the issuer arising from the covered company’s SPV exposure.
(iv) For purposes of this paragraph (a)(2), a covered company that is unable to identify each issuer of assets in an SPV must attribute to a single unknown counterparty the amount of its gross credit exposure to all unidentified issuers and calculate such gross credit exposure using one method in either paragraph (a)(2)(i)(A) or (a)(2)(i)(B) of this section.
(3)(i) If a covered company determines pursuant to paragraph (a)(2) of this section that the amount of its gross credit exposure to an issuer of assets in an SPV is less than 0.25 percent of the covered company’s tier 1 capital, the amount of the covered company’s gross credit exposure to that issuer may be attributed to either that issuer of assets or the SPV:
(A) If attributed to the issuer of assets, the issuer of assets must be identified as a counterparty, and the gross credit exposure calculated under paragraph (a)(2)(i)(A) of this section to that issuer of assets must be aggregated with any other gross credit exposures (valued in accordance with § 238.153) to that same counterparty; and
(B) If attributed to the SPV, the covered company’s gross credit exposure is equal to the covered company’s SPV exposure, valued in accordance with § 238.153(a).
(ii) If a covered company determines pursuant to paragraph (a)(2) of this section that the amount of its gross credit exposure to an issuer of assets in an SPV is equal to or greater than 0.25 percent of the covered company’s tier 1 capital or the covered company is unable to determine that the amount of the gross credit exposure is less than 0.25 percent of the covered company’s tier 1 capital:
(A) The covered company must calculate the amount of its gross credit exposure to the issuer of assets in the SPV using the look-through approach in paragraph (b) of this section;
(B) The issuer of assets in the SPV must be identified as a counterparty, and the gross credit exposure calculated in accordance with paragraph (b) of this section must be aggregated with any other gross credit exposures (valued in accordance with § 238.153) to that same counterparty; and
(C) When applying the look-through approach in paragraph (b) of this section, a covered company that is unable to identify each issuer of assets in an SPV must attribute to a single unknown counterparty the amount of its gross credit exposure, calculated in accordance with paragraph (b) of this section, to all unidentified issuers.
(iii) For purposes of this section, a covered company must aggregate all gross credit exposures to unknown counterparties for all SPVs as if the exposures related to a single unknown counterparty; this single unknown counterparty is subject to the limits of § 238.152 as if it were a single counterparty.
(b) Look-through approach. A covered company that is required to calculate the amount of its gross credit exposure with respect to an issuer of assets in accordance with this paragraph (b) must calculate the amount as follows:
(1) Where all investors in the SPV rank pari passu, the amount of the gross credit exposure to the issuer of assets is equal to the covered company’s pro rata share of the SPV multiplied by the value of the underlying asset in the SPV, valued in accordance with § 238.153(a); and
(2) Where all investors in the SPV do not rank pari passu, the amount of the gross credit exposure to the issuer of assets is equal to:
(i) The pro rata share of the covered company’s investment in the tranche of the SPV; multiplied by
(ii) The lesser of:
(A) The market value of the tranche in which the covered company has invested, except in the case of a debt security that is held to maturity, in which case the tranche must be valued at the amortized purchase price of the securities; and
(B) The value of each underlying asset attributed to the issuer in the SPV, each as calculated pursuant to § 238.153(a).
(c) Exposures to third parties. (1) Notwithstanding any other requirement in this section, a covered company must recognize, for purposes of this subpart, a gross credit exposure to each third party that has a contractual obligation to provide credit or liquidity support to an SPV whose failure or material financial distress would cause a loss in the value of the covered company’s SPV exposure.
(2) The amount of any gross credit exposure that is required to be recognized to a third party under paragraph (c)(1) of this section is equal to the covered company’s SPV exposure, up to the maximum contractual obligation of that third party to the SPV, valued in accordance with § 238.153(a). (This gross credit exposure is in addition to the covered company’s gross credit exposure to the SPV or the issuers of assets of the SPV, calculated in accordance with paragraphs (a) and (b) of this section.)
(3) A covered company must aggregate the gross credit exposure to a third party recognized in accordance with paragraphs (c)(1) and (2) of this section with its other gross credit exposures to that third party (that are unrelated to the SPV) for purposes of compliance with the limits of § 238.152.
§ 238.156 Aggregation of exposures to more than one counterparty due to economic interdependence or control relationships.
(a) In general. (1) If a covered company has an aggregate net credit exposure to any counterparty that exceeds 5 percent of its tier 1 capital, the covered company must assess its relationship with the counterparty under paragraph (b)(2) of this section to determine whether the counterparty is economically interdependent with one or more other counterparties of the covered company and under paragraph (c)(1) of this section to determine whether the counterparty is connected by a control relationship with one or more other counterparties.
(2) If, pursuant to an assessment required under paragraph (a)(1) of this section, the covered company determines that one or more of the factors of paragraph (b)(2) or (c)(1) of this section are met with respect to one or more counterparties, or the Board determines pursuant to paragraph (d) of this section that one or more other counterparties of a covered company are economically interdependent or that one or more other counterparties of a covered company are connected by a control relationship, the covered company must aggregate its net credit exposure to the counterparties for all purposes under this subpart, including, but not limited to, § 238.152.
(3) In connection with any request pursuant to paragraph (b)(3) or (c)(2) of this section, the Board may require the covered company to provide additional information.
(b) Aggregation of exposures to more than one counterparty due to economic interdependence. (1) For purposes of this paragraph, two counterparties are economically interdependent if the failure, default, insolvency, or material financial distress of one counterparty would cause the failure, default, insolvency, or material financial distress of the other counterparty, taking into account the factors in paragraph (b)(2) of this section.
(2) A covered company must assess whether the financial distress of one counterparty (counterparty A) would prevent the ability of the other counterparty (counterparty B) to fully and timely repay counterparty B’s liabilities and whether the insolvency or default of counterparty A is likely to be associated with the insolvency or default of counterparty B and, therefore, these counterparties are economically interdependent, by evaluating the following:
(i) Whether 50 percent or more of one counterparty’s gross revenue is derived from, or gross expenditures are directed to, transactions with the other counterparty;
(ii) Whether counterparty A has fully or partly guaranteed the credit exposure of counterparty B, or is liable by other means, in an amount that is 50 percent or more of the covered company’s net credit exposure to counterparty A;
(iii) Whether 25 percent or more of one counterparty’s production or output is sold to the other counterparty, which cannot easily be replaced by other customers;
(iv) Whether the expected source of funds to repay the loans of both counterparties is the same and neither counterparty has another independent source of income from which the loans may be serviced and fully repaid;
(v) Whether two or more counterparties rely on the same source for the majority of their funding and, in the event of the common provider’s default, an alternative provider cannot be found.
(3)(i) Notwithstanding paragraph (b)(2) of this section, if a covered company determines that one or more of the factors in paragraph (b)(2) is met, the covered company may request in writing a determination from the Board that those counterparties are not economically interdependent and that the covered company is not required to aggregate those counterparties.
(ii) Upon a request by a covered company pursuant to paragraph (b)(3) of this section, the Board may grant temporary relief to the covered company and not require the covered company to aggregate one counterparty with another counterparty provided that the counterparty could promptly modify its business relationships, such as by reducing its reliance on the other counterparty, to address any economic interdependence concerns, and provided that such relief is in the public interest and is consistent with the purpose of this subpart.
(c) Aggregation of exposures to more than one counterparty due to certain control relationships. (1) For purposes of this subpart, one counterparty (counterparty A) is deemed to control the other counterparty (counterparty B) if:
(i) Counterparty A owns, controls, or holds with the power to vote 25 percent or more of any class of voting securities of counterparty B; or
(ii) Counterparty A controls in any manner the election of a majority of the directors, trustees, or general partners (or individuals exercising similar functions) of counterparty B.
(2)(i) Notwithstanding paragraph (c)(1) of this section, if a covered company determines that one or more of the factors in paragraph (c)(1) is met, the covered company may request in writing a determination from the Board that counterparty A does not control counterparty B and that the covered company is not required to aggregate those counterparties.
(ii) Upon a request by a covered company pursuant to paragraph (c)(2) of this section, the Board may grant temporary relief to the covered company and not require the covered company to aggregate counterparty A with counterparty B provided that, taking into account the specific facts and circumstances, such indicia of control does not result in the entities being connected by control relationships for purposes of this subpart, and provided that such relief is in the public interest and is consistent with the purpose of this subpart.
(d) Board determinations for aggregation of counterparties due to economic interdependence or control relationships. The Board may determine, after notice to the covered company and opportunity for hearing, that one or more counterparties of a covered company are:
(1) Economically interdependent for purposes of this subpart, considering the factors in paragraph (b)(2) of this section, as well as any other indicia of economic interdependence that the Board determines in its discretion to be relevant; or
(2) Connected by control relationships for purposes of this subpart, considering the factors in paragraph (c)(1) of this section and whether counterparty A:
(i) Controls the power to vote 25 percent or more of any class of voting securities of Counterparty B pursuant to a voting agreement;
(ii) Has significant influence on the appointment or dismissal of counterparty B’s administrative, management, or governing body, or the fact that a majority of members of such body have been appointed solely as a result of the exercise of counterparty A’s voting rights; or
(iii) Has the power to exercise a controlling influence over the management or policies of counterparty B.
(e) Board determinations for aggregation of counterparties to prevent evasion. Notwithstanding paragraphs (b) and (c) of this section, a covered company must aggregate its exposures to a counterparty with the covered company’s exposures to another counterparty if the Board determines in writing after notice and opportunity for hearing, that the exposures to the two counterparties must be aggregated to prevent evasions of the purposes of this subpart, including, but not limited to § 238.156.
§ 238.157 Exemptions.
(a) Exempted exposure categories. The following categories of credit transactions are exempt from the limits on credit exposure under this subpart:
(1) Any direct claim on, and the portion of a claim that is directly and fully guaranteed as to principal and interest by, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, only while operating under the conservatorship or receivership of the Federal Housing Finance Agency, and any additional obligation issued by a U.S. government-sponsored entity as determined by the Board;
(2) Intraday credit exposure to a counterparty;
(3) Any trade exposure to a qualifying central counterparty related to the covered company’s clearing activity, including potential future exposure arising from transactions cleared by the qualifying central counterparty and pre-funded default fund contributions;
(4) Any credit transaction with the Bank for International Settlements, the International Monetary Fund, the International Bank for Reconstruction and Development, the International Finance Corporation, the International Development Association, the Multilateral Investment Guarantee Agency, or the International Centre for Settlement of Investment Disputes;
(5) Any credit transaction with the European Commission or the European Central Bank; and
(6) Any transaction that the Board exempts if the Board finds that such exemption is in the public interest and is consistent with the purpose of this subpart.
(b) Exemption for Federal Home Loan Banks. For purposes of this subpart, a covered company does not include any Federal Home Loan Bank.
(c) Additional exemptions by the Board. The Board may, by regulation or order, exempt transactions, in whole or in part, from the definition of the term “credit exposure,” if the Board finds that the exemption is in the public interest.
§ 238.158 Compliance.
(a) Scope of compliance. (1) Using all available data, including any data required to be maintained or reported to the Federal Reserve under this subpart, a covered company must comply with the requirements of this subpart on a daily basis at the end of each business day.
(2) A covered company must report its compliance to the Federal Reserve as of the end of the quarter, unless the Board determines and notifies that company in writing that more frequent reporting is required.
(3) In reporting its compliance, a covered company must calculate and include in its gross credit exposure to an issuer of eligible collateral or eligible guarantor the amounts of eligible collateral, eligible guarantees, eligible equity derivatives, and eligible credit derivatives that were provided to the covered company in connection with credit transactions with exempt counterparties, valued in accordance with and as required by § 238.154(b) through (d) and § 238.154 (g).
(b) Qualifying master netting agreement. With respect to any qualifying master netting agreement, a covered company must establish and maintain procedures that meet or exceed the requirements of § 217.3(d) of this chapter to monitor possible changes in relevant law and to ensure that the agreement continues to satisfy these requirements.
(c) Noncompliance. (1) Except as otherwise provided in this section, if a covered company is not in compliance with this subpart with respect to a counterparty solely due to the circumstances listed in paragraphs (c)(2)(i) through (v) of this section, the covered company will not be subject to enforcement actions for a period of 90 days (or, with prior notice to the company, such shorter or longer period determined by the Board, in its sole discretion, to be appropriate to preserve the safety and soundness of the covered company), if the covered company uses reasonable efforts to return to compliance with this subpart during this period. The covered company may not engage in any additional credit transactions with such a counterparty in contravention of this rule during the period of noncompliance, except as provided in paragraph (c)(2) of this section.
(2) A covered company may request a special temporary credit exposure limit exemption from the Board. The Board may grant approval for such exemption in cases where the Board determines that such credit transactions are necessary or appropriate to preserve the safety and soundness of the covered company. In acting on a request for an exemption, the Board will consider the following:
(i) A decrease in the covered company’s capital stock and surplus;
(ii) The merger of the covered company with another covered company;
(iii) A merger of two counterparties; or
(iv) An unforeseen and abrupt change in the status of a counterparty as a result of which the covered company’s credit exposure to the counterparty becomes limited by the requirements of this section; or
(v) Any other factor(s) the Board determines, in its discretion, is appropriate.
(d) Other measures. The Board may impose supervisory oversight and additional reporting measures that it determines are appropriate to monitor compliance with this subpart. Covered companies must furnish, in the manner and form prescribed by the Board, such information to monitor compliance with this subpart and the limits therein as the Board may require.
Subpart R – Company-Run Stress Test Requirements for Foreign Savings and Loan Holding Companies With Total Consolidated Assets Over $250 Billion
§ 238.160 Definitions.
For purposes of this subpart, the following definitions apply:
(a) Foreign savings and loan holding company means a savings and loan holding company as defined in section 10 of the Home Owners’ Loan Act (12 U.S.C. 1467a(a)) that is incorporated or organized under the laws of a country other than the United States.
(b) Pre-provision net revenue means revenue less expenses before adjusting for total loan loss provisions.
(c) Stress test cycle has the same meaning as in subpart O of this part.
(d) Total loan loss provisions means the amount needed to make reserves adequate to absorb estimated credit losses, based upon management’s evaluation of the loans and leases that the company has the intent and ability to hold for the foreseeable future or until maturity or payoff, as determined under applicable accounting standards.
§ 238.161 Applicability.
(a) Applicability for foreign savings and loan holding companies with total consolidated assets of more than $250 billion – (1) General. A foreign savings and loan holding company must comply with the stress test requirements set forth in this section beginning on the first day of the ninth quarter following the date on which its average total consolidated assets exceed $250 billion.
(2) Cessation of requirements. A foreign savings and loan holding company will remain subject to requirements of this subpart until the date on which the foreign savings and loan holding company’s total consolidated assets are below $250 billion for each of four most recent calendar quarters.
(b) [Reserved]
§ 238.162 Capital stress testing requirements.
(a) In general. (1) A foreign savings and loan holding company subject to this subpart must:
(i) Be subject on a consolidated basis to a capital stress testing regime by its home-country supervisor that meets the requirements of paragraph (a)(2) of this section; and
(ii) Conduct such stress tests or be subject to a supervisory stress test and meet any minimum standards set by its home-country supervisor with respect to the stress tests.
(2) The capital stress testing regime of a foreign savings and loan holding company’s home-country supervisor must include:
(i) A supervisory capital stress test conducted by the relevant home-country supervisor or an evaluation and review by the home-country supervisor of an internal capital adequacy stress test conducted by the foreign savings and loan holding company, conducted on at least a biennial basis; and
(ii) Requirements for governance and controls of stress testing practices by relevant management and the board of directors (or equivalent thereof).
(b) Additional standards. (1) Unless the Board otherwise determines in writing, a foreign savings and loan holding company that does not meet each of the requirements in paragraphs (a)(1) and (2) of this section must:
(i) Conduct an annual stress test of its U.S. subsidiaries to determine whether those subsidiaries have the capital necessary to absorb losses as a result of adverse economic conditions; and
(ii) Report on at least a biennial basis a summary of the results of the stress test to the Board that includes a description of the types of risks included in the stress test, a description of the conditions or scenarios used in the stress test, a summary description of the methodologies used in the stress test, estimates of aggregate losses, pre-provision net revenue, total loan loss provisions, net income before taxes and pro forma regulatory capital ratios required to be computed by the home-country supervisor of the foreign savings and loan holding company and any other relevant capital ratios, and an explanation of the most significant causes for any changes in regulatory capital ratios.
(2) An enterprise-wide stress test that is approved by the Board may meet the stress test requirement of paragraph (b)(1)(ii) of this section.
Subpart S – Capital Planning and Stress Capital Buffer Requirement
§ 238.170 Capital planning and stress capital buffer requirement.
(a) Purpose. This section establishes capital planning and prior notice and approval requirements for capital distributions by certain savings and loan holding companies. This section also establishes the Board’s process for determining the stress capital buffer requirement applicable to these savings and loan holding companies.
(b) Scope and reservation of authority – (1) Applicability. Except as provided in § 238.170(c), this section applies to:
(i) Any top-tier covered savings and loan holding company domiciled in the United States with average total consolidated assets of $100 billion or more ($100 billion asset threshold); and
(ii) Any other covered savings and loan holding company domiciled in the United States that is made subject to this section, in whole or in part, by order of the Board.
(2) Average total consolidated assets. For purposes of this section, average total consolidated assets means the average of the total consolidated assets as reported by a covered savings and loan holding company on its Consolidated Financial Statements for Holding Companies (FR Y-9C) for the four most recent consecutive quarters. If the covered savings and loan holding company has not filed the FR Y-9C for each of the four most recent consecutive quarters, average total consolidated assets means the average of the company’s total consolidated assets, as reported on the company’s FR Y-9C, for the most recent quarter or consecutive quarters, as applicable. Average total consolidated assets are measured on the as-of date of the most recent FR Y-9C used in the calculation of the average.
(3) Ongoing applicability. A covered savings and loan holding company (including any successor covered savings and loan holding company) that is subject to any requirement in this section shall remain subject to such requirements unless and until its total consolidated assets fall below $100 billion for each of four consecutive quarters, as reported on the FR Y-9C and effective on the as-of date of the fourth consecutive FR Y-9C.
(4) Reservation of authority. Nothing in this section shall limit the authority of the Federal Reserve to issue or enforce a capital directive or take any other supervisory or enforcement action, including an action to address unsafe or unsound practices or conditions or violations of law.
(5) Application of this section by order. The Board may apply this section, in whole or in part, to a covered savings and loan holding company by order based on the institution’s size, level of complexity, risk profile, scope of operations, or financial condition.
(c) Transition periods for certain covered savings and loan holding companies. (1) A covered savings and loan holding company that meets the $100 billion asset threshold (as measured under paragraph (b) of this section) on or before September 30 of a calendar year must comply with the requirements of this section beginning on January 1 of the next calendar year, unless that time is extended by the Board in writing. Notwithstanding the previous sentence, the Board will not provide a covered savings and loan holding company with notice of its stress capital buffer requirement until the first year in which the Board conducts an analysis of the covered savings and loan company pursuant to 12 CFR 238.132.
(2) A covered savings and loan holding company that meets the $100 billion asset threshold after September 30 of a calendar year must comply with the requirements of this section beginning on January 1 of the second calendar year after the covered savings and loan holding company meets the $100 billion asset threshold, unless that time is extended by the Board in writing. Notwithstanding the previous sentence, the Board will not provide a covered savings and loan holding company with notice of its stress capital buffer requirement until the first year in which the Board conducts an analysis of the covered savings and loan holding company pursuant to 12 CFR 238.132.
(3) The Board, or the appropriate Reserve Bank with the concurrence of the Board, may require a covered savings and loan holding company described in paragraph (c)(1) or (2) of this section to comply with any or all of the requirements of this section if the Board, or appropriate Reserve Bank with concurrence of the Board, determines that the requirement is appropriate on a different date based on the company’s risk profile, scope of operation, or financial condition and provides prior notice to the company of the determination.
(d) Definitions. For purposes of this section, the following definitions apply:
(1) Advanced approaches means the risk-weighted assets calculation methodologies at 12 CFR part 217, subpart E, as applicable.
(2) Average total nonbank assets means the average of the total nonbank assets, calculated in accordance with the instructions to the FR Y-9LP, for the four most recent calendar quarters or, if the covered savings and loan holding company has not filed the FR Y-9LP for each of the four most recent calendar quarters, for the most recent quarter or quarters, as applicable.
(3) Capital action means any issuance of a debt or equity capital instrument, any capital distribution, and any similar action that the Federal Reserve determines could impact a covered savings and loan holding company’s consolidated capital.
(4) Capital distribution means a redemption or repurchase of any debt or equity capital instrument, a payment of common or preferred stock dividends, a payment that may be temporarily or permanently suspended by the issuer on any instrument that is eligible for inclusion in the numerator of any minimum regulatory capital ratio, and any similar transaction that the Federal Reserve determines to be in substance a distribution of capital.
(5) Capital plan means a written presentation of a covered savings and loan holding company’s capital planning strategies and capital adequacy process that includes the mandatory elements set forth in paragraph (e)(2) of this section.
(6) Capital plan cycle means the period beginning on January 1 of a calendar year and ending on December 31 of that year.
(7) Capital policy means a covered savings and loan holding company’s written principles and guidelines used for capital planning, capital issuance, capital usage and distributions, including internal capital goals; the quantitative or qualitative guidelines for capital distributions; the strategies for addressing potential capital shortfalls; and the internal governance procedures around capital policy principles and guidelines.
(8) Category IV savings and loan holding company means a covered savings and loan holding company identified as a Category IV banking organization pursuant to 12 CFR 238.10.
(9) Common equity tier 1 capital has the same meaning as under 12 CFR part 217.
(10) Effective capital distribution limitations means any limitations on capital distributions established by the Board by order or regulation, including pursuant to 12 CFR 217.11, provided that, for any limitations based on risk-weighted assets, such limitations must be calculated using the standardized approach, as set forth in 12 CFR part 217, subpart D.
(11) Final planned capital distributions means the planned capital distributions included in a capital plan that include the adjustments made pursuant to paragraph (h) of this section, if any.
(12) Internal baseline scenario means a scenario that reflects the covered savings and loan holding company’s expectation of the economic and financial outlook, including expectations related to the covered saving and loan holding company’s capital adequacy and financial condition.
(13) Internal stress scenario means a scenario designed by a covered savings and loan holding company that stresses the specific vulnerabilities of the covered savings and loan holding company’s risk profile and operations, including those related to the covered savings and loan holding company’s capital adequacy and financial condition.
(14) Planning horizon means the period of at least nine consecutive quarters, beginning with the quarter preceding the quarter in which the covered savings and loan holding company submits its capital plan, over which the relevant projections extend.
(15) Regulatory capital ratio means a capital ratio for which the Board has established minimum requirements for the covered savings and loan holding company by regulation or order, including, as applicable, the covered savings and loan holding company’s regulatory capital ratios calculated under 12 CFR part 217 and the deductions required under 12 CFR 248.12; except that the covered savings and loan holding company shall not use the advanced approaches to calculate its regulatory capital ratios.
(16) Severely adverse scenario means a set of conditions that affect the U.S. economy or the financial condition of a covered company and that overall are significantly more severe than those associated with the baseline scenario and may include trading or other additional components.
(17) Stress capital buffer requirement means the amount calculated under paragraph (f) of this section.
(18) Supervisory stress test means a stress test conducted using a severely adverse scenario and the assumptions contained in 12 CFR part 238, subpart O.
(e) Capital planning requirements and procedures – (1) Annual capital planning. (i) A covered savings and loan holding company must develop and maintain a capital plan.
(ii) A covered savings and loan holding company must submit its complete capital plan to the Board and the appropriate Reserve Bank by April 5 of each calendar year, or such later date as directed by the Board or by the appropriate Reserve Bank with concurrence of the Board.
(iii) The covered savings and loan holding company’s board of directors or a designated committee thereof must at least annually and prior to submission of the capital plan under paragraph (e)(1)(ii) of this section:
(A) Review the robustness of the covered savings and loan holding company’s process for assessing capital adequacy;
(B) Ensure that any deficiencies in the covered savings and loan holding company’s process for assessing capital adequacy are appropriately remedied; and
(C) Approve the covered savings and loan holding company’s capital plan.
(2) Mandatory elements of capital plan. A capital plan must contain at least the following elements:
(i) An assessment of the expected uses and sources of capital over the planning horizon that reflects the covered savings and loan holding company’s size, complexity, risk profile, and scope of operations, assuming both expected and stressful conditions, including:
(A) Estimates of projected revenues, losses, reserves, and pro forma capital levels, including regulatory capital ratios, and any additional capital measures deemed relevant by the covered savings and loan holding company, over the planning horizon under a range of scenarios, including:
(1) If the covered savings and loan holding company is a Category IV savings and loan holding company, the Internal baseline scenario and at least one Internal stress scenario, as well as any additional scenarios, based on financial conditions or the macroeconomic outlook, or based on the covered savings and loan holding company’s financial condition, size, complexity, risk profile, or activities, or risks to the U.S. economy, that the Federal Reserve may provide the covered savings and loan holding company after giving notice to the covered savings and loan holding company; or
(2) If the covered savings and loan holding company is not a Category IV savings and loan holding company, any scenarios provided by the Federal Reserve, the Internal baseline scenario, and at least one Internal stress scenario;
(B) A discussion of the results of any stress test required by law or regulation, and an explanation of how the capital plan takes these results into account; and
(C) A description of all planned capital actions over the planning horizon. Planned capital actions must be consistent with effective capital distribution limitations, except as may be adjusted pursuant to paragraph (h) of this section. In determining whether a covered savings and loan holding company’s planned capital distributions are consistent with effective capital distribution limitations, a covered savings and loan holding company must assume that any countercyclical capital buffer amount currently applicable to the covered savings and loan holding company remains at the same level, except that the covered savings and loan holding company must reflect any increases or decreases in the countercyclical capital buffer amount that have been announced by the Board at the times indicated by the Board’s announcement for when such increases or decreases will take effect.
(ii) A detailed description of the covered savings and loan holding company’s process for assessing capital adequacy, including:
(A) A discussion of how the covered savings and loan holding company will, under expected and stressful conditions, maintain capital commensurate with its risks, maintain capital above the regulatory capital ratios, and serve as a source of strength to its subsidiary depository institutions;
(B) A discussion of how the covered savings and loan holding company will, under expected and stressful conditions, maintain sufficient capital to continue its operations by maintaining ready access to funding, meeting its obligations to creditors and other counterparties, and continuing to serve as a credit intermediary;
(iii) The covered savings and loan holding company’s capital policy; and
(iv) A discussion of any expected changes to the covered savings and loan holding company’s business plan that are likely to have a material impact on the covered savings and loan holding company’s capital adequacy or liquidity.
(3) Data collection. Upon the request of the Board or appropriate Reserve Bank, the covered savings and loan holding company shall provide the Federal Reserve with information regarding:
(i) The covered savings and loan holding company’s financial condition, including its capital;
(ii) The covered savings and loan holding company’s structure;
(iii) Amount and risk characteristics of the covered savings and loan holding company’s on- and off-balance sheet exposures, including exposures within the covered savings and loan holding company’s trading account, other trading-related exposures (such as counterparty-credit risk exposures) or other items sensitive to changes in market factors, including, as appropriate, information about the sensitivity of positions to changes in market rates and prices;
(iv) The covered savings and loan holding company’s relevant policies and procedures, including risk management policies and procedures;
(v) The covered savings and loan holding company’s liquidity profile and management;
(vi) The loss, revenue, and expense estimation models used by the covered savings and loan holding company for stress scenario analysis, including supporting documentation regarding each model’s development and validation; and
(vii) Any other relevant qualitative or quantitative information requested by the Board or by the appropriate Reserve Bank to facilitate review of the covered savings and loan holding company’s capital plan under this section.
(4) Resubmission of a capital plan. (i) A covered savings and loan holding company must update and resubmit its capital plan to the appropriate Reserve Bank within 30 calendar days of the occurrence of one of the following events:
(A) The covered savings and loan holding company determines there has been or will be a material change in the covered savings and loan holding company’s risk profile, financial condition, or corporate structure since the covered savings and loan holding company last submitted the capital plan to the Board and the appropriate Reserve Bank under this section; or
(B) The Board, or the appropriate Reserve Bank with concurrence of the Board, directs the covered savings and loan holding company in writing to revise and resubmit its capital plan for any of the following reasons:
(1) The capital plan is incomplete or the capital plan, or the covered savings and loan holding company’s internal capital adequacy process, contains material weaknesses;
(2) There has been, or will likely be, a material change in the covered savings and loan holding company’s risk profile (including a material change in its business strategy or any risk exposure), financial condition, or corporate structure;
(3) The Internal stress scenario(s) are not appropriate for the covered savings and loan holding company’s business model and portfolios, or changes in financial markets or the macro-economic outlook that could have a material impact on a covered savings and loan holding company’s risk profile and financial condition require the use of updated scenarios; or
(ii) The Board, or the appropriate Reserve Bank with concurrence of the Board, may extend the 30-day period in paragraph (e)(4)(i) of this section for up to an additional 60 calendar days, or such longer period as the Board or the appropriate Reserve Bank, with concurrence of the Board, determines appropriate.
(iii) Any updated capital plan must satisfy all the requirements of this section; however, a covered savings and loan holding company may continue to rely on information submitted as part of a previously submitted capital plan to the extent that the information remains accurate and appropriate.
(5) Confidential treatment of information submitted. The confidentiality of information submitted to the Board under this section and related materials shall be determined in accordance with applicable exemptions under the Freedom of Information Act (5 U.S.C. 552(b)) and the Board’s Rules Regarding Availability of Information (12 CFR part 261).
(f) Calculation of the stress capital buffer requirement – (1) General. The Board will determine the stress capital buffer requirement that applies under 12 CFR 217.11 pursuant to paragraph (f) of this section. For each covered savings and loan holding company that is not a Category IV savings and loan holding company, the Board will calculate the covered savings and loan holding company’s stress capital buffer requirement annually. For each Category IV savings and loan holding company, the Board will calculate the covered savings and loan holding company’s stress capital buffer requirement biennially, occurring in each calendar year ending in an even number, and will adjust the covered savings and loan holding company’s stress capital buffer requirement biennially, occurring in each calendar year ending in an odd number. Notwithstanding the previous sentence, the Board will calculate the stress capital buffer requirement of a Category IV savings and loan holding company in a year ending in an odd number with respect to which that company makes an election pursuant to 12 CFR 238.132(c)(2)(ii).
(2) Stress capital buffer requirement calculation. A covered savings and loan holding company’s stress capital buffer requirement is equal to the greater of:
(i) The following calculation:
(A) The ratio of a covered savings and loan holding company’s common equity tier 1 capital to risk-weighted assets, as calculated under 12 CFR part 217, subpart D, as of the final quarter of the previous capital plan cycle, unless otherwise determined by the Board; minus
(B) The lowest projected ratio of the covered savings and loan holding company’s common equity tier 1 capital to risk-weighted assets, as calculated under 12 CFR part 217, subpart D, in any quarter of the planning horizon under a supervisory stress test; plus
(C) The ratio of:
(1) The sum of the covered savings and loan holding company’s planned common stock dividends (expressed as a dollar amount) for each of the fourth through seventh quarters of the planning horizon; to
(2) The risk-weighted assets of the covered savings and loan holding company in the quarter in which the covered savings and loan holding company had its lowest projected ratio of common equity tier 1 capital to risk-weighted assets, as calculated under 12 CFR part 217, subpart D, in any quarter of the planning horizon under a supervisory stress test; and
(ii) 2.5 percent.
(3) Recalculation of stress capital buffer requirement. If a covered savings and loan holding company resubmits its capital plan pursuant to paragraph (e)(4) of this section, the Board may recalculate the covered savings and loan holding company’s stress capital buffer requirement. The Board will provide notice of whether the covered savings and loan holding company’s stress capital buffer requirement will be recalculated within 75 calendar days after the date on which the capital plan is resubmitted, unless the Board provides notice to the company that it is extending the time period.
(4) Adjustment of stress capital buffer requirement. In each calendar year in which the Board does not calculate a Category IV savings and loan holding company’s stress capital buffer requirement pursuant to paragraph (f)(1) of this section, the Board will adjust the Category IV savings and loan holding company’s stress capital buffer requirement to be equal to the result of the calculation set forth in paragraph (f)(2) of this section, using the same values that were used to calculate the stress capital buffer requirement most recently provided to the covered savings and loan holding company, except that the value used in paragraph (f)(2)(i)(C)(1) of the calculation will be equal to the covered savings and loan holding company’s planned common stock dividends (expressed as a dollar amount) for each of the fourth through seventh quarters of the planning horizon as set forth in the capital plan submitted by the covered savings and loan holding company in the calendar year in which the Board adjusts the covered savings and loan holding company’s stress capital buffer requirement.
(g) Review of capital plans by the Federal Reserve. The Board, or the appropriate Reserve Bank with concurrence of the Board, will consider the following factors in reviewing a covered savings and loan holding company’s capital plan:
(1) The comprehensiveness of the capital plan, including the extent to which the analysis underlying the capital plan captures and addresses potential risks stemming from activities across the covered savings and loan holding company and the covered savings and loan holding company’s capital policy;
(2) The reasonableness of the covered savings and loan holding company’s capital plan, the assumptions and analysis underlying the capital plan, and the robustness of its capital adequacy process;
(3) Relevant supervisory information about the covered savings and loan holding company and its subsidiaries;
(4) The covered savings and loan holding company’s regulatory and financial reports, as well as supporting data that would allow for an analysis of the covered savings and loan holding company’s loss, revenue, and reserve projections;
(5) The results of any stress tests conducted by the covered savings and loan holding company or the Federal Reserve; and
(6) Other information requested or required by the Board or the appropriate Reserve Bank, as well as any other information relevant, or related, to the savings and loan holding company’s capital adequacy.
(h) Federal Reserve notice of stress capital buffer requirement; final planned capital distributions – (1) Notice. The Board will provide a covered savings and loan holding company with notice of its stress capital buffer requirement and an explanation of the results of the supervisory stress test. Unless otherwise determined by the Board, notice will be provided by June 30 of the calendar year in which the capital plan was submitted pursuant to paragraph (e)(1)(ii) of this section or within 90 calendar days of receiving notice that the Board will recalculate the covered savings and loan holding company’s stress capital buffer requirement pursuant to paragraph (f)(3) of this section.
(2) Response to notice – (i) Request for reconsideration of stress capital buffer requirement. A covered savings and loan holding company may request reconsideration of a stress capital buffer requirement provided under paragraph (h)(1) of this section. To request reconsideration of a stress capital buffer requirement, a covered savings and loan holding company must submit to the Board a request pursuant to paragraph (i) of this section.
(ii) Adjustments to planned capital distributions. Within two business days of receipt of notice of a stress capital buffer requirement under paragraph (h)(1) or (i)(5) of this section, as applicable, a covered savings and loan holding company must:
(A) Determine whether the planned capital distributions for the fourth through seventh quarters of the planning horizon under the Internal baseline scenario would be consistent with effective capital distribution limitations assuming the stress capital buffer requirement provided by the Board under paragraph (h)(1) or (i)(5) of this section, as applicable, in place of any stress capital buffer requirement in effect; and
(1) If the planned capital distributions for the fourth through seventh quarters of the planning horizon under the Internal baseline scenario would not be consistent with effective capital distribution limitations assuming the stress capital buffer requirement provided by the Board under paragraph (h)(1) or (i)(5) of this section, as applicable, in place of any stress capital buffer requirement in effect, the covered savings and loan holding company must adjust its planned capital distributions such that its planned capital distributions would be consistent with effective capital distribution limitations assuming the stress capital buffer requirement provided by the Board under paragraph (h)(1) or (i)(5) of this section, as applicable, in place of any stress capital buffer requirement in effect; or
(2) If the planned capital distributions for the fourth through seventh quarters of the planning horizon under the Internal baseline scenario would be consistent with effective capital distribution limitations assuming the stress capital buffer requirement provided by the Board under paragraph (h)(1) or (i)(5) of this section, as applicable, in place of any stress capital buffer requirement in effect, the covered savings and loan holding company may adjust its planned capital distributions. A covered savings and loan holding company may not adjust its planned capital distributions to be inconsistent with the effective capital distribution limitations assuming the stress capital buffer requirement provided by the Board under paragraph (h)(1) or (i)(5) of this section, as applicable; and
(B) Notify the Board of any adjustments made to planned capital distributions for the fourth through seventh quarters of the planning horizon under the Internal baseline scenario.
(3) Final planned capital distributions. The Board will consider the planned capital distributions, including any adjustments made pursuant to paragraph (h)(2)(ii) of this section, to be the covered savings and loan holding company’s final planned capital distributions on the later of:
(i) The expiration of the time for requesting reconsideration under paragraph (i) of this section; and
(ii) The expiration of the time for adjusting planned capital distributions pursuant to paragraph (h)(2)(ii) of this section.
(4) Effective date of final stress capital buffer requirement. (i) The Board will provide a savings and loan holding company with its final stress capital buffer requirement and confirmation of the covered savings and loan holding company’s final planned capital distributions by August 31 of the calendar year that a capital plan was submitted pursuant to paragraph (e)(1)(ii) of this section, unless otherwise determined by the Board. A stress capital buffer requirement will not be considered final so as to be agency action subject to judicial review under 5 U.S.C. 704 during the pendency of a request for reconsideration made pursuant to paragraph (i) of this section or before the time for requesting reconsideration has expired.
(ii) Unless otherwise determined by the Board, a covered savings and loan holding company’s final planned capital distributions and final stress capital buffer requirement shall:
(A) Be effective on October 1 of the calendar year in which a capital plan was submitted pursuant to paragraph (e)(1)(ii) of this section; and
(B) Remain in effect until superseded.
(5) Publication. With respect to any covered savings and loan holding company subject to this section, the Board may disclose publicly any or all of the following:
(i) The stress capital buffer requirement provided to a covered savings and loan holding company under paragraph (h)(1) or (i)(5) of this section;
(ii) Adjustments made pursuant to paragraph (h)(2)(ii);
(iii) A summary of the results of the supervisory stress test; and
(iv) Other information.
(i) Administrative remedies; request for reconsideration. The following requirements and procedures apply to any request under this paragraph (i):
(1) General. To request reconsideration of a stress capital buffer requirement, provided under paragraph (h) of this section, a covered savings and loan holding company must submit a written request for reconsideration.
(2) Timing of request. A request for reconsideration of a stress capital buffer requirement, provided under paragraph (h) of this section, must be received within 15 calendar days of receipt of a notice of a covered savings and loan holding company’s stress capital buffer requirement.
(3) Contents of request. (i) A request for reconsideration must include a detailed explanation of why reconsideration should be granted (that is, why a stress capital buffer requirement should be reconsidered). With respect to any information that was not previously provided to the Federal Reserve in the covered savings and loan holding company’s capital plan, the request should include an explanation of why the information should be considered.
(ii) A request for reconsideration may include a request for an informal hearing on the covered savings and loan holding company’s request for reconsideration.
(4) Hearing. (i) The Board may, in its sole discretion, order an informal hearing if the Board finds that a hearing is appropriate or necessary to resolve disputes regarding material issues of fact.
(ii) An informal hearing shall be held within 30 calendar days of a request, if granted, provided that the Board may extend this period upon notice to the requesting party.
(5) Response to request. Within 30 calendar days of receipt of the covered savings and loan holding company’s request for reconsideration of its stress capital buffer requirement submitted under paragraph (i)(2) of this section or within 30 days of the conclusion of an informal hearing conducted under paragraph (i)(4) of this section, the Board will notify the company of its decision to affirm or modify the covered savings and loan holding company’s stress capital buffer requirement, provided that the Board may extend this period upon notice to the covered savings and loan holding company.
(6) Distributions during the pendency of a request for reconsideration. During the pendency of the Board’s decision under paragraph (i)(5) of this section, the covered savings and loan holding company may make capital distributions that are consistent with effective distribution limitations, unless prior approval is required under paragraph (j)(1) of this section.
(j) Approval requirements for certain capital actions – (1) Circumstances requiring approval – Resubmission of a capital plan. Unless it receives prior approval pursuant to paragraph (j)(3) of this section, a covered savings and loan holding company may not make a capital distribution (excluding any capital distribution arising from the issuance of a capital instrument eligible for inclusion in the numerator of a regulatory capital ratio) if the capital distribution would occur after the occurrence of an event requiring resubmission under paragraph (e)(4)(i)(A) or (B) of this section.
(2) Contents of request. A request for a capital distribution under this section must contain the following information:
(i) The covered savings and loan holding company’s capital plan or a discussion of changes to the covered savings and loan holding company’s capital plan since it was last submitted to the Federal Reserve;
(ii) The purpose of the transaction;
(iii) A description of the capital distribution, including for redemptions or repurchases of securities, the gross consideration to be paid and the terms and sources of funding for the transaction, and for dividends, the amount of the dividend(s); and
(iv) Any additional information requested by the Board or the appropriate Reserve Bank (which may include, among other things, an assessment of the covered savings and loan holding company’s capital adequacy under a severely adverse scenario, a revised capital plan, and supporting data).
(3) Approval of certain capital distributions. (i) The Board, or the appropriate Reserve Bank with concurrence of the Board, will act on a request for prior approval of a capital distribution within 30 calendar days after the receipt of all the information required under paragraph (j)(2) of this section.
(ii) In acting on a request for prior approval of a capital distribution, the Board, or appropriate Reserve Bank with concurrence of the Board, will apply the considerations and principles in paragraph (g) of this section, as appropriate. In addition, the Board, or the appropriate Reserve Bank with concurrence of the Board, may disapprove the transaction if the covered savings and loan holding company does not provide all of the information required to be submitted under paragraph (j)(2) of this section.
(4) Disapproval and hearing. (i) The Board, or the appropriate Reserve Bank with concurrence of the Board, will notify the covered savings and loan holding company in writing of the reasons for a decision to disapprove any proposed capital distribution. Within 15 calendar days after receipt of a disapproval by the Board, the covered savings and loan holding company may submit a written request for a hearing.
(ii) The Board may, in its sole discretion, order an informal hearing if the Board finds that a hearing is appropriate or necessary to resolve disputes regarding material issues of fact. An informal hearing shall be held within 30 calendar days of a request, if granted, provided that the Board may extend this period upon notice to the requesting party.
(iii) Written notice of the final decision of the Board shall be given to the covered savings and loan holding company within 60 calendar days of the conclusion of any informal hearing ordered by the Board, provided that the Board may extend this period upon notice to the requesting party.
(iv) While the Board’s decision is pending and until such time as the Board, or the appropriate Reserve Bank with concurrence of the Board, approves the capital distribution at issue, the covered savings and loan holding company may not make such capital distribution.
(k) Post notice requirement. A covered savings and loan holding company must notify the Board and the appropriate Reserve Bank within 15 days of making a capital distribution if:
(1) The capital distribution was approved pursuant to paragraph (j)(3) of this section; or
(2) The dollar amount of the capital distribution will exceed the dollar amount of the covered savings and loan holding company’s final planned capital distributions, as measured on an aggregate basis beginning in the fourth quarter of the planning horizon through the quarter at issue.
PART 239 – MUTUAL HOLDING COMPANIES (REGULATION MM)
Subpart A – General Provisions
§ 239.1 Authority, purpose, and scope.
(a) Authority. This part is issued by the Board of Governors of the Federal Reserve System (“Board”) under section 10(g) and (o) of the Home Owners’ Loan Act (“HOLA”).
(b) Purpose. The principal purposes of this part are to:
(1) Regulate the reorganization of mutual savings associations to mutual holding companies and the creation of subsidiary holding companies of mutual holding companies;
(2) Define and regulate the operations of mutual holding companies and subsidiary holding companies of mutual holding companies; and
(3) Set forth the procedures for securing approval for these transactions.
(c) Scope. Except as the Board may otherwise determine, the reorganization of mutual savings associations into mutual holding companies, any related stock issuances by subsidiary holding companies, and the conversion of mutual holding companies into stock form are exclusively governed by the provisions of this part, and no mutual savings association shall reorganize to a mutual holding company, no subsidiary holding company of a mutual holding company shall issue minority stock, and no mutual holding company shall convert into stock form without the prior written approval of the Board. The Board may grant a waiver in writing from any requirement of this part for good cause shown.
§ 239.2 Definitions.
As used in this part and in the forms under this part, the following definitions apply, unless the context otherwise requires:
(a) Acquiree association means any savings association, other than a resulting association, that:
(1) Is acquired by a mutual holding company as part of, and concurrently with, a mutual holding company reorganization; and
(2) Is in the mutual form immediately prior to such acquisition.
(b) Acting in concert has the same meaning as in § 238.31(b) of this chapter.
(c) Affiliate has the same meaning as in § 238.2(a) of this chapter.
(d) Associate of a person is:
(1) A corporation or organization (other than the mutual holding company, subsidiary holding company, or any majority-owned subsidiaries of such holding companies), if the person is a senior officer or partner, or beneficially owns, directly or indirectly, 10 percent or more of any class of equity securities of the corporation or organization.
(2) A trust or other estate, if the person has a substantial beneficial interest in the trust or estate or is a trustee or fiduciary of the trust or estate. For purposes of §§ 239.59(k), 239.59(m), 239.59(n), 239.59(o), 239.59(p), 239.63(b), a person who has a substantial beneficial interest in the mutual holding company or subsidiary holding company’s tax-qualified or non-tax-qualified employee stock benefit plan, or who is a trustee or a fiduciary of the plan, is not an associate of the plan. For the purposes of § 239.59(k), the mutual holding company or subsidiary holding company’s tax-qualified employee stock benefit plan is not an associate of a person.
(3) Any natural person who is related by blood or marriage to such person and:
(i) Who lives in the same home as the person; or
(ii) Who is a director or senior officer of the mutual holding company, subsidiary holding company, or other subsidiary.
(e) Company means any corporation, partnership, trust, association, joint venture, pool, syndicate, unincorporated organization, joint-stock company or similar organization, as defined in paragraph (u) of this section; but a company does not include:
(1) The Federal Deposit Insurance Corporation, the Resolution Trust Corporation, or any Federal Home Loan Bank, or
(2) Any company the majority of shares of which is owned by:
(i) The United States or any State,
(ii) An officer of the United States or any State in his or her official capacity, or
(iii) An instrumentality of the United States or any State.
(f) Control has the same meaning as in § 238.2(e) of this chapter.
(g) Default means any adjudication or other official determination of a court of competent jurisdiction or other public authority pursuant to which a conservator, receiver, or other legal custodian is appointed for a mutual holding company or subsidiary savings association of a mutual holding company.
(h) Demand accounts mean non-interest-bearing demand deposits that are subject to check or to withdrawal or transfer on negotiable or transferable order to the savings association and that are permitted to be issued by statute, regulation, or otherwise and are payable on demand.
(i) Insider means any officer or director of a company or of any affiliate of such company, and any person acting in concert with any such officer or director.
(j) Member means any depositor or borrower of a mutual savings association that is entitled, under the charter of the savings association, to vote on matters affecting the association, and any depositor or borrower of a subsidiary savings association of a mutual holding company that is entitled, under the charter of the mutual holding company, to vote on matters affecting the mutual holding company.
(k) Mutual holding company means a holding company organized in mutual form under this part, and unless otherwise indicated, a subsidiary holding company controlled by a mutual holding company, organized under this part.
(l) Parent means any company which directly or indirectly controls any other company or companies.
(m) Person includes an individual, bank, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or any other form of entity.
(n) Reorganization Notice means a notice of a proposed mutual holding company reorganization that is in the form and contains the information required by the Board.
(o) Reorganization Plan means a plan to reorganize into the mutual holding company format containing the information required by § 239.6.
(p) Reorganizing association means a mutual savings association that proposes to reorganize to become a mutual holding company pursuant to this part.
(q) Resulting association means a savings association in the stock form that is organized as a subsidiary of a reorganizing association to receive the substantial part of the assets and liabilities (including all deposit accounts) of the reorganizing association upon consummation of the reorganization.
(r) Savings account means any withdrawable account, except a demand account, a tax and loan account, a note account, a United States Treasury general account, or a United States Treasury time deposit-open account.
(s) Savings Association has the same meaning as in § 238.2(l) of this chapter.
(t) Savings and loan holding company has the same meaning as specified in section 10(a)(1) of the HOLA and § 238.2(m) of this chapter.
(u) Similar organization for purposes of paragraph (e) of this section means a combination of parties with the potential for or practical likelihood of continuing rather than temporary existence, where the parties thereto have knowingly and voluntarily associated for a common purpose pursuant to identifiable and binding relationships which govern the parties with respect to either:
(1) The transferability and voting of any stock or other indicia of participation in another entity, or
(2) Achievement of a common or shared objective, such as to collectively manage or control another entity.
(v) Stock means common or preferred stock, or any other type of equity security, including (without limitation) warrants or options to acquire common or preferred stock, or other securities that are convertible into common or preferred stock.
(w) Stock Issuance Plan means a plan, submitted pursuant to § 239.24 and containing the information required by § 239.25, providing for the issuance of stock by a subsidiary holding company.
(x) Subsidiary means any company which is owned or controlled directly or indirectly by a person, and includes any service corporation owned in whole or in part by a savings association, or a subsidiary of such service corporation.
(y) Subsidiary holding company means a federally chartered stock holding company controlled by a mutual holding company that owns the stock of a savings association whose depositors have membership rights in the parent mutual holding company.
(z) Tax and loan account means an account, the balance of which is subject to the right of immediate withdrawal, established for receipt of payments of Federal taxes and certain United States obligations. Such accounts are not savings accounts or savings deposits.
(aa) Tax-qualified employee stock benefit plan means any defined benefit plan or defined contribution plan, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan, or other plan, and a related trust, that is qualified under sec. 401 of the Internal Revenue Code (26 U.S.C. 401).
(bb) United States Treasury General Account means an account maintained in the name of the United States Treasury the balance of which is subject to the right of immediate withdrawal, except in the case of the closure of the member, and in which a zero balance may be maintained. Such accounts are not savings accounts or savings deposits.
(cc) United States Treasury Time Deposit Open Account means a non-interest-bearing account maintained in the name of the United States Treasury which may not be withdrawn prior to the expiration of 30 days’ written notice from the United States Treasury, or such other period of notice as the Treasury may require. Such accounts are not savings accounts or savings deposits.
Subpart B – Mutual Holding Companies
§ 239.3 Mutual holding company reorganizations.
(a) A mutual savings association may not reorganize to become a mutual holding company, or join in a mutual holding company reorganization as an acquiree association, unless it satisfies the following conditions:
(1) A Reorganization Plan is approved by a majority of the board of directors of the reorganizing association and any acquiree association;
(2) A Reorganization Notice is filed with the Board pursuant to § 238.14 of this chapter;
(3) The Reorganization Plan is submitted to the members of the reorganizing association and any acquiree association pursuant and is approved by a majority of the total votes of the members of each association eligible to be cast at a meeting held at the call of each association’s directors in accordance with the procedures prescribed by each association’s charter and bylaws; and
(4) All necessary regulatory approvals have been obtained and all conditions imposed by the Board have been satisfied.
(b) Upon receipt of an application under this section, the Reserve Bank will promptly furnish notice and a copy of the Reorganization Plan to the primary federal supervisor of any savings association involved in the transaction. The primary supervisor will have 30 calendar days from the date of the letter giving notice in which to submit its views and recommendations to the Board.
§ 239.4 Grounds for disapproval of reorganizations.
(a) Basic standards. The Board may disapprove a proposed mutual holding company reorganization filed pursuant to § 239.3(a) if:
(1) Disapproval is necessary to prevent unsafe or unsound practices;
(2) The financial or managerial resources of the reorganizing association or any acquiree association warrant disapproval;
(3) The proposed capitalization of the mutual holding company fails to meet the requirements of paragraph (b) of this section;
(4) A stock issuance is proposed in connection with the reorganization pursuant to § 239.24 that fails to meet the standards established by that section;
(5) The reorganizing association or any acquiree association fails to furnish the information required to be included in the Reorganization Notice or any other information requested by the Board in connection with the proposed reorganization; or
(6) The proposed reorganization would violate any provision of law, including (without limitation) § 239.3(a) and (c) (regarding board of directors and membership approval) or § 239.5(a) (regarding continuity of membership rights).
(b) Capitalization. (1) The Board shall disapprove a proposal by a reorganizing association or any acquiree association to capitalize a mutual holding company in an amount in excess of a nominal amount if immediately following the reorganization, the resulting association or the acquiree association would fail to be “adequately capitalized” under the regulatory capital requirements applicable to the savings association.
(2) Proposals by reorganizing associations and acquiree associations to capitalize mutual holding companies shall also comply with any applicable statutes, and with regulations or written policies of the Comptroller of the Currency or the Federal Deposit Insurance Corporation, as applicable, governing capital distributions by savings associations in effect at the time of the reorganization.
(c) Presumptive disqualifiers – (1) Managerial resources. The factors specified in § 238.15(d)(1)(i) through (vi) of this chapter shall give rise to a rebuttable presumption that the managerial resources test of paragraph (a)(2) of this section is not met. For this purpose, each place the term acquiror appears in § 238.15(d)(1)(i) through (vi) of this chapter, it shall be read to mean the reorganizing association or any acquiree association, and the reference in § 238.15(d)(1)(v) of this chapter to filings under this part shall be deemed to include filings under either part 238 of this chapter or this part.
(2) Safety and soundness and financial resources. Failure by a reorganizing association and any acquiree association to submit a business plan in connection with a Reorganization Notice, or submission of a business plan that projects activities that are inconsistent with the credit and lending needs of the reorganizing association or acquiree association’s proposed market area or that fails to demonstrate that the capital of the mutual holding company will be deployed in a safe and sound manner, shall give rise to a rebuttable presumption that the safety and soundness and financial resources tests of paragraphs (a)(1) and (a)(2) of this section are not met.
(d) Failure of the Board to act on a Reorganization Notice within the prescribed time period. A proposed reorganization that obtains regulatory clearance from the Board due to the operation of § 238.14 of this chapter may take place in the manner proposed, subject to the following conditions:
(1) The reorganization shall be consummated within one year of the date of the expiration of the Board’s review period under § 238.14 of this chapter;
(2) The mutual holding company shall not be capitalized in an amount in excess of what is permissible under § 239.4(b);
(3) No request for regulatory waivers or forbearances shall be deemed granted;
(4) The following information shall be submitted within the specified time frames:
(i) On the business day prior to the date of the reorganization, the chief financial officers of the reorganizing association and any acquiree association shall certify to the Board in writing that no material adverse events or material adverse changes have occurred with respect to the financial condition or operations of their respective associations since the date of the financial statements submitted with the Reorganization Notice;
(ii) No later than thirty days after the reorganization, the mutual holding company shall file with the Board a certification by legal counsel stating the effective date of the reorganization, the exact number of shares of stock of the resulting association and any acquiree association acquired by the mutual holding company and by any other persons, and that the reorganization has been consummated in accordance with § 239.3 and all other applicable laws and regulations and the Reorganization Notice;
(iii) No later than thirty days after the reorganization, the mutual holding company shall file with the Board an opinion from its independent auditors certifying that the reorganization was consummated in accordance with generally accepted accounting principles; and
(iv) No later than thirty days after the reorganization, the mutual holding company shall file with the Board a certification stating that the mutual holding company will not deviate materially, or cause its subsidiary savings associations to deviate materially, from the business plan submitted in connection with the Reorganization Notice, unless prior written approval from the Board is obtained.
§ 239.5 Membership rights.
(a) Depositors and borrowers of resulting associations, acquiree associations, and associations in mutual form when acquired. The charter of a mutual holding company must:
(1) Confer upon existing and future depositors of the resulting association the same membership rights in the mutual holding company as were conferred upon depositors by the charter of the reorganizing association as in effect immediately prior to the reorganization;
(2) Confer upon existing and future depositors of any acquiree association or any association that is in the mutual form when acquired by the mutual holding company the same membership rights in the mutual holding company as were conferred upon depositors by the charter of the acquired association immediately prior to acquisition, provided that if the acquired association is merged into another association from which the mutual holding company draws members, the depositors of the acquired association shall receive the same membership rights as the depositors of the association into which the acquired association is merged;
(3) Confer upon the borrowers of the resulting association who are borrowers at the time of reorganization the same membership rights in the mutual holding company as were conferred upon them by the charter of the reorganizing association immediately prior to reorganization, but shall not confer any membership rights in connection with any borrowings made after the reorganization; and
(4) Confer upon the borrowers of any acquiree association or any association that is in the mutual form when acquired by the mutual holding company who are borrowers at the time of the acquisition the same membership rights in the mutual holding company as were conferred upon them by the charter of the acquired association immediately prior to acquisition, but shall not confer any membership rights in connection with any borrowings made after the acquisition, provided that if the acquired association is merged into another association from which the mutual holding company draws members, the borrowers of the acquired association shall instead receive the same grandfathered membership rights as the borrowers of the association into which the acquired association is merged received at the time that association became a subsidiary of the mutual holding company.
(b) Depositors and borrowers of associations in the stock form when acquired. A mutual holding company that acquires a savings association in the stock form, other than a resulting association or an acquiree association, shall not confer any membership rights upon the depositors and borrowers of such association, unless such association is merged into an association from which the mutual holding company draws members, in which case the depositors of the stock association shall receive the same membership rights as other depositors of the association into which the stock association is merged.
§ 239.6 Contents of Reorganization Plans.
Each Reorganization Plan shall contain a complete description of all significant terms of the proposed reorganization, shall attach and incorporate any Stock Issuance Plan proposed in connection with the Reorganization Plan, and shall:
(a) Provide for amendment of the charter and bylaws of the reorganizing association to read in the form of the charter and bylaws of a mutual holding company, and attach and incorporate such charter and bylaws;
(b) Provide for the organization of the resulting association, which shall be an interim federal or state subsidiary savings association of the reorganizing association, and attach and incorporate the proposed charter and bylaws of such association;
(c) If the reorganizing association proposes to form a subsidiary holding company, provide for the organization of a subsidiary holding company and attach and incorporate the proposed charter and bylaws of such subsidiary holding company.
(d) Provide for amendment of the charter and bylaws of any acquiree association to read in the form of the charter and bylaws of a state or federal savings association in the stock form, and attach and incorporate such charter and bylaws;
(e) Provide that, upon consummation of the reorganization, substantially all of the assets and liabilities (including all savings accounts, demand accounts, tax and loan accounts, United States Treasury General Accounts, or United States Treasury Time Deposit Open Accounts, as those terms are defined in this part) of the reorganizing association shall be transferred to the resulting association, which shall thereupon become an operating subsidiary savings association of the mutual holding company;
(f) Provide that all assets, rights, obligations, and liabilities of whatever nature of the reorganizing association that are not expressly retained by the mutual holding company shall be deemed transferred to the resulting association;
(g) Provide that each depositor in the reorganizing association or any acquiree association immediately prior to the reorganization shall upon consummation of the reorganization receive, without payment, an identical account in the resulting association or the acquiree association, as the case may be (Appropriate modifications should be made to this provision if savings associations are being merged as a part of the reorganization);
(h) Provide that the Reorganization Plan as adopted by the boards of directors of the reorganizing association and any acquiree association may be substantively amended by those boards of directors as a result of comments from regulatory authorities or otherwise prior to the solicitation of proxies from the members of the reorganizing association and any acquiree association to vote on the Reorganization Plan and at any time thereafter with the concurrence of the Board; and that the reorganization may be terminated by the board of directors of the reorganizing association or any acquiree association at any time prior to the meeting of the members of the association called to consider the Reorganization Plan and at any time thereafter with the concurrence of the Board;
(i) Provide that the Reorganization Plan shall be terminated if not completed within a specified period of time (The time period shall not be more than 24 months from the date upon which the members of the reorganizing association or the date upon which the members of any acquiree association, whichever is earlier, approve the Reorganization Plan and may not be extended by the reorganizing or acquiree association); and
(j) Provide that the expenses incurred in connection with the reorganization shall be reasonable.
§ 239.7 Acquisition and disposition of savings associations, savings and loan holding companies, and other corporations by mutual holding companies.
(a) Acquisitions – (1) Stock savings associations. A mutual holding company may not acquire control of a savings association that is in the stock form unless the necessary approvals are obtained from the Board, including approval pursuant to § 238.11 of this chapter.
(2) Mutual savings associations. A mutual holding company may not acquire a savings association in the mutual form by merger of such association into any subsidiary savings association of such holding company from which the parent mutual holding company draws members or into an interim subsidiary savings association of the mutual holding company, unless:
(i) The proposed acquisition is approved by a majority of the board of directors of the mutual association;
(ii) The proposed acquisition is submitted to the mutual association’s members and is approved by a majority of the total votes of the association’s members eligible to be cast at a meeting held at the call of the association’s directors in accordance with the procedures prescribed by the association’s charter and bylaws;
(iii) The necessary approvals are obtained from the Board, including approval pursuant to § 238.11 of this chapter, and any other approvals required to form an interim association, to amend the charter and bylaws of the association being acquired, and/or to amend the charter and bylaws of the mutual holding company consistent with § 239.6(a); and
(iv) The approval of the members of the mutual holding company is obtained, if the Board advises the mutual holding company in writing that such approval will be required.
(3) Mutual holding companies. A mutual holding company that is not a subsidiary holding company may not acquire control of another mutual holding company, including a subsidiary holding company, by merging with or into such company, unless the necessary approvals are obtained from the Board, including approval pursuant to § 238.11 of this chapter. The approval of the members of the mutual holding companies shall also be obtained if the Board advises the mutual holding companies in writing that such approval will be required.
(4) Stock holding companies. A mutual holding company may not acquire control of a savings and loan holding company in the stock form that is not a subsidiary holding company, unless the necessary approvals are obtained from the Board, including approval pursuant to § 238.11 of this chapter. The acquired holding company may be held as a subsidiary of the mutual holding company or merged into the mutual holding company.
(5) Non-controlling acquisitions of savings association stock. A mutual holding company may acquire non-controlling amounts of the stock of savings associations and savings and loan holding companies subject to the restrictions imposed by 12 U.S.C. 1467a(e) and (q) and §§ 238.41 and 238.11 of this chapter.
(6) Other corporations. A mutual holding company may not acquire control of, or make non-controlling investments in the stock of, any corporation other than a savings association or savings and loan holding company unless:
(i)(A) Such corporation is engaged exclusively in activities that are permissible for mutual holding companies pursuant to § 239.8(a); or
(B) It is lawful for the stock of such corporation to be purchased by a federal savings association under the applicable regulations of the Comptroller of the Currency or by a state savings association under the applicable regulations of the Federal Deposit Insurance Corporation and the laws of any state where any subsidiary savings association of the mutual holding company has its home office; and
(ii) Such corporation is not controlled, directly or indirectly, by a subsidiary savings association of the mutual holding company.
(b) Dispositions. (1) A mutual holding company shall provide written notice to the appropriate Reserve Bank at least 30 days prior to the effective date of any direct or indirect transfer of any of the stock that it holds in a subsidiary holding company, a resulting association, an acquiree association, or any subsidiary savings association that was in the mutual form when acquired by the mutual holding company, including stock transferred in connection with a pledge pursuant to § 239.8(b) or any transfer of all or a substantial portion of the assets or liabilities of any such subsidiary holding company or association. Any such disposition shall comply with the requirements of this part, as appropriate, and with any other applicable statute or regulation.
(2) A mutual holding company may, subject to applicable laws and regulations, transfer any or all of the stock or cause or permit the transfer of any or all of the assets and liabilities of:
(i) Any subsidiary savings association that was in the stock form when acquired, provided such association is not a resulting association or an acquiree association;
(ii) Any subsidiary holding company acquired pursuant to paragraph (a)(4) of this section; or
(iii) Any corporation other than a savings association or savings and loan holding company.
(3) A mutual holding company may, subject to applicable laws and regulations, transfer any stock acquired pursuant to paragraph (a)(5) of this section.
(4) No transfer authorized by this section may be made to any insider of the mutual holding company, any associate of an insider of the mutual holding company, or any tax-qualified or non-tax-qualified employee stock benefit plan of the mutual holding company unless the mutual holding company provides notice to the appropriate Reserve Bank at least 30 days prior to the effective date of the proposed transfer. This notice shall be in addition to any other application or notice required under applicable laws or regulations, including those imposed by this part or Regulation LL.
§ 239.8 Operating restrictions.
(a) Activities restrictions. A mutual holding company may engage in any business activity specified in 12 U.S.C. 1467a(c)(2) or (c)(9)(A)(ii). In addition, the business activities of subsidiaries of mutual holding companies may include the activities specified in § 239.7(a)(6). A mutual holding company or its subsidiaries may engage in the foregoing activities only upon compliance with the procedures specified in §§ 238.53(c) or 238.54(b) of this chapter.
(b) Pledging stock. (1) No mutual holding company may pledge the stock of its resulting association, an acquiree association, or any subsidiary savings association that was in the mutual form when acquired by the mutual holding company (or its parent mutual holding company), unless the proceeds of the loan secured by the pledge are infused into the association whose stock is pledged. No mutual holding company may pledge the stock of its subsidiary holding company unless the proceeds of the loan secured by the pledge are infused into any subsidiary savings association of the subsidiary holding company that is a resulting association, an acquiree association, or a subsidiary savings association that was in the mutual form when acquired by the subsidiary holding company (or its parent mutual holding company). In the event the subsidiary holding company has more than one subsidiary savings association, the loan proceeds shall, unless otherwise approved by the Board, be infused in equal amounts to each subsidiary savings association. Any amount of the stock of such association or subsidiary holding company may be pledged for these purposes. Nothing in this paragraph shall be deemed to prohibit:
(i) The payment of dividends from a subsidiary savings association to its mutual holding company parent to the extent otherwise permissible; or
(ii) The payment of dividends from a subsidiary holding company to its mutual holding company parent to the extent otherwise permissible; or
(iii) A mutual holding company from pledging the stock of more than one subsidiary savings association provided that the stock pledged of each such subsidiary association is proportionate to the proceeds of the loan infused into each subsidiary association.
(2) Any mutual holding company that fails to make any payment on a loan secured by the pledge of stock pursuant to paragraph (b)(1) of this section on or before the date on which such payment is due shall, on the first day after such payment is due, provide written notice of nonpayment to the appropriate Reserve Bank.
(c) Restrictions on stock repurchases. (1) No subsidiary holding company that has any stockholders other than its parent mutual holding company may repurchase any share of stock within one year of its date of issuance (which may include the time period the shares issued by the savings association were outstanding if the subsidiary holding company was formed after the initial issuance by the savings association), unless the repurchase:
(i) Is in compliance with the requirements set forth in § 239.63;
(ii) Is part of a general repurchase made on a pro rata basis pursuant to an offer approved by the Board and made to all stockholders of the association or subsidiary holding company (except that the parent mutual holding company may be excluded from the repurchase with the Board’s approval);
(iii) Is limited to the repurchase of qualifying shares of a director; or
(iv) Is purchased in the open market by a tax-qualified or non-tax-qualified employee stock benefit plan of the savings association (or of a subsidiary holding company) in an amount reasonable and appropriate to fund such plan.
(2) No mutual holding company may purchase shares of its subsidiary savings association or subsidiary holding company within one year after a stock issuance, except if the purchase complies with § 239.63. For purposes of this section, the reference in § 239.63 to five percent refers to minority shareholders.
(d) Restrictions on waiver of dividends. (1) A mutual holding company may waive the right to receive any dividend declared by a subsidiary of the mutual holding company, if –
(i) No insider of the mutual holding company, associate of an insider, or tax-qualified or non-tax-qualified employee stock benefit plan of the mutual holding company holds any share of the stock in the class of stock to which the waiver would apply; or
(ii) The mutual holding company gives written notice to the Board of the intent of the mutual holding company to waive the right to receive dividends, not later than 30 days before the date of the proposed date of payment of the dividend, and the Board does not object to the waiver.
(2) A notice of a waiver under paragraph (d)(1)(ii) of this section shall include a copy of the resolution of the board of directors of the mutual holding company together with any supporting materials relied upon by the board of directors of the mutual holding company, concluding that the proposed dividend waiver is consistent with the fiduciary duties of the board of directors to the mutual members of the mutual holding company.
The resolution shall include:
(i) A description of the conflict of interest that exists because of a mutual holding company director’s ownership of stock in the subsidiary declaring dividends and any actions the mutual holding company and board of directors have taken to eliminate the conflict of interest, such as waiver by the directors of their right to receive dividends;
(ii) A finding by the mutual holding company’s board of directors that the waiver of dividends is consistent with the board of directors’ fiduciary duties despite any conflict of interest;
(iii) If the mutual holding company has pledged the stock of a subsidiary holding company or subsidiary savings association as collateral for a loan made to the mutual holding company, or is subject to any other loan agreement, an affirmation that the mutual holding company is able to meet the terms of the loan agreement; and
(iv) An affirmation that a majority of the mutual members of the mutual holding company eligible to vote have, within the 12 months prior to the declaration date of the dividend by the subsidiary of the mutual holding company, approved a waiver of dividends by the mutual holding company, and any proxy statement used in connection with the member vote contained –
(A) A detailed description of the proposed waiver of dividends by the mutual holding company and the reasons the board of directors requested the waiver of dividends;
(B) The disclosure of any mutual holding company director’s ownership of stock in the subsidiary declaring dividends and any actions the mutual holding company and board of directors have taken to eliminate the conflict of interest, such as the directors waiving their right to receive dividends; and
(C) A provision providing that the proxy concerning the waiver of dividends given by the mutual members may be used for no more than 12 months from the date it is given.
(3) The Board may not object to a waiver of dividends under paragraph (d)(1)(ii) of this section if:
(i) The waiver would not be detrimental to the safe and sound operation of the savings association;
(ii) The board of directors of the mutual holding company expressly determines that a waiver of the dividend by the mutual holding company is consistent with the fiduciary duties of the board of directors to the mutual members of the mutual holding company; and
(iii) The mutual holding company has, prior to December 1, 2009 –
(A) Reorganized into a mutual holding company under section 10(o) of HOLA;
(B) Issued minority stock either from its mid-tier stock holding company or its subsidiary stock savings association; and
(C) Waived dividends it had a right to receive from the subsidiary stock savings association.
(4) For a mutual holding company that does not meet each of the conditions in paragraph (d)(3) of this section, the Board will not object to a waiver of dividends under paragraph (d)(1)(ii) of this section if – :
(i) The savings association currently operates in a manner consistent with the safe and sound operation of a savings association, and the waiver is not detrimental to the safe and sound operation of the savings association;
(ii) If the mutual holding company has pledged the stock of a subsidiary holding company or subsidiary savings association as collateral for a loan made to the mutual holding company, or is subject to any other loan agreement, an affirmation that the mutual holding company is able to meet the terms of the loan agreement;
(iii) Within the 12 months prior to the declaration date of the dividend by the subsidiary of the mutual holding company, a majority of the mutual members of the mutual holding company has approved the waiver of dividends by the mutual holding company. Any proxy statement used in connection with the member vote must contain –
(A) A detailed description of the proposed waiver of dividends by the mutual holding company and the reasons the board of directors requested the waiver of dividends;
(B) The disclosure of any mutual holding company director’s ownership of stock in the subsidiary declaring dividends and any actions the mutual holding company and board of directors have taken to eliminate the conflict of interest, such as the directors waiving their right to receive dividends; and
(C) A provision providing that the proxy concerning the waiver of dividends given by the mutual members may be used for no more than 12 months from the date it is given;
(iv) The board of directors of the mutual holding company expressly determines that the waiver of dividends is consistent with the board of directors’ fiduciary duties despite any conflict of interest;
(v)(A) A majority of the entire board of directors of the mutual holding company approves the waiver of dividends and any director with direct or indirect ownership, control, or the power to vote shares of the subsidiary declaring the dividend, or who otherwise directly or indirectly benefits through an associate from the waiver of dividends, has abstained from the board vote; or
(B) Each officer or director of the mutual holding company or its affiliates, associate of such officer or director, and any tax-qualified or non-tax-qualified employee stock benefit plan in which such officer or director participates that holds any share of the stock in the class of stock to which the waiver would apply waives the right to receive any dividend declared by a subsidiary of the mutual holding company;
(vi) The Board does not object to the amount of dividends declared by a subsidiary of the mutual holding company. In reviewing whether a declaration by a subsidiary of the mutual holding company is appropriate, the Board may consider, among other factors, the reasonableness of the entire dividend distribution declared if the waiver is not approved;
(vii) The waived dividends are excluded from the capital accounts of the subsidiary holding company or savings association, as applicable, for purposes of calculating any future dividend payments;
(viii) The mutual holding company appropriately accounts for all waived dividends in a manner that permits the Board to consider the waived dividends in evaluating the proposed exchange ratio in the event of a full conversion of the mutual holding company to stock form; and
(ix) The mutual holding company complies with such other conditions as the Board may require to prevent conflicts of interest or actions detrimental to the safe and sound operation of the savings association.
(5) Valuation. (i) The Board will consider waived dividends in determining an appropriate exchange ratio in the event of a full conversion to stock form.
(ii) In the case of a savings association that has reorganized into a mutual holding company, has issued minority stock from a mid-tier stock holding company or a subsidiary stock savings association of the mutual holding company, and has waived dividends it had a right to receive from a subsidiary savings association before December 1, 2009, the Board shall not consider waived dividends in determining an appropriate exchange ratio in the event of a full conversion to stock form.
(e) Restrictions on issuance of stock to insiders. A subsidiary of a mutual holding company that is not a savings association or subsidiary holding company may issue stock to any insider, associate of an insider or tax-qualified or non-tax-qualified employee stock benefit plan of the mutual holding company or any subsidiary of the mutual holding company, provided that such persons or plans provide written notice to the appropriate Reserve Bank at least 30 days prior to the stock issuance, and the Reserve Bank or the Board does not object to the subsequent stock issuance. Subsidiary holding companies may issue stock to such persons only in accordance with § 239.24.
(f) Applicability of rules governing savings and loan holding companies. Except as expressly provided in this part, mutual holding companies shall be subject to the provisions of 12 U.S.C. 1467a and 3201 et seq. and the provisions of parts 207, 228, and 238 of this chapter.
(g) Separate vote for charitable organization contribution. In a mutual holding company stock issuance, a separate vote of a majority of the outstanding shares of common stock held by stockholders other than the mutual holding company or subsidiary holding company must approve any charitable organization contribution.
§ 239.9 Conversion or liquidation of mutual holding companies.
(a) Conversion – (1) Generally. A mutual holding company may convert to the stock form in accordance with the rules and regulations set forth in subpart E of this part.
(2) Exchange of subsidiary savings association or subsidiary holding company stock. Any stock issued by a subsidiary savings association, or by a subsidiary holding company pursuant to § 239.24, of a mutual holding company to persons other than the parent mutual holding company may be exchanged for the stock issued by the successor to parent mutual holding company in connection with the conversion of the parent mutual holding company to stock form. The parent mutual holding company and the subsidiary holding company must demonstrate to the satisfaction of the Board that the basis for the exchange is fair and reasonable.
(3) If a subsidiary holding company or subsidiary savings association has issued shares to an entity other than the mutual holding company, the conversion of the mutual holding company to stock form may not be consummated unless a majority of the shares issued to entities other than the mutual holding company vote in favor of the conversion. This requirement applies in addition to any otherwise required account holder or shareholder votes.
(b) Involuntary liquidation. (1) The Board may file a petition with the federal bankruptcy courts requesting the liquidation of a mutual holding company pursuant to 12 U.S.C. 1467a(o)(9) and title 11, United States Code, upon the occurrence of any of the following events:
(i) The default of the resulting association, any acquiree association, or any subsidiary savings association of the mutual holding company that was in the mutual form when acquired by the mutual holding company;
(ii) The default of the parent mutual holding company or its subsidiary holding company; or
(iii) Foreclosure on any pledge by the mutual holding company of subsidiary savings association stock or subsidiary holding company stock.
(2) Except as provided in paragraph (b)(3) of this section, the net proceeds of any liquidation of any mutual holding company shall be transferred to the members of the mutual holding company and, if applicable, the stock holders of the subsidiary holding company in accordance with the charter of the mutual holding company and, if applicable, the charter of the subsidiary holding company.
(3) If the FDIC incurs a loss as a result of the default of any subsidiary savings association of a mutual holding company and that mutual holding company is liquidated pursuant to paragraph (b)(1) of this section, the FDIC shall succeed to the membership interests of the depositors of such savings association in the mutual holding company to the extent of the FDIC’s loss.
(c) Voluntary liquidation. The provisions of § 239.16 shall apply to mutual holding companies.
§ 239.10 Procedural requirements.
(a) Proxies and proxy statements – (1) Solicitation of proxies. The provisions of §§ 239.56 and 239.57(a) through (d) and (f) through (h) shall apply to all solicitations of proxies by any person in connection with any membership vote required by this part. Proxy materials must be in the form specified by the Board and contain the information specified in §§ 239.57(b) and 239.57(d), to the extent such information is relevant to the action that members are being asked to approve, with such additions, deletions, and other modifications as are required under this part, or as are necessary or appropriate under the disclosure standard set forth in § 239.57(f). File proxies and proxy statements in accordance with § 239.55(c) and address them to the appropriate Reserve Bank. For purposes of this paragraph, the term conversion, as it appears in the provisions of part subpart E of this part, refers to the reorganization, the stock issuance, or other corporate action, as appropriate.
(2) Additional proxy disclosure requirements. In addition to the requirements in paragraph (a) of this section, all proxies requesting accountholder approval of a mutual holding company reorganization shall address in detail:
(i) The reasons for the reorganization, including the relative advantages and disadvantages of undertaking the transaction proposed instead of a standard conversion;
(ii) Whether management believes the reorganization is in the best interests of the association and its accountholders and the basis of that belief;
(iii) The fiduciary duties owed to accountholders by the association’s officers and directors and why the reorganization is in accord with those duties and is otherwise equitable to the accountholders and the association;
(iv) Any compensation agreements that will be entered into by management in connection with the reorganization; and
(v) Whether the mutual holding company intends to waive dividends, the implications to accountholders, and the reasons such waivers are consistent with the fiduciary duties of the directors of the mutual holding company.
(3) Nonconforming minority stock issuances. Subsidiary holding companies proposing non-conforming minority stock issuances pursuant to § 239.24(c)(6)(ii) must include in the proxy materials to accountholders seeking approval of a proposed reorganization an additional disclosure statement that serves as a cover sheet that clearly addresses:
(i) The consequences to accountholders of voting to approve a reorganization in which their subscription rights are prioritized differently and potentially eliminated; and
(ii) Any intent by the mutual holding company to waive dividends, and the implications to accountholders.
(4) Use of “running” proxies. Unless otherwise prohibited, a mutual holding company may make use of any proxy conferring general authority to vote on any and all matters at any meeting of members, provided that the member granting such proxy has been furnished a proxy statement regarding the matters and the member does not grant a later-dated proxy to vote at the meeting at which the matter will be considered or attend such meeting and vote in person, and further provided that “running” proxies or similar proxies may not be used to vote for a mutual holding company reorganization, mutual-to-stock conversion undertaken by a mutual holding company, dividend waiver, or any other material transaction. Subject to the limitations set forth in this paragraph, any proxy conferring on the board of directors or officers of a mutual savings association general authority to cast a member’s votes on any and all matters presented to the members shall be deemed to cover the member’s votes as a member of the mutual holding company and such authority shall be conferred on the board of directors or officers of a mutual holding company.
(b) Applications under this part. Except as provided in paragraph (c) of this section, any application, notice or certification required to be filed with the Board under this part must be filed in accordance with § 238.14 of this chapter. The Board will review any filing made under this part in accordance with § 238.14 of this chapter.
(c) Reorganization Notices and stock issuance applications – (1) Contents. Each Reorganization Notice submitted to the appropriate Reserve Bank pursuant to § 239.3(a) and each application for approval of the issuance of stock submitted to the appropriate Reserve Bank pursuant to § 239.24(a) shall be in the form and contain the information specified by the Board.
(2) Filing instructions. Any Reorganization Notice submitted under § 239.3(a) must be filed in accordance with § 238.14 of this chapter. Any stock issuance application submitted pursuant to § 239.24(a) shall be filed in accordance with § 239.55.
(3) Public notice, public comment, and meetings. Mutual holding company reorganizations are subject to applicable public notice, public comment, and meeting requirements under the Bank Merger Act regulations at § 238.11(e) of this chapter and the Savings and Loan Holding Company Act regulations at § 238.14 of this chapter.
(d) Amendments. Any mutual holding company may amend any notice or application submitted pursuant to this part or file additional information with respect thereto upon request of the Board or upon the mutual holding company’s own initiative.
(e) Time-frames. All Reorganization Notices and applications filed pursuant to this part must be processed in accordance with the processing procedures at § 238.14 of this chapter. Any related approvals requested in connection with Reorganization Notices or applications for approval of stock issuances (including, without limitation, requests for approval to transfer assets to resulting associations, to acquire acquiree associations, and to organize resulting associations or interim associations, and requests for approval of charters, bylaws, and stock forms) shall be processed pursuant to the procedures specified in this section in conjunction with the Reorganization Notice or stock issuance application to which they pertain, rather than pursuant to any inconsistent procedures specified elsewhere in this chapter. The approval standards for all such related applications, however, shall remain unchanged. The review by the Board of any materials used in connection with the issuance of stock under § 239.24 must not be subject to the applications processing time-frames set forth in §§ 238.14(f) and (g) of this chapter.
(f) Disclosure. The rules governing disclosure of any notice or application submitted pursuant to this part, or any public comment submitted pursuant to paragraph (c) of this section, shall be the same as set forth in § 238.14(b) of this chapter for notices, applications, and public comments filed under § 238.14 of this chapter.
(g) Appeals. Any party aggrieved by a final action by the Board which approves or disapproves any application or notice pursuant to this part may obtain review of such action in accordance with 12 U.S.C. 1467a(j).
(h) Federal preemption. This part preempts state law with regard to the creation and regulation of mutual holding companies.
§ 239.11 Subsidiary holding companies.
(a) Subsidiary holding companies. A mutual holding company may establish a subsidiary holding company as a direct subsidiary to hold 100 percent of the stock of its subsidiary savings association. The formation and operation of the subsidiary holding company may not be utilized as a means to evade or frustrate the purposes of this part. The subsidiary holding company may be established either at the time of the initial mutual holding company reorganization or at a subsequent date, subject to the approval of the Board.
(b) Stock issuances. §§ 239.24 and 239.25 apply to issuance of stock by a subsidiary holding company. In the case of a stock issuance by a subsidiary holding company, the aggregate amount of outstanding common stock of the association owned or controlled by persons other than the subsidiary holding company’s mutual holding company parent at the close of the proposed issuance shall be less than 50 percent of the subsidiary holding company’s total outstanding common stock.
(c) Charters and bylaws for subsidiary holding companies. The charter and bylaws of a subsidiary holding company shall be in the form set forth in Appendices B and D, respectively.
§ 239.12 Communication between members of a mutual holding company.
(a) Right of communication with other members. A member of a mutual holding company has the right to communicate, as prescribed in paragraph (b) of this section, with other members of the mutual holding company regarding any matter related to the mutual holding company’s affairs, except for “improper” communications, as defined in paragraph (c) of this section. The mutual holding company may not defeat that right by redeeming a savings member’s savings account in the subsidiary savings association.
(b) Member communication procedures. If a member of a mutual holding company desires to communicate with other members, the following procedures shall be followed:
(1) The member shall give the mutual holding company a written request to communicate;
(2) If the proposed communication is in connection with a meeting of the mutual holding company’s members, the request shall be given at least thirty days before the annual meeting or 10 days before a special meeting;
(3) The request shall contain –
(i) The member’s full name and address;
(ii) The nature and extent of the member’s interest in the mutual holding company at the time the information is given;
(iii) A copy of the proposed communication; and
(iv) If the communication is in connection with a meeting of the members, the date of the meeting;
(4) The mutual holding company shall reply to the request within either –
(i) Fourteen days;
(ii) Ten days, if the communication is in connection with the annual meeting; or
(iii) Three days, if the communication is in connection with a special meeting;
(5) The reply shall provide either –
(i) The number of the mutual holding company’s members and the estimated reasonable cost to the mutual holding company of mailing to them the proposed communication; or
(ii) Notification that the mutual holding company has determined not to mail the communication because it is “improper”, as defined in paragraph (c) of this section;
(6) After receiving the amount of the estimated costs of mailing and sufficient copies of the communication, the mutual holding company shall mail the communication to all members, by a class of mail specified by the requesting member, either –
(i) Within fourteen days;
(ii) Within seven days, if the communication is in connection with the annual meeting;
(iii) As soon as practicable before the meeting, if the communication is in connection with a special meeting; or
(iv) On a later date specified by the member;
(7) If the mutual holding company refuses to mail the proposed communication, it shall return the requesting member’s materials together with a written statement of the specific reasons for refusal, and shall simultaneously send to the appropriate Reserve Bank a copy of each of the requesting member’s materials, the mutual holding company’s written statement, and any other relevant material. The materials shall be sent within:
(i) Fourteen days,
(ii) Ten days if the communication is in connection with the annual meeting, or
(iii) Three days, if the communication is in connection with a special meeting, after the mutual holding company receives the request for communication.
(c) Improper communication. A communication is an “improper communication” if it contains material which:
(1) At the time and in the light of the circumstances under which it is made:
(i) Is false or misleading with respect to any material fact; or
(ii) Omits a material fact necessary to make the statements therein not false or misleading, or necessary to correct a statement in an earlier communication on the same subject which has become false or misleading;
(2) Relates to a personal claim or a personal grievance, or is solicitous of personal gain or business advantage by or on behalf of any party;
(3) Relates to any matter, including a general economic, political, racial, religious, social, or similar cause, that is not significantly related to the business of the mutual holding company or is not within the control of the mutual holding company; or
(4) Directly or indirectly and without expressed factual foundation:
(i) Impugns character, integrity, or personal reputation,
(ii) Makes charges concerning improper, illegal, or immoral conduct, or
(iii) Makes statements impugning the stability and soundness of the mutual holding company.
§ 239.13 Charters.
(a) Charters. The charter of a mutual holding company shall be in the form set forth in appendix A of this part and may be amended pursuant to this paragraph. The Board may amend the form of charter set forth in appendix A to this part.
(b) Corporate title. The corporate title of each mutual holding company shall include the term “mutual” or the abbreviation “M.H.C.”
(c) Availability of charter. A mutual holding company shall make available to its members at all times in the offices of each subsidiary savings association from which the mutual holding company draws members a true copy of its charter, including any amendments, and shall deliver such a copy to any member upon request.
§ 239.14 Charter amendments.
(a) General. In order to adopt a charter amendment, a mutual holding company must comply with the following requirements:
(1) Board of directors approval. The board of directors of the mutual holding company must adopt a resolution proposing the charter amendment that states the text of such amendment;
(2) Form of filing –
(i) Application requirement. If the proposed charter amendment would render more difficult or discourage a merger, proxy contest, the assumption of control by a mutual account holder of the mutual holding company, or the removal of incumbent management; or involve a significant issue of law or policy; then, the mutual holding shall submit the charter amendment to the appropriate Reserve Bank for approval. Applications submitted under this paragraph are subject to the processing procedures at § 238.14 of this chapter.
(ii) Notice requirement. If the proposed charter amendment does not implicate paragraph (a)(2)(i) of this section and is permissible under all applicable laws, rules and regulations, the mutual holding company shall submit the proposed amendment to the appropriate Reserve Bank at least 30 days prior to the effective date of the proposed charter amendment.
(b) Approval. Any charter amendment filed pursuant to paragraph (a)(2)(ii) of this section shall automatically be approved 30 days from the date of filing of such amendment with the appropriate Reserve Bank, provided that the mutual holding company follows the requirements of its charter in adopting such amendment, unless the Reserve Bank or the Board notifies the mutual holding company prior to the expiration of such 30-day period that such amendment is rejected or is deemed to be filed under the provisions of paragraph (a)(2)(i) of this section. Notwithstanding anything in paragraph (a) of this section to the contrary, the following charter amendments, including the adoption of the Federal mutual holding company charter as set forth in appendix A, shall be effective and deemed approved at the time of adoption, if adopted without change and filed with Board, within 30 days after adoption, provided the mutual holding company follows the requirements of its charter in adopting such amendments.
(1) Title change. (i) Subject to § 239.13 and this paragraph (b), a mutual holding company may amend its charter by substituting a new corporate title in section 1 of its charter.
(ii) Prior to changing its corporate title, a mutual holding company must file with the Board a written notice indicating the intended change. The Board shall provide to the mutual holding company a timely written acknowledgment stating when the notice was received. If, within 30 days of receipt of notice, the Board does not notify the mutual holding company of its objection to the corporate title change on the grounds that the title misrepresents the nature of the institution or the services it offers, the mutual holding company may change its title by amending its charter in accordance with § 239.14(b) or § 239.22 and the amendment provisions of its charter.
(2) Maximum number of votes. A mutual holding company may amend section 5 of its charter by substituting the maximum number of votes per member to any number from 1 to 1000.
(c) Reissuance of charter. A mutual holding company that has amended its charter may apply to have its charter, including the amendments, reissued by the Board. Such request for reissuance should be filed with the appropriate Reserve Bank.
§ 239.15 Bylaws.
(a) General. A mutual holding company shall operate under bylaws that contain provisions that comply with all requirements specified by the Board, the provisions of this section, the mutual holding company’s charter, and all other applicable laws, rules, and regulations provided that, a bylaw provision inconsistent with the provisions of this section may be adopted with the approval of the Board. Bylaws may be adopted, amended or repealed by a majority of the votes cast by the members at a legal meeting or a majority of the mutual holding company’s board of directors. Throughout this section, the term “trustee” may be substituted for the term “director” as relevant.
(b) The following requirements are applicable to mutual holding companies:
(1) Annual meetings of members. A mutual holding company shall provide for and conduct an annual meeting of its members for the election of directors and at which any other business of the mutual holding company may be conducted. Such meeting shall be held, as designated by its board of directors, at a location within the state that constitutes the principal place of business of the subsidiary savings association, or at any other convenient place the board of directors may designate, and at a date and time within 150 days after the end of the mutual holding company’s fiscal year. At each annual meeting, the officers shall make a full report of the financial condition of the mutual holding company and of its progress for the preceding year and shall outline a program for the succeeding year.
(2) Special meetings of members. Procedures for calling any special meeting of the members and for conducting such a meeting shall be set forth in the bylaws. The subject matter of such special meeting must be established in the notice for such meeting. The board of directors of the mutual holding company or the holders of 10 percent or more of the voting capital shall be entitled to call a special meeting. For purposes of this section, “voting capital” means FDIC-insured deposits as of the voting record date.
(3) Notice of meeting of members. Notice specifying the date, time, and place of the annual or any special meeting and adequately describing any business to be conducted shall be published for two successive weeks immediately prior to the week in which such meeting shall convene in a newspaper of general circulation in the city or county in which the principal place of business of the subsidiary savings association is located, or mailed postage prepaid at least 15 days and not more than 45 days prior to the date on which such meeting shall convene to each of its members of record at the last address appearing on the books of the mutual holding company. A similar notice shall be posted in a conspicuous place in each of the offices of the subsidiary savings association during the 14 days immediately preceding the date on which such meeting shall convene. The bylaws may permit a member to waive in writing any right to receive personal delivery of the notice. When any meeting is adjourned for 30 days or more, notice of the adjournment and reconvening of the meeting shall be given as in the case of the original meeting.
(4) Fixing of record date. For the purpose of determining members entitled to notice of or to vote at any meeting of members or any adjournment thereof, or in order to make a determination of members for any other proper purpose, the bylaws shall provide for the fixing of a record date and a method for determining from the books of the subsidiary savings association the members entitled to vote. Such date shall be not more than 60 days or fewer than 10 days prior to the date on which the action, requiring such determination of members, is to be taken. The same determination shall apply to any adjourned meeting.
(5) Member quorum. Any number of members present and voting, represented in person or by proxy, at a regular or special meeting of the members shall constitute a quorum. A majority of all votes cast at any meeting of the members shall determine any question, unless otherwise required by regulation. At any adjourned meeting, any business may be transacted that might have been transacted at the meeting as originally called. Members present at a duly constituted meeting may continue to transact business until adjournment.
(6) Voting by proxy. Procedures shall be established for voting at any annual or special meeting of the members by proxy pursuant to the rules and regulations of the Board, including the placing of such proxies on file with the secretary of the mutual holding company, for verification, prior to the convening of such meeting. Proxies may be given telephonically or electronically as long as the holder uses a procedure for verifying the identity of the member. All proxies with a term greater than eleven months or solicited at the expense of the subsidiary savings association must run to the board of directors as a whole, or to a committee appointed by a majority of such board.
(7) Communications between members. Provisions relating to communications between members shall be consistent with § 239.12. No member, however, shall have the right to inspect or copy any portion of any books or records of a mutual holding company containing:
(i) A list of depositors in or borrowers from the subsidiary savings association;
(ii) Their addresses;
(iii) Individual deposit or loan balances or records; or
(iv) Any data from which such information could be reasonably constructed.
(8) Number of directors, membership. The bylaws shall set forth a specific number of directors, not a range. The number of directors shall be not fewer than five nor more than fifteen, unless a higher or lower number has been authorized by the Board. Each director of the mutual holding company shall be a member of the mutual holding company. Directors may be elected for periods of one to three years and until their successors are elected and qualified, but if a staggered board is chosen, provision shall be made for the election of approximately one-third or one-half of the board each year, as appropriate.
(9) Meetings of the board. The board of directors shall determine the place, frequency, time, procedure for notice, which shall be at least 24 hours unless waived by the directors, and waiver of notice for all regular and special meetings. The meetings shall be under the direction of a chairman, appointed annually by the board; or in the absence of the chairman, the meetings shall be under the direction of the president. The board also may permit telephonic participation at meetings. The bylaws may provide for action to be taken without a meeting if unanimous written consent is obtained for such action. A majority of the authorized directors shall constitute a quorum for the transaction of business. The act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board.
(10) Officers, employees, and agents. (i) The bylaws shall contain provisions regarding the officers of the mutual holding company, their functions, duties, and powers. The officers of the mutual holding company shall consist of a president, one or more vice presidents, a secretary, and a treasurer or comptroller, each of whom shall be elected annually by the board of directors. Such other officers and assistant officers and agents as may be deemed necessary may be elected or appointed by the board of directors or chosen in such other manner as may be prescribed in the bylaws. Any two or more offices may be held by the same person, except the offices of president and secretary.
(ii) All officers and agents of the mutual holding company, as between themselves and the mutual holding company, shall have such authority and perform such duties in the management of the mutual holding company as may be provided in the bylaws, or as may be determined by resolution of the board of directors not inconsistent with the bylaws. In the absence of any such provision, officers shall have such powers and duties as generally pertain to their respective offices. Any officer may be removed by the board of directors with or without cause, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the officer so removed.
(iii) Any indemnification provision must provide that any indemnification is subject to applicable Federal law, rules, and regulations.
(11) Vacancies, resignation or removal of directors. Members of the mutual holding company shall elect directors by ballot: Provided, that in the event of a vacancy on the board, the board of directors may, by their affirmative vote, fill such vacancy, even if the remaining directors constitute less than a quorum. A director elected to fill a vacancy shall be elected to serve only until the next election of directors by the members. The bylaws shall set out the procedure for the resignation of a director, which shall be by written notice or by any other procedure established in the bylaws. Directors may be removed only for cause as defined in § 239.41, by a vote of the holders of a majority of the shares then entitled to vote at an election of directors.
(12) Powers of the board. The board of directors shall have the power:
(i) By resolution, to appoint from among its members and remove an executive committee and one or more other committees, which committee[s] shall have and may exercise all the powers of the board between the meetings or the board; but no such committee shall have the authority of the board to amend the charter or bylaws, adopt a plan of merger, consolidation, dissolution, or provide for the disposition of all or substantially all the property and assets of the mutual holding company. Such committee shall not operate to relieve the board, or any member thereof, of any responsibility imposed by law;
(ii) To fix the compensation of directors, officers, and employees; and to remove any officer or employee at any time with or without cause;
(iii) To exercise any and all of the powers of the mutual holding company not expressly reserved by the charter to the members.
(13) Nominations for directors. The bylaws shall provide that nominations for directors may be made at the annual meeting by any member and shall be voted upon, except, however, the bylaws may require that nominations by a member must be submitted to the secretary and then prominently posted in the principal place of business, at least 10 days prior to the date of the annual meeting. However, if such provision is made for prior submission of nominations by a member, then the bylaws must provide for a nominating committee, which, except in the case of a nominee substituted as a result of death or other incapacity, must submit nominations to the secretary and have such nominations similarly posted at least 15 days prior to the date of the annual meeting.
(14) New business. The bylaws shall provide procedures for the introduction of new business at the annual meeting. Those provisions may require that such new business be stated in writing and filed with the secretary prior to the annual meeting at least 30 days prior to the date of the annual meeting.
(15) Amendment. Bylaws may include any provision for their amendment that would be consistent with applicable law, rules, and regulations and adequately addresses its subject and purpose.
(i) Amendments shall be effective:
(A) After approval by a majority vote of the authorized board, or by a majority of the vote cast by the members of the mutual holding company at a legal meeting; and
(B) After receipt of any applicable regulatory approval.
(ii) When a mutual holding company fails to meet its quorum requirement, solely due to vacancies on the board, the bylaws may be amended by an affirmative vote of a majority of the sitting board.
(16) Miscellaneous. The bylaws may also address the subject of age limitations for directors or officers as long as they are consistent with applicable Federal law, rules or regulations, and any other subjects necessary or appropriate for effective operation of the mutual holding company.
(c) Form of filing – (1) Application requirement. (i) Any bylaw amendment shall be submitted to the appropriate Reserve Bank for approval if it would:
(A) Render more difficult or discourage a merger, proxy contest, the assumption of control by a mutual account holder of the mutual holding company, or the removal of incumbent management;
(B) Involve a significant issue of law or policy, including indemnification, conflicts of interest, and limitations on director or officer liability; or
(C) Be inconsistent with the requirements of this section or with applicable laws, rules, regulations, or the mutual holding company’s charter.
(ii) Applications submitted under paragraph (c)(1)(i) of this section are subject to the processing procedures at § 238.14 of this chapter.
(iii) For purposes of this paragraph (c), bylaw provisions that adopt the language of the model bylaws contained in appendix C to this part, if adopted without change, and filed with Board within 30 days after adoption, are effective upon adoption. The Board may amend the model bylaws provided in appendix C to this part.
(2) Filing requirement. If the proposed bylaw amendment does not implicate paragraph (c)(1) or (c)(3) of this section, then the mutual holding company shall submit the amendment to the appropriate Reserve Bank at least 30 days prior to the date the bylaw amendment is to be adopted by the mutual holding company.
(3) Corporate governance procedures. A mutual holding company may elect to follow the corporate governance procedures of the laws of the state where the main office of the institution is located, provided that such procedures may be elected only to the extent not inconsistent with applicable Federal statutes, regulations, and safety and soundness, and such procedures are not of the type described in paragraph (c)(1)(i) of this section. If this election is selected, a mutual holding company shall designate in its bylaws the provision or provisions from the body of law selected for its corporate governance procedures, and shall file a copy of such bylaws, which are effective upon adoption, within 30 days after adoption. The submission shall indicate, where not obvious, why the bylaw provisions do not require an application under paragraph (c)(1)(i) of this section.
(d) Effectiveness. Any bylaw amendment filed pursuant to paragraph (c)(2) of this section shall automatically be effective 30 days from the date of filing of such amendment, provided that the mutual holding company follows the requirements of its charter and bylaws in adopting such amendment, unless the Board notifies the mutual holding company prior to the expiration of the 30-day period that such amendment is rejected or that such amendment requires an application to be filed pursuant to paragraph (c)(1) of this section.
(e) Availability of bylaws. A mutual holding company shall make available to its members at all times in the offices of each subsidiary savings association from which the mutual holding company draws members a true copy of its bylaws, including any amendments, and shall deliver such a copy to any member upon request.
§ 239.16 Voluntary dissolution.
(a) A mutual holding company’s board of directors may propose a plan for dissolution of the mutual holding company. All references in this section to mutual holding company shall also apply to a subsidiary holding company organized under this part. The plan may provide for either:
(1) Transfer of all the mutual holding company’s assets to another mutual holding company or home-financing institutions under Federal charter either for cash sufficient to pay all obligations of the mutual holding company and retire all outstanding accounts or in exchange for that mutual holding company’s payment of all the mutual holding company’s outstanding obligations and issuance of share accounts or other evidence of interest to the mutual holding company’s members on a pro rata basis; or
(2) Dissolution in a manner proposed by the directors which they consider best for all concerned.
(b) The plan, and a statement of reasons for proposing dissolution and for proposing the plan, shall be submitted to the appropriate Reserve Bank for approval. The Board will approve the plan if the Board believes dissolution is advisable and the plan is best for all concerned. If the Board considers the plan inadvisable, the Board may either make recommendations to the mutual holding company concerning the plan or disapprove it. When the plan is approved by the mutual holding company’s board of directors and by the Board, it shall be submitted to the mutual holding company’s members at a duly called meeting and, when approved by a majority of votes cast at that meeting, shall become effective. After dissolution in accordance with the plan, a certificate evidencing dissolution, supported by such evidence as the Board may require, shall immediately be filed with the Board. When the Board receives such evidence satisfactory to the Board, it will terminate the corporate existence of the dissolved mutual holding company and the mutual holding company’s charter shall thereby be canceled.
Subpart C – Subsidiary Holding Companies
§ 239.20 Scope.
This subpart applies only to a subsidiary holding company of a mutual holding company.
§ 239.21 Charters.
(a) Charters. The charter of a subsidiary holding company of a mutual holding company shall be in the form set forth in appendix B of this part and may be amended pursuant to § 239.22. The Board may amend the form of charter provided in appendix B.
(b) Optional charter provision limiting minority stock ownership. (1) A subsidiary holding company that engages in its initial minority stock issuance after October 1, 2008 may, before it conducts its initial minority stock issuance, at the time it conducts its initial minority stock issuance, or, subject to the condition below, at any time during the five years following a minority stock issuance that such subsidiary holding company conducts in accordance with the purchase priorities set forth in subpart E of this part, include in its charter the provision set forth in paragraph (b)(2) of this section. For purposes of the charter provision set forth in paragraph (b)(2), the definitions set forth at § 239.22(b)(8) apply. This charter provision expires a maximum of five years from the date of the minority stock issuance. The subsidiary holding company may adopt the charter provision set forth in paragraph (b)(2) of this section after a minority stock issuance only if it provided, in the offering materials related to its previous minority stock issuance or issuances, full disclosure of the possibility that the subsidiary holding company might adopt such a charter provision.
(2) Beneficial ownership limitation. No person may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10 percent of the outstanding stock of any class of voting stock of the subsidiary holding company held by persons other than the subsidiary holding company’s mutual holding company parent. This limitation expires on [insert date within five years of minority stock issuance] and does not apply to a transaction in which an underwriter purchases stock in connection with a public offering, or the purchase of stock by an employee stock ownership plan or other tax-qualified employee stock benefit plan which is exempt from the approval requirements under § 238.12(a)(7) of this chapter.
(c) In the event a person acquires stock in violation of this section, all stock beneficially owned in excess of 10 percent shall be considered “excess stock” and shall not be counted as stock entitled to vote and shall not be voted by any person or counted as voting stock in connection with any matters submitted to the stockholders for a vote.
§ 239.22 Charter amendments.
(a) General. In order to adopt a charter amendment, a subsidiary holding company must comply with the following requirements:
(1) Board of directors approval. The board of directors of the subsidiary holding company must adopt a resolution proposing the charter amendment that states the text of such amendment.
(2) Form of filing – (i) Application requirement. If the proposed charter amendment would render more difficult or discourage a merger, tender offer, or proxy contest, the assumption of control by a holder of a block of the subsidiary holding company’s stock, the removal of incumbent management, or involve a significant issue of law or policy, the subsidiary holding company shall file the proposed amendment with and shall obtain the prior approval of the Board pursuant to § 238.14 of this chapter; and
(ii) Notice requirement. If the proposed charter amendment does not implicate paragraph (a)(2)(i) of this section and such amendment is permissible under all applicable laws, rules or regulations, the subsidiary holding company shall submit the proposed amendments to the appropriate Reserve Bank, at least 30 days prior to the date the proposed charter amendment is to be mailed for consideration by the subsidiary holding company’s shareholders.
(b) Approval. Any charter amendment filed pursuant to paragraph (a)(2)(ii) of this section shall automatically be approved 30 days from the date of filing of such amendment, provided that the subsidiary holding company follows the requirements of its charter in adopting such amendment, unless the Board notifies the mutual holding company prior to the expiration of such 30-day period that such amendment is rejected or is deemed to be filed under the provisions of paragraph (a)(2)(i) of this section. In addition, the following charter amendments, including the adoption of the charter as set forth in appendix B of this part, shall be approved at the time of adoption, if adopted without change and filed with the Board within 30 days after adoption, provided the subsidiary holding company follows the requirements of its charter in adopting such amendments.
(1) Title change. Prior to changing its corporate title, a subsidiary holding company must file with the appropriate Reserve Bank a written notice indicating the intended change. The Reserve Bank shall provide to the subsidiary holding company a timely written acknowledgment stating when the notice was received. If, within 30 days of receipt of notice, the Reserve Bank or the Board does not notify the subsidiary holding company of its objection on the grounds that the title misrepresents the nature of the institution or the services it offers, the subsidiary holding company may change its title by amending section 1 of its charter in accordance with this section and the amendment provisions of its charter.
(2) Home office. A subsidiary holding company may amend its charter by substituting a new domicile in section 2 of its charter.
(3) Number of shares of stock and par value. A subsidiary holding company may amend Section 5 of its charter to change the number of authorized shares of stock, the number of shares within each class of stock, and the par or stated value of such shares.
(4) Capital stock. A subsidiary holding company may amend its charter by revising Section 5 to read as follows:
Section 5. Capital stock. The total number of shares of all classes of capital stock that the subsidiary holding company has the authority to issue is ___, of which ___ shall be common stock of par [or if no par value is specified the stated] value of ___ per share and of which [list the number of each class of preferred and the par or if no par value is specified the stated value per share of each such class]. The shares may be issued from time to time as authorized by the board of directors without further approval of shareholders, except as otherwise provided in this Section 5 or to the extent that such approval is required by governing law, rule, or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the par [or stated] value. Neither promissory notes nor future services shall constitute payment or part payment for the issuance of shares of the subsidiary holding company. The consideration for the shares shall be cash, tangible or intangible property (to the extent direct investment in such property would be permitted), labor, or services actually performed for the subsidiary holding company, or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such property, labor, or services, as determined by the board of directors of the subsidiary holding company, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, that part of the retained earnings of the subsidiary holding company that is transferred to common stock or paid-in capital accounts upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance.
Except for shares issued in the initial organization of the subsidiary holding company, no shares of capital stock (including shares issuable upon conversion, exchange, or exercise of other securities) shall be issued, directly or indirectly, to officers, directors, or controlling persons of the association or subsidiary holding company other than as part of a general public offering or as qualifying shares to a director, unless their issuance or the plan under which they would be issued has been approved by a majority of the total votes eligible to be cast at a legal meeting.
Nothing contained in this Section 5 (or in any supplementary sections hereto) shall entitle the holders of any class of a series of capital stock to vote as a separate class or series or to more than one vote per share, except as to the cumulation of votes for the election of directors, unless the charter otherwise provides that there shall be no such cumulative voting: Provided, That this restriction on voting separately by class or series shall not apply:
(i) To any provision which would authorize the holders of preferred stock, voting as a class or series, to elect some members of the board of directors, less than a majority thereof, in the event of default in the payment of dividends on any class or series of preferred stock;
(ii) To any provision that would require the holders of preferred stock, voting as a class or series, to approve the merger or consolidation of the subsidiary holding company with another corporation or the sale, lease, or conveyance (other than by mortgage or pledge) of properties or business in exchange for securities of a corporation other than the subsidiary holding company if the preferred stock is exchanged for securities of such other corporation: Provided, That no provision may require such approval for transactions undertaken with the assistance or pursuant to the direction of the Board or the Federal Deposit Insurance Corporation;
(iii) To any amendment which would adversely change the specific terms of any class or series of capital stock as set forth in this Section 5 (or in any supplementary sections hereto), including any amendment which would create or enlarge any class or series ranking prior thereto in rights and preferences. An amendment which increases the number of authorized shares of any class or series of capital stock, or substitutes the surviving subsidiary holding company in a merger or consolidation for the subsidiary holding company, shall not be considered to be such an adverse change.
A description of the different classes and series (if any) of the subsidiary holding company’s capital stock and a statement of the designations, and the relative rights, preferences, and limitations of the shares of each class of and series (if any) of capital stock are as follows:
A. Common stock. Except as provided in this Section 5 (or in any supplementary sections thereto) the holders of the common stock shall exclusively possess all voting power. Each holder of shares of the common stock shall be entitled to one vote for each share held by each holder, except as to the cumulation of votes for the election of directors, unless the charter otherwise provides that there shall be no such cumulative voting.
Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of sinking fund, retirement fund, or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends out of any assets legally available for the payment of dividends.
In the event of any liquidation, dissolution, or winding up of the subsidiary holding company, the holders of the common stock (and the holders of any class or series of stock entitled to participate with the common stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the subsidiary holding company available for distribution remaining after: (i) Payment or provision for payment of the subsidiary holding company’s debts and liabilities; (ii) distributions or provision for distributions in settlement of its liquidation account; and (iii) distributions or provision for distributions to holders of any class or series of stock having preference over the common stock in the liquidation, dissolution, or winding up of the subsidiary holding company. Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock.
B. Preferred stock. The subsidiary holding company may provide in supplementary sections to its charter for one or more classes of preferred stock, which shall be separately identified. The shares of any class may be divided into and issued in series, with each series separately designated so as to distinguish the shares thereof from the shares of all other series and classes. The terms of each series shall be set forth in a supplementary section to the charter. All shares of the same class shall be identical except as to the following relative rights and preferences, as to which there may be variations between different series:
(a) The distinctive serial designation and the number of shares constituting such series;
(b) The dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date(s), the payment date(s) for dividends, and the participating or other special rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of shares of such series;
(d) Whether the shares of such series shall be redeemable and, if so, the price(s) at which, and the terms and conditions on which, such shares may be redeemed;
(e) The amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution, or winding up of the subsidiary holding company;
(f) Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of stock of the subsidiary holding company and, if so, the conversion price(s) or the rate(s) of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange.
(h) The price or other consideration for which the shares of such series shall be issued; and
(i) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the same relative rights as and be identical in all respects with all the other shares of the same series.
The board of directors shall have authority to divide, by the adoption of supplementary charter sections, any authorized class of preferred stock into series, and, within the limitations set forth in this section and the remainder of this charter, fix and determine the relative rights and preferences of the shares of any series so established.
Prior to the issuance of any preferred shares of a series established by a supplementary charter section adopted by the board of directors, the subsidiary holding company shall file with the appropriate Reserve Bank a dated copy of that supplementary section of this charter established and designating the series and fixing and determining the relative rights and preferences thereof.
(5) Limitations on subsequent issuances. A subsidiary holding company may amend its charter to require shareholder approval of the issuance or reservation of common stock or securities convertible into common stock under circumstances which would require shareholder approval under the rules of the New York or American Stock Exchange if the shares were then listed on the New York or American Stock Exchange.
(6) Cumulative voting. A subsidiary holding company may amend its charter by substituting the following sentence for the second sentence in the third paragraph of Section 5: “Each holder of shares of common stock shall be entitled to one vote for each share held by such holder and there shall be no right to cumulate votes in an election of directors.”
(7) [Reserved]
(8) Anti-takeover provisions following mutual to stock conversion. Notwithstanding the law of the state in which the subsidiary holding company is located, a subsidiary holding company may amend its charter by renumbering existing sections as appropriate and adding a new section 8 as follows:
Section 8. Certain Provisions Applicable for Five Years. Notwithstanding anything contained in the subsidiary holding company’s charter or bylaws to the contrary, for a period of [specify number of years up to five] years from the date of completion of the conversion of the subsidiary holding company from mutual to stock form, the following provisions shall apply:
A. Beneficial Ownership Limitation. No person shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10 percent of any class of an equity security of the subsidiary holding company. This limitation shall not apply to a transaction in which the subsidiary holding company forms a holding company without change in the respective beneficial ownership interests of its stockholders other than pursuant to the exercise of any dissenter and appraisal rights, the purchase of shares by underwriters in connection with a public offering, or the purchase of shares by a tax-qualified employee stock benefit plan which is exempt from the approval requirements under § 238.12(a) of this chapter.
In the event shares are acquired in violation of this section 8, all shares beneficially owned by any person in excess of 10 percent shall be considered “excess shares” and shall not be counted as shares entitled to vote and shall not be voted by any person or counted as voting shares in connection with any matters submitted to the stockholders for a vote.
For purposes of this section 8, the following definitions apply:
(1) The term “person” includes an individual, a group acting in concert, a corporation, a partnership, an association, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of the equity securities of the subsidiary holding company.
(2) The term “offer” includes every offer to buy or otherwise acquire, solicitation of an offer to sell, tender offer for, or request or invitation for tenders of, a security or interest in a security for value.
(3) The term “acquire” includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise.
(4) The term “acting in concert” means (a) knowing participation in a joint activity or conscious parallel action towards a common goal whether or not pursuant to an express agreement, or (b) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangements, whether written or otherwise.
B. Cumulative Voting Limitation. Stockholders shall not be permitted to cumulate their votes for election of directors.
C. Call for Special Meetings. Special meetings of stockholders relating to changes in control of the subsidiary holding company or amendments to its charter shall be called only upon direction of the board of directors.
(c) Anti-takeover provisions. The Board may grant approval to a charter amendment not listed in paragraph (b) of this section regarding the acquisition by any person or persons of its equity securities provided that the subsidiary holding company shall file as part of its application for approval an opinion, acceptable to the Board, of counsel independent from the subsidiary holding company that the proposed charter provision would be permitted to be adopted by a corporation chartered by the state in which the principal office of the subsidiary holding company is located. Any such provision must be consistent with applicable statutes, regulations, and Board policies. Further, any such provision that would have the effect of rendering more difficult a change in control of the subsidiary holding company and would require for any corporate action (other than the removal of directors) the affirmative vote of a larger percentage of shareholders than is required by this part, shall not be effective unless adopted by a percentage of shareholder vote at least equal to the highest percentage that would be required to take any action under such provision.
(d) Reissuance of charter. A subsidiary holding company that has amended its charter may apply to have its charter, including the amendments, reissued by the Board. Such requests for reissuance should be filed with the appropriate Reserve Bank, and contain signatures required by the charter in appendix B to this part, together with such supporting documents as needed to demonstrate that the amendments were properly adopted.
§ 239.23 Bylaws.
(a) General. At its first organizational meeting, the board of directors of a subsidiary holding company shall adopt a set of bylaws for the administration and regulation of its affairs. Bylaws may be adopted, amended or repealed by either a majority of the votes cast by the shareholders at a legal meeting or a majority of the board of directors. The bylaws shall contain sufficient provisions to govern the subsidiary holding company in accordance with the requirements of §§ 239.26, 239.27, 239.28, and 239.29 and shall not contain any provision that is inconsistent with those sections or with applicable laws, rules, regulations or the subsidiary holding company’s charter, except that a bylaw provision inconsistent with §§ 239.26, 239.27, 239.28, and 239.29 may be adopted with the approval of the Board.
(b) Form of filing – (1) Application requirement. (i) Any bylaw amendment shall be submitted to the appropriate Reserve Bank for approval if it would:
(A) Render more difficult or discourage a merger, tender offer, or proxy contest, the assumption of control by a holder of a large block of the subsidiary holding company’s stock, or the removal of incumbent management; or
(B) Be inconsistent with §§ 239.26, 239.27, 239.28, and 239.29, with applicable laws, rules, regulations or the subsidiary holding company’s charter or involve a significant issue of law or policy, including indemnification, conflicts of interest, and limitations on director or officer liability.
(ii) Applications submitted under paragraph (b)(1)(i) of this section are subject to the processing procedures under § 238.14 of this chapter;
(iii) For purposes of this paragraph (b), bylaw provisions that adopt the language of the model bylaws contained in appendix D to this part, if adopted without change and filed with Board within 30 days after adoption, are effective upon adoption. The Board may amend the model bylaws provided in appendix D.
(2) Filing requirement. If the proposed bylaw amendment does not implicate paragraph (b)(1) or (b)(3) of this section and is permissible under all applicable laws, rules, or regulations, the subsidiary holding company shall submit the amendment to the appropriate Reserve Bank at least 30 days prior to the date the bylaw amendment is to be adopted by the subsidiary holding company.
(3) Corporate governance procedures. A subsidiary holding company may elect to follow the corporate governance procedures of: The laws of the state where the main office of the subsidiary holding company is located; Delaware General Corporation law; or The Model Business Corporation Act, provided that such procedures may be elected to the extent not inconsistent with applicable Federal statutes and regulations and safety and soundness, and such procedures are not of the type described in paragraph (b)(1)(i) of this section. If this election is selected, a subsidiary holding company shall designate in its bylaws the provision or provisions from the body or bodies of law selected for its corporate governance procedures, and shall file a copy of such bylaws, which are effective upon adoption, within 30 days after adoption. The submission shall indicate, where not obvious, why the bylaw provisions do not require an application under paragraph (b)(1)(i) of this section.
(c) Effectiveness. Any bylaw amendment filed pursuant to paragraph (b)(2) of this section shall automatically be effective 30 days from the date of filing of such amendment, provided that the subsidiary holding company follows the requirements of its charter and bylaws in adopting such amendment, unless the Board notifies the subsidiary holding company prior to the expiration of such 30-day period that such amendment is rejected or requires an application to be filed pursuant to paragraph (b)(1) of this section.
(d) Effect of subsequent charter or bylaw change. Notwithstanding any subsequent change to its charter or bylaws, the authority of a subsidiary holding company to engage in any transaction shall be determined only by the subsidiary holding company’s charter or bylaws then in effect, unless otherwise provided by Federal law or regulation.
§ 239.24 Issuances of stock by subsidiary holding companies of mutual holding companies.
(a) Requirements. No subsidiary holding company of a mutual holding company may issue stock to persons other than its mutual holding company parent in connection with a mutual holding company reorganization, or at any time subsequent to the subsidiary holding company’s acquisition by the mutual holding company, unless the subsidiary holding company obtains advance approval of each such issuance from the Board. Approval of a mutual holding company reorganization filed pursuant to § 239.3(a) shall be deemed to constitute approval of any stock issuance specifically applied for pursuant to this section in connection with the reorganization, unless otherwise specified by the Board. The Board shall approve any proposed issuance that meets each of the criteria set forth below in paragraphs (a)(1) through (a)(7) of this section.
(1) The proposed issuance is to be made pursuant to a Stock Issuance Plan that contains all the provisions required by § 239.25.
(2) The Stock Issuance Plan is consistent with the terms of the subsidiary holding company’s charter (or any proposed amendments thereto), including terms governing the type and amount of stock that may be issued.
(3) The Stock Issuance Plan would provide the subsidiary holding company, its mutual holding company parent, and any subsidiary savings associations of the subsidiary holding company with fully sufficient capital and would not be inequitable or detrimental to the subsidiary holding company or its mutual holding company parent or to members of the mutual holding company parent.
(4) The proposed price or price range of the stock to be issued is reasonable. The Board shall review the reasonableness of the proposed price or price range.
(5) The aggregate amount of outstanding common stock of the subsidiary holding company owned or controlled by persons other than the subsidiary holding company’s mutual holding company parent at the close of the proposed issuance shall be less than 50 percent of the subsidiary holding company’s total outstanding common stock, unless the subsidiary holding company was a stock holding company when acquired by the mutual holding company, in which case the foregoing restriction shall not apply. Any amount of preferred stock may be issued by any subsidiary holding company of a mutual holding company to persons other than the subsidiary holding company’s mutual holding company, consistent with any other applicable laws and regulations.
(6) The subsidiary holding company furnishes the information required by the Board in connection with the proposed issuance.
(7) The proposed stock issuance meets the convenience and needs standard of § 239.55(g).
(8) The proposed issuance complies with all other applicable laws and regulations.
(9) Unless otherwise determined by the Board, the limitations on the minimum and maximum amounts of the estimated price range required by § 239.59(c) shall apply.
(b) Related approvals. Approval by the Board of any stock issuance pursuant to this section shall also be deemed to constitute:
(1) Approval of the form of stock certificate proposed to be utilized in connection with the stock issuance, provided such form was included in the application materials filed pursuant to this section; and
(2) Approval of any charter or bylaw amendment required to authorize issuance of the stock, provided such amendment was proposed in the application materials filed pursuant to this section.
(c) Offering restrictions. (1) No representations may be made in any manner in connection with the offer or sale of any stock issued pursuant to this section that the price, price range or any other pricing information related to such stock issuance has been approved by the Board or that the stock has been approved or disapproved by the Board or that the Board has endorsed the accuracy or adequacy of any securities offering documents disseminated in connection with such stock.
(2) The sale of minority stock of the subsidiary holding company to be made under the minority stock issuance plan, including any sale in a public offering or direct community marketing, shall be completed as promptly as possible and within 45 calendar days after the last day of the subscription period, unless extended by the Board.
(3) In the offer, sale, or purchase of stock issued pursuant to this section, no person shall:
(i) Employ any device, scheme, or artifice to defraud;
(ii) Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
(iii) Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon a purchaser or seller.
(4) Prior to the completion of a stock issuance pursuant to this section, no person shall transfer, or enter into any agreement or understanding to transfer, the legal or beneficial ownership of the stock to be issued to any other person.
(5) Prior to the completion of a stock issuance pursuant to this section, no person shall make any offer, or any announcement of any offer, to purchase any stock to be issued, or knowingly acquire any stock in the issuance, in excess of the maximum purchase limitations established in the Stock Issuance Plan.
(6) All stock issuances pursuant to this section must:
(i) Comply with § 239.59 and, to the extent applicable, the form or forms specified by the Board; and
(ii) Provide that the offering be structured in a manner similar to a standard conversion under subpart E of this part, including the stock purchase priorities accorded members of the issuing subsidiary holding company’s mutual holding company, unless the subsidiary holding company would qualify for a supervisory conversion if it were to undertake a conversion under subpart E of this part; or demonstrates to the satisfaction of the Board that a non-conforming issuance would be more beneficial to the savings association and subsidiary holding company compared to a conforming offering, considering, in the aggregate, the effect of each on the savings association and subsidiary holding company’s financial and managerial resources and future prospects, the effect of the issuance upon the savings association and subsidiary holding company, the insurance risk to the Deposit Insurance Fund, and the convenience and needs of the community to be served.
(7) Notwithstanding the restrictions in paragraph (c)(6)(ii) of this section, a subsidiary holding company of a mutual holding company may issue stock as part of a stock benefit plan to any insider, associate of an insider, or tax qualified or non-tax qualified employee stock benefit plan of the mutual holding company or subsidiary of the mutual holding company without including the purchase priorities of subpart E of this part.
(8) As part of a reorganization, a reasonable amount of shares or proceeds may be contributed to a charitable organization that complies with §§ 239.64(b) to 239.64(f), provided such contribution does not result in any taxes on excess business holdings under section 4943 of the Internal Revenue Code (26 U.S.C. 4943).
(d) Procedural and substantive requirements. The procedural and substantive requirements of subpart E of this part shall apply to all mutual holding company stock issuances and subsidiary holding company stock issuances under this section, unless clearly inapplicable, as determined by the Board. For purposes of this paragraph, the term conversion as it appears in the provisions of subpart E of this part shall refer to the stock issuance, and the term mutual holding company shall refer to the subsidiary holding company undertaking the stock issuance.
§ 239.25 Contents of Stock Issuance Plans.
(a) Mandatory provisions. Each of the provisions mandatory for all stock issuance plans under this paragraph (a) shall be deemed regulatory requirements. Each Stock Issuance Plan shall contain a complete description of all significant terms of the proposed stock issuance (including the information specified in § 239.65(f) to the extent known), shall attach and incorporate the proposed form of stock certificate, the proposed stock order form, and any agreements or other documents defining the rights of the stockholders, and shall:
(1) Provide that the stock shall be sold at a total price equal to the estimated pro forma market value of such stock, based upon an independent valuation;
(2) Provide that the aggregate amount of outstanding common stock of the subsidiary holding company owned or controlled by persons other than the subsidiary holding company’s mutual holding company parent at the close of the proposed issuance shall be less than fifty percent of the subsidiary holding company’s total outstanding common stock (This provision may be omitted if the proposed issuance will be conducted by a subsidiary holding company that was in the stock form when acquired by its mutual holding company parent);
(3) Provide that all employee stock ownership plans or other tax-qualified employee stock benefit plans (collectively, ESOPs) must not encompass, in the aggregate, more than either 4.9 percent of the outstanding shares of the subsidiary holding company’s common stock or 4.9 percent of the subsidiary holding company’s stockholders’ equity at the close of the proposed issuance;
(4) Provide that all ESOPs and management recognition plans (MRPs) must not encompass, in the aggregate, more than either 4.9 percent of the outstanding shares of the subsidiary holding company’s common stock or 4.9 percent of the subsidiary holding company’s stockholders’ equity at the close of the proposed issuance. However, if the subsidiary holding company’s tangible capital equals at least ten percent at the time of implementation of the plan, the Board may permit such ESOPs and MRPs to encompass, in the aggregate, up to 5.88 percent of the outstanding common stock or stockholders’ equity at the close of the proposed issuance;
(5) Provide that all MRPs must not encompass, in the aggregate, more than either 1.47 percent of the common stock of the subsidiary holding company or 1.47 percent of the subsidiary holding company’s stockholders’ equity at the close of the proposed issuance. However, if the subsidiary holding company’s tangible capital is at least ten percent at the time of implementation of the plan, the Board may permit MRPs to encompass, in the aggregate, up to 1.96 percent of the outstanding shares of the subsidiary holding company’s common stock or 1.96 percent of the savings subsidiary holding company’s stockholders’ equity at the close of the proposed issuance;
(6) Provide that all stock option plans (Option Plans) must not encompass, in the aggregate, more than either 4.9 percent of the subsidiary holding company’s outstanding common stock at the close of the proposed issuance or 4.9 percent of the subsidiary holding company’s stockholders’ equity at the close of the proposed issuance;
(7) Provide that an ESOP, a MRP or an Option Plan modified or adopted no earlier than one year after the close of: the proposed issuance, or any subsequent issuance that is made in substantial conformity with the purchase priorities § 239.59(a) set forth in subpart E of this part, may exceed the percentage limitations contained in paragraphs (a)(3) through (6) of this section (plan expansion), subject to the following two requirements. First, all common stock awarded in connection with any plan expansion must be acquired for such awards in the secondary market. Second, such acquisitions must begin no earlier than when such plan expansion is permitted to be made;
(8)(i) Provide that the aggregate amount of common stock that may be encompassed under all Option Plans and MRPs, or acquired by all insiders of the subsidiary holding company and subsidiary savings association and associates of insiders of the subsidiary holding company and subsidiary savings association, must not exceed the following percentages of common stock or stockholders’ equity of the subsidiary holding company, held by persons other than the subsidiary holding company’s mutual holding company parent at the close of the proposed issuance:
| Institution size | Officer and director purchases (percent) |
|---|---|
| $ 50,000,000 or less | 35 |
| $ 50,000,001-100,000,000 | 34 |
| $100,000,001-150,000,000 | 33 |
| $150,000,001-200,000,000 | 32 |
| $200,000,001-250,000,000 | 31 |
| $250,000,001-300,000,000 | 30 |
| $300,000,001-350,000,000 | 29 |
| $350,000,001-400,000,000 | 28 |
| $400,000,001-450,000,000 | 27 |
| $450,000,001-500,000,000 | 26 |
| Over $500,000,000 | 25 |
(ii) The percentage limitations contained in paragraph 8(i) of this section may be exceeded provided that all stock acquired by insiders and associates of insiders or awarded under all MRPs and Option Plans in excess of those limitations is acquired in the secondary market. If acquired for such awards on the secondary market, such acquisitions must begin no earlier than one year after the close of the proposed issuance or any subsequent issuance that is made in substantial conformity with the purchase priorities set forth in subpart E of this part.
(iii) In calculating the number of shares held by insiders and their associates under this provision, shares awarded but not delivered under an ESOP, MRP, or Option Plan that are attributable to such persons shall not be counted as being acquired by such persons.
(9) Provide that the amount of common stock that may be encompassed under all Option Plans and MRPs must not exceed, in the aggregate, 25 percent of the outstanding common stock held by persons other than the subsidiary holding company’s mutual holding company parent at the close of the proposed issuance;
(10) Provide that the issuance shall be conducted in compliance with, to the extent applicable, the forms required by the Board;
(11) Provide that the sales price of the shares of stock to be sold in the issuance shall be a uniform price determined in accordance with § 239.24;
(12) Provide that, if at the close of the stock issuance the subsidiary holding company has more than thirty-five shareholders of any class of stock, the subsidiary holding company shall promptly register that class of stock pursuant to the Securities Exchange Act of 1934, as amended (15 U.S.C. 78a-78jj), and undertake not to deregister such stock for a period of three years thereafter;
(13) Provide that, if at the close of the stock issuance the subsidiary holding company has more than one hundred shareholders of any class of stock, the subsidiary holding company shall use its best efforts to:
(i) Encourage and assist a market maker to establish and maintain a market for that class of stock; and
(ii) List that class of stock on a national or regional securities exchange or on the NASDAQ quotation system;
(14) Provide that, for a period of three years following the proposed issuance, no insider of the subsidiary holding company or his or her associates shall purchase, without the prior written approval of the Board, any stock of the subsidiary holding company except from a broker dealer registered with the Securities and Exchange Commission, except that the foregoing restriction shall not apply to:
(i) Negotiated transactions involving more than one percent of the outstanding stock in the class of stock; or
(ii) Purchases of stock made by and held by any tax-qualified or non-tax-qualified employee stock benefit plan of the subsidiary holding company even if such stock is attributable to insiders of the subsidiary holding company and subsidiary savings association or their associates;
(15) Provide that stock purchased by insiders of the subsidiary holding company and subsidiary savings association and their associates in the proposed issuance shall not be sold for a period of at least one year following the date of purchase, except in the case of death of the insider or associate;
(16) Provide that, in connection with stock subject to restriction on sale for a period of time:
(i) Each certificate for such stock shall bear a legend giving appropriate notice of such restriction;
(ii) Appropriate instructions shall be issued to the subsidiary holding company’s transfer agent with respect to applicable restrictions on transfer of such stock; and
(iii) Any shares issued as a stock dividend, stock split, or otherwise with respect to any such restricted stock shall be subject to the same restrictions as apply to the restricted stock;
(17) Provide that the subsidiary holding company will not offer or sell any of the stock proposed to be issued to any person whose purchase would be financed by funds loaned, directly or indirectly, to the person by the subsidiary holding company;
(18) Provide that, if necessary, the subsidiary holding company’s charter will be amended to authorize issuance of the stock and attach and incorporate by reference the text of any such amendment;
(19) Provide that the expenses incurred in connection with the issuance shall be reasonable;
(20) Provide that the Stock Issuance Plan, if proposed as part of a Reorganization Plan, may be amended or terminated in the same manner as the Reorganization Plan. Otherwise, the Stock Issuance Plan shall provide that it may be substantively amended by the board of directors of the issuing subsidiary holding company as a result of comments from regulatory authorities or otherwise prior to approval of the Plan by the Board, and at any time thereafter with the concurrence of the Board; and that the Stock Issuance Plan may be terminated by the board of directors at any time prior to approval of the Plan by the Board, and at any time thereafter with the concurrence of the Board;
(21) Provide that, unless an extension is granted by the Board, the Stock Issuance Plan shall be terminated if not completed within 90 days of the date of such approval; or
(22) Provide that the subsidiary holding company may make scheduled discretionary contributions to a tax-qualified employee stock benefit plan provided such contributions do not cause the subsidiary holding company to fail to meet any of its regulatory capital requirements.
(b) Optional provisions. A Stock Issuance Plan may:
(1) Provide that, in the event the proposed stock issuance is part of a Reorganization Plan, the stock offering may be commenced concurrently with or at any time after the mailing to the members of the reorganizing association and any acquiree association of any proxy statement(s). The offering may be closed before the required membership vote(s), provided the offer and sale of the stock shall be conditioned upon the approval of the Reorganization Plan and Stock Issuance Plan by the members of the reorganizing association and any acquiree association;
(2) Provide that any insignificant residue of stock of the subsidiary holding company not sold in the offering may be sold in such other manner as provided in the Stock Issuance Plan, with the Board’s approval;
(3) Provide that the subsidiary holding company may issue and sell, in lieu of shares of its stock, units of securities consisting of stock and long-term warrants or other equity securities, in which event any reference in the provisions of this section and in § 239.24 to stock shall apply to such units of equity securities unless the context otherwise requires; or
(4) Provide that the subsidiary holding company may reserve shares representing up to ten percent of the proposed offering for issuance in connection with an employee stock benefit plan.
(c) Applicability of provisions of § 239.63(a)(1) to minority stock issuances. Notwithstanding § 239.24(d), § 239.63(a)(1)(ii) do not apply to minority stock issuances, because the permissible sizes of ESOPs, MRPs, and Option Plans in minority stock issuances are subject to each of the requirements set forth at paragraphs (a)(3) through (a)(9) of this section. Section 239.63(a)(4) through (a)(14), apply for one year after the subsidiary holding company engages in a minority stock issuance that is conducted in accordance with the purchase priorities set forth in subpart E of this part. In addition to the shareholder vote requirement for Option Plans and MRPs set forth at § 239.63(a)(1)(vi), any Option Plans and MRPs put to a shareholder vote after a minority stock issuance that is conducted in accordance with the purchase priorities set forth in subpart E of this part must be approved by a majority of the votes cast by stockholders other than the mutual holding company.
(a) Shareholder meetings. An annual meeting of the shareholders of the subsidiary holding company for the election of directors and for the transaction of any other business of the subsidiary holding company shall be held annually within 150 days after the end of the subsidiary holding company’s fiscal year. Unless otherwise provided in the subsidiary holding company’s charter, special meetings of the shareholders may be called by the board of directors or on the request of the holders of 10 percent or more of the shares entitled to vote at the meeting, or by such other persons as may be specified in the bylaws of the subsidiary holding company. All annual and special meetings of shareholders shall be held at such place as the board of directors may determine in the state in which the subsidiary savings association has its principal place of business, or at any other convenient place the board of directors may designate.
(b) Notice of shareholder meetings. Written notice stating the place, day, and hour of the meeting and the purpose or purposes for which the meeting is called shall be delivered not fewer than 20 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, the secretary, or the directors, or other natural persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the shareholder at the address appearing on the stock transfer books or records of the subsidiary holding company as of the record date prescribed in paragraph (c) of this section, with postage thereon prepaid. When any shareholders’ meeting, either annual or special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. Notwithstanding anything in this section, however, a subsidiary holding company that is wholly owned shall not be subject to the shareholder notice requirement.
(c) Fixing of record date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days and, in case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof.
(d) Voting lists. (1) At least 20 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for the shares of the subsidiary holding company shall make a complete list of the stockholders of record entitled to vote at such meeting, or any adjournments thereof, arranged in alphabetical order, with the address and the number of shares held by each. This list of shareholders shall be kept on file at the home office of the subsidiary holding company and shall be subject to inspection by any shareholder of record or the stockholder’s agent during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the stockholders entitled to examine such list or transfer books or to vote at any meeting of stockholders. Notwithstanding anything in this section, however, a subsidiary holding company that is wholly owned shall not be subject to the voting list requirements.
(2) In lieu of making the shareholders list available for inspection by any shareholders as provided in paragraph (d)(1) of this section, the board of directors may perform such acts as required by paragraphs (a) and (b) of Rule 14a-7 of the General Rules and Regulations under the Securities and Exchange Act of 1934 (17 CFR 240.14a-7) as may be duly requested in writing, with respect to any matter which may be properly considered at a meeting of shareholders, by any shareholder who is entitled to vote on such matter and who shall defray the reasonable expenses to be incurred by the subsidiary holding company in performance of the act or acts required.
(e) Shareholder quorum. A majority of the outstanding shares of the subsidiary holding company entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, unless the vote of a greater number of stockholders voting together or voting by classes is required by law or the charter. Directors, however, are elected by a plurality of the votes cast at an election of directors.
(f) Shareholder voting – (1) Proxies. Unless otherwise provided in the subsidiary holding company’s charter, at all meetings of shareholders, a shareholder may vote in person or by proxy executed in writing by the shareholder or by a duly authorized attorney in fact. Proxies may be given telephonically or electronically as long as the holder uses a procedure for verifying the identity of the shareholder. A proxy may designate as holder a corporation, partnership or company, or other person. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid more than eleven months from the date of its execution except for a proxy coupled with an interest.
(2) Shares controlled by subsidiary holding company. Neither treasury shares of its own stock held by the subsidiary holding company nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the subsidiary holding company, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting.
(g) Nominations and new business submitted by shareholders. Nominations for directors and new business submitted by shareholders shall be voted upon at the annual meeting if such nominations or new business are submitted in writing and delivered to the secretary of the subsidiary holding company at least five days prior to the date of the annual meeting. Ballots bearing the names of all the natural persons nominated shall be provided for use at the annual meeting.
(h) Informal action by stockholders. If the bylaws of the subsidiary holding company so provide, any action required to be taken at a meeting of the stockholders, or any other action that may be taken at a meeting of the stockholders, may be taken without a meeting if consent in writing has been given by all the stockholders entitled to vote with respect to the subject matter.
§ 239.27 Board of directors.
(a) General powers and duties. The business and affairs of the subsidiary holding company shall be under the direction of its board of directors. The board of directors shall annually elect a chairman of the board from among its members and shall designate the chairman of the board, when present, to preside at its meeting. Directors need not be stockholders unless the bylaws so require.
(b) Number and term. The bylaws shall set forth a specific number of directors, not a range. The number of directors shall be not fewer than five nor more than fifteen, unless a higher or lower number has been authorized by the Board. Directors shall be elected for a term of one to three years and until their successors are elected and qualified. If a staggered board is chosen, the directors shall be divided into two or three classes as nearly equal in number as possible and one class shall be elected by ballot annually. In the case of a converting or newly chartered subsidiary holding company where all directors shall be elected at the first election of directors, if a staggered board is chosen, the terms shall be staggered in length from one to three years.
(c) Regular meetings. A regular meeting of the board of directors shall be held immediately after, and at the same place as, the annual meeting of shareholders. The board of directors shall determine the place, frequency, time and procedure for notice of regular meetings.
(d) Quorum. A majority of the number of directors shall constitute a quorum for the transaction of business at any meeting of the board of directors. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by regulation of the Board.
(e) Vacancies. Any vacancy occurring in the board of directors may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve only until the next election of directors by the shareholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the board of directors for a term of office continuing only until the next election of directors by the shareholders.
(f) Removal or resignation of directors. (1) At a meeting of shareholders called expressly for that purpose, any director may be removed only for cause, as defined in § 239.41, by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. Subsidiary holding companies may provide for procedures regarding resignations in the bylaws.
(2) If less than the entire board is to be removed, no one of the directors may be removed if the votes cast against the removal would be sufficient to elect a director if then cumulatively voted at an election of the class of directors of which such director is a part.
(3) Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the charter or supplemental sections thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole.
(g) Executive and other committees. The board of directors, by resolution adopted by a majority of the full board, may designate from among its members an executive committee and one or more other committees each of which, to the extent provided in the resolution or bylaws of the subsidiary holding company, shall have and may exercise all of the authority of the board of directors, except no committee shall have the authority of the board of directors with reference to: the declaration of dividends; the amendment of the charter or bylaws of the subsidiary holding company; recommending to the stockholders a plan of merger, consolidation, or conversion; the sale, lease, or other disposition of all, or substantially all, of the property and assets of the subsidiary holding company otherwise than in the usual and regular course of its business; a voluntary dissolution of the subsidiary holding company; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest. The designation of any committee and the delegation of authority thereto shall not operate to relieve the board of directors, or any director, of any responsibility imposed by law or regulation.
(h) Notice of special meetings. Written notice of at least 24 hours regarding any special meeting of the board of directors or of any committee designated thereby shall be given to each director in accordance with the bylaws, although such notice may be waived by the director. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting need be specified in the notice or waiver of notice of such meeting. The bylaws may provide for telephonic participation at a meeting.
(i) Action without a meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the actions so taken, shall be signed by all of the directors.
(j) Presumption of assent. A director of the subsidiary holding company who is present at a meeting of the board of directors at which action on any subsidiary holding company matter is taken shall be presumed to have assented to the action taken unless his or her dissent or abstention shall be entered in the minutes of the meeting or unless a written dissent to such action shall be filed with the individual acting as the secretary of the meeting before the adjournment thereof or shall be forwarded by registered mail to the secretary of the subsidiary holding company within five days after the date on which a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action.
(k) Age limitation on directors. A subsidiary holding company may provide a bylaw on age limitation for directors. Bylaws on age limitations must comply with all Federal laws, rules and regulations.
§ 239.28 Officers.
(a) Positions. The officers of the subsidiary holding company shall be a president, one or more vice presidents, a secretary, and a treasurer or comptroller, each of whom shall be elected by the board of directors. The board of directors may also designate the chairman of the board as an officer. The offices of the secretary and treasurer or comptroller may be held by the same individual and the vice president may also be either the secretary or the treasurer or comptroller. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the subsidiary holding company may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices.
(b) Removal. Any officer may be removed by the board of directors whenever in its judgment the best interests of the subsidiary holding company will be served thereby; but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the individual so removed. Employment contracts shall conform with § 239.41.
(c) Age limitation on officers. A subsidiary holding company may provide a bylaw on age limitation for officers. Bylaws on age limitations must comply with all Federal laws, rules, and regulations.
(a) Certificates for shares. Certificates representing shares of capital stock of the subsidiary holding company shall be in such form as shall be determined by the board of directors and approved by the Board. The certificates shall be signed by the chief executive officer or by any other officer of the subsidiary holding company authorized by the board of directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar other than the subsidiary holding company itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the subsidiary holding company. All certificates surrendered to the subsidiary holding company for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in the case of a lost or destroyed certificate a new certificate may be issued upon such terms and indemnity to the subsidiary holding company as the board of directors may prescribe.
(b) Transfer of shares. Transfer of shares of capital stock of the subsidiary holding company shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by a legal representative, who shall furnish proper evidence of such authority, or by an attorney authorized by a duly executed power of attorney and filed with the subsidiary holding company. The transfer shall be made only on surrender for cancellation of the certificate for the shares. The person in whose name shares of capital stock stand on the books of the subsidiary holding company shall be deemed by the subsidiary holding company to be the owner for all purposes.
§ 239.30 Annual reports; books and records.
(a) Annual reports to stockholders. A subsidiary holding company not wholly-owned by a holding company shall, within 130 days after the end of its fiscal year, mail to each of its stockholders entitled to vote at its annual meeting an annual report containing financial statements that satisfy the requirements of rule 14a-3 under the Securities Exchange Act of 1934. (17 CFR 240.14a-3). Concurrently with such mailing a certification of such mailing signed by the chairman of the board, the president or a vice president of the subsidiary holding company, together with a copy of the report, shall be transmitted by the subsidiary holding company to the appropriate Reserve Bank.
(b) Books and records. (1) Each subsidiary holding company shall keep correct and complete books and records of account; shall keep minutes of the proceedings of its stockholders, board of directors, and committees of directors; and shall keep at its home office or at the office of its transfer agent or registrar, a record of its stockholders, giving the names and addresses of all stockholders, and the number, class and series, if any, of the shares held by each.
(2) Any stockholder or group of stockholders of a subsidiary holding company, holding of record the number of voting shares of such subsidiary holding company specified below, upon making written demand stating a proper purpose, shall have the right to examine, in person or by agent or attorney, at any reasonable time or times, nonconfidential portions of its books and records of account, minutes and record of stockholders and to make extracts therefrom. Such right of examination is limited to a stockholder or group of stockholders holding of record:
(i) Voting shares having a cost of not less than $100,000 or constituting not less than one percent of the total outstanding voting shares, provided in either case such stockholder or group of stockholders have held of record such voting shares for a period of at least six months before making such written demand, or
(ii) Not less than five percent of the total outstanding voting shares.
No stockholder or group of stockholders of a subsidiary holding company shall have any other right under this section or common law to examine its books and records of account, minutes and record of stockholders, except as provided in its bylaws with respect to inspection of a list of stockholders.
(3) The right to examination authorized by paragraph (b)(2) of this section and the right to inspect the list of stockholders provided by a subsidiary holding company’s bylaws may be denied to any stockholder or group of stockholders upon the refusal of any such stockholder or group of stockholders to furnish such subsidiary holding company, its transfer agent or registrar an affidavit that such examination or inspection is not desired for any purpose which is in the interest of a business or object other than the business of the subsidiary holding company, that such stockholder has not within the five years preceding the date of the affidavit sold or offered for sale, and does not now intend to sell or offer for sale, any list of stockholders of the subsidiary holding company or of any other corporation, and that such stockholder has not within said five-year period aided or abetted any other person in procuring any list of stockholders for purposes of selling or offering for sale such list.
(4) Notwithstanding any provision of this section or common law, no stockholder or group of stockholders shall have the right to obtain, inspect or copy any portion of any books or records of a subsidiary holding company containing:
(i) A list of depositors in or borrowers from such subsidiary holding company;
(ii) Their addresses;
(iii) Individual deposit or loan balances or records; or
(iv) Any data from which such information could be reasonably constructed.
§ 239.31 Indemnification; employment contracts.
(a) Restrictions on indemnification. The provisions of § 239.40 shall apply to subsidiary holding companies.
(b) Restrictions on employment contracts. The provisions of § 239.41 and any policies of the Board thereunder shall apply to subsidiary holding companies.
Subpart D – Indemnification; Employment Contracts
§ 239.40 Indemnification of directors, officers and employees.
A mutual holding company shall indemnify its directors, officers, and employees in accordance with the following requirements:
(a) Definitions and rules of construction. (1) Definitions for purposes of this section.
(i) Action means any judicial or administrative proceeding, or threatened proceeding, whether civil, criminal, or otherwise, including any appeal or other proceeding for review;
(ii) Court includes, without limitation, any court to which or in which any appeal or any proceeding for review is brought.
(iii) Final judgment means a judgment, decree, or order which is not appealable or as to which the period for appeal has expired with no appeal taken.
(iv) Settlement includes entry of a judgment by consent or confession or a plea of guilty or nolo contendere.
(2) References in this section to any individual or other person, including any mutual holding company, shall include legal representatives, successors, and assigns thereof.
(b) General. Subject to paragraphs (c) and (g) of this section, a mutual holding company shall indemnify any person against whom an action is brought or threatened because that person is or was a director, officer, or employee of the mutual holding company, for:
(1) Any amount for which that person becomes liable under a judgment if such action; and
(2) Reasonable costs and expenses, including reasonable attorney’s fees, actually paid or incurred by that person in defending or settling such action, or in enforcing his or her rights under this section if he or she attains a favorable judgment in such enforcement action.
(c) Requirements. Indemnification shall be made to such period under paragraph (b) of this section only if:
(1) Final judgment on the merits is in his or her favor; or
(2) In case of:
(i) Settlement,
(ii) Final judgment against him or her, or
(iii) Final judgment in his or her favor, other than on the merits, if a majority of the disinterested directors of the mutual holding company determine that he or she was acting in good faith within the scope of his or her employment or authority as he or she could reasonably have perceived it under the circumstances and for a purpose he or she could reasonably have believed under the circumstances was in the best interests of the mutual holding company or its members.
However, no indemnification shall be made unless the mutual holding company gives the Board at least 60 days’ notice of its intention to make such indemnification. Such notice shall state the facts on which the action arose, the terms of any settlement, and any disposition of the action by a court. Such notice, a copy thereof, and a certified copy of the resolution containing the required determination by the board of directors shall be sent to the appropriate Reserve Bank, who shall promptly acknowledge receipt thereof. The notice period shall run from the date of such receipt. No such indemnification shall be made if the Board advises the mutual holding company in writing, within such notice period, of its objection to the indemnification.
(d) Insurance. A mutual holding company may obtain insurance to protect it and its directors, officers, and employees from potential losses arising from claims against any of them for alleged wrongful acts, or wrongful acts, committed in their capacity as directors, officers, or employees. However, no mutual holding company may obtain insurance which provides for payment of losses of any individual incurred as a consequence of his or her willful or criminal misconduct.
(e) Payment of expenses. If a majority of the directors of a mutual holding company concludes that, in connection with an action, any person ultimately may become entitled to indemnification under this section, the directors may authorize payment of reasonable costs and expenses, including reasonable attorneys’ fees, arising from the defense or settlement of such action. Nothing in this paragraph shall prevent the directors of a mutual holding company from imposing such conditions on a payment of expenses as they deem warranted and in the interests of the mutual holding company. Before making advance payment of expenses under this paragraph, the mutual holding company shall obtain an agreement that the mutual holding company will be repaid if the person on whose behalf payment is made is later determined not to be entitled to such indemnification.
(f) Exclusiveness of provisions. No mutual holding company shall indemnify any person referred to in paragraph (b) of this section or obtain insurance referred to in paragraph (d) of the section other than in accordance with this section. However, a mutual holding company which has a bylaw in effect relating to indemnification of its personnel shall be governed solely by that bylaw, except that its authority to obtain insurance shall be governed by paragraph (d) of this section.
(g) The indemnification provided for in paragraph (b) of this section is subject to and qualified by 12 U.S.C. 1821(k).
§ 239.41 Employment contracts.
(a) General. A mutual holding company may enter into an employment contract with its officers and other employees only in accordance with the requirements of this section. All employment contracts shall be in writing and shall be approved specifically by the respective mutual holding company’s board of directors. A mutual holding company shall not enter into an employment contract with any of its officers or other employees if such contract would constitute an unsafe or unsound practice. The making of such an employment contract would be an unsafe or unsound practice if such contract could lead to material financial loss or damage to the mutual holding company or could interfere materially with the exercise by the members of its board of directors of their duty or discretion provided by law, charter, bylaw or regulation as to the employment or termination of employment of an officer or employee of the mutual holding company. This may occur, depending upon the circumstances of the case, where an employment contract provides for an excessive term.
(b) Required provisions. Each employment contract shall provide that:
(1) The mutual holding company’s board of directors may terminate the officer or employee’s employment at any time, but any termination by the mutual holding company’s board of directors other than termination for cause, shall not prejudice the officer or employee’s right to compensation or other benefits under the contract. The officer or employee shall have no right to receive compensation or other benefits for any period after termination for cause. Termination for cause shall include termination because of the officer or employee’s personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of the contract.
(2) If the officer or employee is suspended and/or temporarily prohibited from participating in the conduct of the mutual holding company’s affairs by a notice served under section 8 (e)(3) or (g)(1) of Federal Deposit Insurance Act (12 U.S.C. 1818 (e)(3) and (g)(1)) the mutual holding company’s obligations under the contract shall be suspended as of the date of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the mutual holding company may in its discretion:
(i) Pay the officer or employee all or part of the compensation withheld while its contract obligations were suspended, and
(ii) Reinstate (in whole or in part) any of its obligations which were suspended.
(3) If the officer or employee is removed and/or permanently prohibited from participating in the conduct of the mutual holding company’s affairs by an order issued under section 8 (e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818 (e)(4) or (g)(1)), all obligations of the mutual holding company under the contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.
(4) If the subsidiary savings association is in default (as defined in section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under the contract shall terminate as of the date of default, but this paragraph (b) shall not affect any vested rights of the contracting parties: Provided, that this paragraph (b) need not be included in an employment contract if prior written approval is secured from the Board.
(5) If the mutual holding company is subject to bankruptcy proceedings under title 11 of the United States Code, all obligations of the mutual holding company under the contract shall terminate as of the date that the petition is filed, but vested rights of the contracting parties shall not be affected: Provided, that this paragraph (b) need not be included in an employment contract if prior written approval is secured from the Board.
(6) All obligations under the contract shall be terminated, except to the extent determined that continuation of the contract is necessary to the continued operation of the mutual holding company –
(i) By the Board, at the time the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the subsidiary savings association under the authority contained in 13(c) of the Federal Deposit Insurance Act; or
(ii) By the Board, at the time the Board approves a supervisory merger to resolve problems related to operation of the mutual holding company or when the mutual holding company is determined by the Board to be in an unsafe or unsound condition.
Subpart E – Conversions From Mutual to Stock Form
§ 239.50 Purpose and scope.
(a) General. This subpart governs how a mutual holding company may convert from the mutual to the stock form of ownership. This subpart supersedes all inconsistent charter and bylaw provisions of mutual holding companies converting to stock form.
(b) Prescribed forms. A mutual holding company must use the forms prescribed under this subpart and provide such information as the Board may require under the forms by regulation or otherwise. The forms required under this subpart include: Form AC (Application for Conversion); Form PS (Proxy Statement); Form OC (Offering Circular); and Form OF (Order Form).
(c) Waivers. The Board may waive any requirement of this subpart or a provision in any prescribed form. To obtain a waiver, a mutual holding company must file a written request with the Board that:
(1) Specifies the requirement(s) or provision(s) that the mutual holding company wants the Board to waive;
(2) Demonstrates that the waiver is equitable; is not detrimental to the mutual holding company, mutual members, or other mutual holding companies or savings associations; and is not contrary to the public interest; and
(3) Includes an opinion of counsel demonstrating that applicable law does not conflict with the waiver of the requirement or provision.
§ 239.51 Acquiring another insured stock depository institution as part of a conversion.
When a mutual holding company converts to stock form, the subsidiary savings association may acquire for cash or stock another insured depository institution that is already in the stock form of ownership.
§ 239.52 Definitions.
The following definitions apply to this subpart and the forms prescribed under this subpart:
(a) Association members or members are persons who, under applicable law, are eligible to vote at the meeting on conversion.
(b) Eligibility record date is the date for determining eligible account holders. The eligibility record date must be at least one year before the date that the board of directors adopts the plan of conversion.
(c) Eligible account holders are any persons holding qualifying deposits on the eligibility record date.
(d) IRS is the United States Internal Revenue Service.
(e) Local community includes:
(1) Every county, parish, or similar governmental subdivision in which the mutual holding company has a home or branch office;
(2) Each county’s, parish’s, or subdivision’s metropolitan statistical area;
(3) All zip code areas in the mutual holding company’s Community Reinvestment Act assessment area; and
(4) Any other area or category the mutual holding company sets out in its plan of conversion, as approved by the Board.
(f) Mutual holding company has the same meaning in this subpart as that term is given in subpart A. For purposes of this subpart, references to mutual holding company shall also include a resulting stock holding company, where applicable.
(g) Offer, offer to sell, or offer for sale is an attempt or offer to dispose of, or a solicitation of an offer to buy, a security or interest in a security for value. Preliminary negotiations or agreements with an underwriter, or among underwriters who are or will be in privity of contract with the mutual holding company or resulting stock holding company, are not offers, offers to sell, or offers for sale.
(h) Proxy soliciting material includes a proxy statement, form of proxy, or other written or oral communication regarding the conversion.
(i) Purchase or buy includes every contract to acquire a security or interest in a security for value.
(j) Qualifying deposit is the total balance in an account holder’s savings accounts at the close of business on the eligibility or supplemental eligibility record date. The mutual holding company’s plan of conversion may provide that only savings accounts with total deposit balances of $50 or more will qualify.
(k) Resulting stock holding company means the stock savings and loan holding company that is issuing stock in connection with conversion of a mutual holding company pursuant to this subpart.
(l) Sale or sell includes every contract to dispose of a security or interest in a security for value. An exchange of securities in a merger or acquisition approved by the Board is not a sale.
(m) Solicitation and solicit is a request for a proxy, whether or not accompanied by or included in a form of proxy; a request to execute, not execute, or revoke a proxy; or the furnishing of a form of proxy or other communication reasonably calculated to cause the members to procure, withhold, or revoke a proxy. Solicitation or solicit does not include providing a form of proxy at the unsolicited request of a member, the acts required to mail communications for members, or ministerial acts performed on behalf of a person soliciting a proxy.
(n) Subscription offering is the offering of shares through nontransferable subscription rights to:
(1) Eligible account holders under § 239.59(h);
(2) Tax-qualified employee stock ownership plans under § 239.59(m);
(3) Supplemental eligible account holders under § 239.59(h); and
(4) Other voting members under § 239.59(j).
(o) Supplemental eligibility record date is the date for determining supplemental eligible account holders. The supplemental eligibility record date is the last day of the calendar quarter before the Board approves the conversion and will occur only if the Board has not approved the conversion within 15 months of the eligibility record date.
(p) Supplemental eligible account holders are any persons, except officers, directors, and their associates of the mutual holding company or subsidiary savings association, holding qualifying deposits on the supplemental eligibility record date.
(q) Underwriter is any person who purchases any securities from the mutual holding company or resulting stock holding company with a view to distributing the securities, offers or sells securities for the mutual stock holding company or resulting stock holding company in connection with the securities’ distribution, or participates or has a direct or indirect participation in the direct or indirect underwriting of any such undertaking. Underwriter does not include a person whose interest is limited to a usual and customary distributor’s or seller’s commission from an underwriter or dealer.
§ 239.53 Prior to conversion.
(a) Pre-filing meeting and consultation. (1) The mutual holding company’s board, or a subcommittee of the board, may meet with the staff of the appropriate Reserve Bank or Board staff before the mutual holding company’s board of directors votes on the plan of conversion. At that meeting the mutual holding company may provide the Reserve Bank or Board staff with a written strategic plan that outlines the objectives of the proposed conversion and the intended use of the conversion proceeds.
(2) The mutual holding company should also consult with the Board or appropriate Reserve Bank before it files its application for conversion. The Reserve Bank or Board will discuss the information that the mutual holding company must include in the application for conversion, general issues that the mutual holding company may confront in the conversion process, and any other pertinent issues.
(b) Business plan. (1) Prior to filing an application for conversion, the mutual holding company must adopt a business plan reflecting the mutual holding company’s intended plans for deployment of the proposed conversion proceeds. The business plan is required, under § 239.55(b), to be included in the mutual holding company’s conversion application. At a minimum, the business plan must address:
(i) The subsidiary savings association’s projected operations and activities for three years following the conversion. The business plan must describe how the conversion proceeds will be deployed at the savings association (and holding company, if applicable), what opportunities are available to reasonably achieve the planned deployment of conversion proceeds in the relevant proposed market areas, and how its deployment will provide a reasonable return on investment commensurate with investment risk, investor expectations, and industry norms, by the final year of the business plan. The business plan must include three years of projected financial statements. The business plan must provide that the subsidiary savings associations receive at least 50 percent of the net conversion proceeds. The Board may require that a larger percentage of proceeds be contributed to the subsidiary savings associations.
(ii) The mutual holding company’s plan for deploying conversion proceeds to meet credit and lending needs in the proposed market areas. The Board strongly discourages business plans that provide for a substantial investment in mortgage securities or other securities, except as an interim measure to facilitate orderly, prudent deployment of proceeds during the three years following the conversion, or as part of a properly managed leverage strategy.
(iii) The risks associated with the plan for deployment of conversion proceeds, and the effect of this plan on management resources, staffing, and facilities.
(iv) The expertise of the mutual holding company and saving association subsidiary’s management and board of directors, or that the mutual holding company has planned for adequate staffing and controls to prudently manage the growth, expansion, new investment, and other operations and activities proposed in its business plan.
(2) The mutual holding company may not project returns of capital or special dividends in any part of the business plan. A newly converted company may not plan on stock repurchases in the first year of the business plan.
(c) Management and board review of business plan. (1) The chief executive officer and members of the board of directors of the mutual holding company must review, and at least two-thirds of the board of directors must approve, the business plan.
(2) The chief executive officer and at least two-thirds of the board of directors of the mutual holding company must certify that the business plan accurately reflects the intended plans for deployment of conversion proceeds, and that any new initiatives reflected in the business plan are reasonably achievable. The mutual holding company must submit these certifications with its business plan, as part of the conversion application under paragraph (b) of this section.
(d) Board review of the business plan. (1) The Board will review the business plan to determine whether it demonstrates a safe and sound deployment of conversion proceeds, as part of its review of the conversion application. In making its determination, the Board will consider how the mutual holding company has addressed the applicable factors of paragraph (b) of this section. No single factor will be determinative. The Board will review every case on its merits.
(2) The mutual holding company must file its business plan with the appropriate Reserve Bank. The Board or appropriate Reserve Bank may request additional information, if necessary, to support its determination under paragraph (d)(1) of this section. The mutual holding company must file its business plan as a confidential exhibit to the Form AC.
(3) If the Board approves the application for conversion and the mutual holding company completes the conversion, the resulting stock holding company must operate within the parameters of the business plan. The Board must approve any material deviation from the business plan in writing prior to such material deviation.
(e) Disclosure of business plan. (1) The mutual holding company may discuss information about the conversion with individuals that it authorizes to prepare documents for the conversion.
(2) Except as permitted under paragraph (e)(1) of this section, the mutual holding company must keep all information about the conversion confidential until the board of directors adopts the plan of conversion.
(3) If the mutual holding company violates this section, the Board may require it to take remedial action. For example, the Board may require the mutual holding company to take any or all of the following actions:
(i) Publicly announce that the mutual holding company is considering a conversion;
(ii) Set an eligibility record date acceptable to the Board;
(iii) Limit the subscription rights of any person who violates or aids in a violation of this section; or
(iv) Take any other action to ensure that the conversion is fair and equitable.
§ 239.54 Plan of conversion.
(a) Adoption by the board of directors. Prior to filing an application for conversion, the board of directors of the mutual holding company must adopt a plan of conversion that conforms to §§ 239.59 through 239.62 and 239.63(b). The board of directors must adopt the plan by at least a two-thirds vote. The plan of conversion is required, under § 239.55(b), to be included in the conversion application.
(b) Contents of the plan of conversion. The mutual holding company must include the information included in §§ 239.59 through 239.62 and 239.63(b) in the plan of conversion. The Board may require the mutual holding company to delete or revise any provision in the plan of conversion if the Board determines the provision is inequitable; is detrimental to the mutual holding company, the account holders, other mutual holding companies, or other savings associations; or is contrary to public interest.
(c) Notice of board of directors’ approval of the plan of conversion – (1) Notice. The mutual holding company must promptly notify its members that the board of directors adopted a plan of conversion and that a copy of the plan is available for the members’ inspection in the mutual holding company’s home office and in each of the subsidiary savings association’s branch offices. The mutual holding company must mail a letter to each member or publish a notice in the local newspaper in every local community where the savings association has an office. The mutual holding company may also issue a press release. The Board may require broader publication, if necessary, to ensure adequate notice to the members.
(2) Contents of notice. The mutual holding company may include any of the following statements and descriptions in the letter, notice, or press release.
(i) The board of directors adopted a proposed plan to convert from mutual to stock form.
(ii) The mutual holding company will send its members a proxy statement with detailed information on the proposed conversion before the mutual holding company convenes a members’ meeting to vote on the conversion.
(iii) The members will have an opportunity to approve or disapprove the proposed conversion at a meeting. At least a majority of the eligible votes must approve the conversion.
(iv) The mutual holding company will not vote existing proxies to approve or disapprove the conversion. The mutual holding company will solicit new proxies for voting on the proposed conversion.
(v) The Board must approve the conversion before the conversion will be effective. The members will have an opportunity to file written comments, including objections and materials supporting the objections, with the Board.
(vi) The IRS must issue a favorable tax ruling, or a tax expert must issue an appropriate tax opinion, on the tax consequences of the conversion before the Board will approve the conversion. The ruling or opinion must indicate the conversion will be a tax-free reorganization.
(vii) The Board might not approve the conversion, and the IRS or a tax expert might not issue a favorable tax ruling or tax opinion.
(viii) Savings account holders will continue to hold accounts in the savings association with the same dollar amounts, rates of return, and general terms as existing deposits. The FDIC will continue to insure the accounts.
(ix) The mutual holding company’s conversion will not affect borrowers’ loans, including the amount, rate, maturity, security, and other contractual terms.
(x) The savings association’s business of accepting deposits and making loans will continue without interruption.
(xi) The current management and staff will continue to conduct current services for depositors and borrowers under current policies and in existing offices.
(xii) The subsidiary savings association may continue to be a member of the Federal Home Loan Bank System.
(xiii) The mutual holding company may substantively amend the proposed plan of conversion before the members’ meeting.
(xiv) The mutual holding company may terminate the proposed conversion.
(xv) After the Board approves the proposed conversion, the mutual holding company will send proxy materials providing additional information. After the mutual holding company sends proxy materials, members may telephone or write to the mutual holding company with additional questions.
(xvi) The proposed record date for determining the eligible account holders who are entitled to receive subscription rights to purchase the shares.
(xvii) A brief description of the circumstances under which supplemental eligible account holders will receive subscription rights to purchase the shares.
(xviii) A brief description of how voting members may participate in the conversion.
(xix) A brief description of how directors, officers, and employees will participate in the conversion.
(xx) A brief description of the proposed plan of conversion.
(xxi) The par value (if any) and approximate number of shares that will be issued and sold in the conversion.
(3) Other requirements. (i) The mutual holding company may not solicit proxies, provide financial statements, describe the benefits of conversion, or estimate the value of the shares upon conversion in the letter, notice, or press release.
(ii) If the mutual holding company responds to inquiries about the conversion, it may address only the matters listed in paragraph (c)(2) of this section.
(d) Amending a plan of conversion. The mutual holding company may amend its plan of conversion before it solicits proxies. After the mutual holding company solicits proxies, it may amend the plan of conversion only if the Board concurs.
§ 239.55 Filing requirements.
(a) Applications under this subpart. Any filing with the Board required under this subpart must be filed in accordance with § 238.14 of this chapter. The Board will review any filing made under this subpart in accordance with § 238.14 of this chapter.
(b) Requirements. (1) The application for conversion must include all of the following information.
(i) A plan of conversion meeting the requirements of § 239.54(b).
(ii) Pricing materials meeting the requirements paragraph (g)(2) of this section.
(iii) Proxy soliciting materials under § 239.57(d), including:
(A) A preliminary proxy statement with signed financial statements;
(B) A form of proxy meeting the requirements of § 239.57(b); and
(C) Any additional proxy soliciting materials, including press releases, personal solicitation instructions, radio or television scripts that the mutual holding company plans to use or furnish to the members, and a legal opinion indicating that any marketing materials comply with all applicable securities laws.
(iv) An offering circular described in § 239.58(a).
(v) The documents and information required by Form AC. The mutual holding company may obtain Form AC from the appropriate Reserve Bank and the Board’s Web site (http://www.federalreserve.gov).
(vi) Where indicated, written consents, signed and dated, of any accountant, attorney, investment banker, appraiser, or other professional who prepared, reviewed, passed upon, or certified any statement, report, or valuation for use. See Form AC, instruction B(7).
(vii) The business plan, submitted as a separately bound, confidential exhibit. See paragraph (c) of this section.
(viii) Any additional information the Board requests.
(2) The Board will not accept for filing, and will return, any application for conversion that is improperly executed, materially deficient, substantially incomplete, or that provides for unreasonable conversion expenses.
(c) Filing an application for conversion. (1) The mutual holding company must file the application for conversion on Form AC with the appropriate Reserve Bank.
(2) Upon receipt of an application under this subpart, the Reserve Bank will promptly furnish notice and a copy of the application to the primary federal supervisor of any subsidiary savings association. The primary supervisor will have 30 calendar days from the date of the letter giving notice in which to submit its views and recommendations to the Board.
(d) Confidential treatment of portions of an application for conversion. (1) The Board makes all filings under this subpart available to the public, but may keep portions of the application for conversion confidential under paragraph (d)(2) of this section.
(2) The mutual holding company may request the Board keep portions of the application confidential. To do so, the mutual holding company must separately bind and clearly designate as “confidential” any portion of the application for conversion that the mutual holding company deems confidential. The mutual holding company must provide a written statement specifying the grounds supporting the request for confidentiality. The Board will not treat as confidential the portion of the application describing how the mutual holding company plans to meet the Community Reinvestment Act (CRA) objectives. The CRA portion of the application may not incorporate by reference information contained in the confidential portion of the application.
(3) The Board will determine whether confidential information must be made available to the public under 5 U.S.C. 552 and part 261 of this chapter. The Board will advise the mutual holding company before it makes information the mutual holding company designated as “confidential” available to the public.
(e) Amending an application for conversion. To amend an application for conversion, the mutual holding company must:
(1) File an amendment with an appropriate facing sheet;
(2) Number each amendment consecutively;
(3) Respond to all issues raised by the Board; and
(4) Demonstrate that the amendment conforms to all applicable regulations.
(f) Notice of filing of application and comment process – (1) Public notice of an application for conversion. (i) The mutual holding company must publish a public notice of the application for conversion in accordance with the procedures in § 238.14 of this chapter. The mutual holding company must simultaneously prominently post the notice in its home office and in all of the branch offices of its subsidiary savings associations.
(ii) Promptly after publication, the mutual holding company must file a copy of any public notice and an affidavit of publication from each publisher with the appropriate Reserve Bank.
(iii) If the Board does not accept the application for conversion under § 239.55(g) and requires the mutual holding company to file a new application, the mutual holding company must publish and post a new notice and allow an additional 30 days for comment.
(2) Public comments. Commenters may submit comments on the application in accordance with the procedures in § 238.14 of this chapter. A commenter must file any comments with the appropriate Reserve Bank.
(g) Board review of the application for conversion – (1) Board action on a conversion application. The Board may approve an application for conversion only if:
(i) The conversion complies with this subpart;
(ii) The mutual holding company will meet all applicable regulatory capital requirements after the conversion; and
(iii) The conversion will not result in a taxable reorganization under the Internal Revenue Code of 1986, as amended.
(2) Board review of appraisal. The Board will review the appraisal required by paragraph (b)(1)(ii) of this section in determining whether to approve the application. The Board will review the appraisal under the following requirements.
(i) Independent persons experienced and expert in corporate appraisal, and acceptable to the Board, must prepare the appraisal report.
(ii) An affiliate of the appraiser may serve as an underwriter or selling agent, if the mutual holding company ensures that the appraiser is separate from the underwriter or selling agent affiliate and the underwriter or selling agent affiliate does not make recommendations or affect the appraisal.
(iii) The appraiser may not receive any fee in connection with the conversion other than for appraisal services.
(iv) The appraisal report must include a complete and detailed description of the elements of the appraisal, a justification for the appraisal methodology, and sufficient support for the conclusions.
(v) If the appraisal is based on a capitalization of the pro forma income, it must indicate the basis for determining the income to be derived from the sale of shares, and demonstrate that the earnings multiple used is appropriate, including future earnings growth assumptions.
(vi) If the appraisal is based on a comparison of the shares with outstanding shares of existing stock associations, the existing stock associations must be reasonably comparable in size, market area, competitive conditions, risk profile, profit history, and expected future earnings.
(vii) The Board may decline to process the application for conversion and deem it materially deficient or substantially incomplete if the initial appraisal report is materially deficient or substantially incomplete.
(viii) The mutual holding company may not represent or imply that the Board has approved the appraisal.
(3) Board review of compliance record. The Board will review the compliance record of the subsidiary savings association under the regulations applicable to the savings association and the business plan to determine how the conversion will affect the convenience and needs of its communities.
(i) Based on this review, the Board may approve the application, deny the application, or approve the application on the condition that the resulting stock holding company will improve the CRA performance or will address the particular credit or lending needs of the communities that it will serve.
(ii) The Board may deny the application if the business plan does not demonstrate that the proposed use of conversion proceeds will help the resulting stock holding company to meet the credit and lending needs of the communities that the resulting stock holding company will serve.
(4) The Board may request that the mutual holding company amend the application if further explanation is necessary, material is missing, or material must be corrected.
(5) The Board will deny the application if the application does not meet the requirements of this subpart, unless the Board waives the requirement under § 239.50(c).
(h) Judicial review. (1) Any person aggrieved by the Board’s final action on the application for conversion may ask the court of appeals of the United States for the circuit in which the principal office or residence of such person is located, or the U.S. Court of Appeals for the District of Columbia Circuit, to review the action under 12 U.S.C. 1467a(j), which provisions shall apply in all respects as if such final action were an order, subject to paragraph (h)(2) of this section.
(2) To obtain court review of the action, the aggrieved person must file a written petition requesting that the court modify, terminate, or set aside the final Board action. The aggrieved person must file the petition with the court within the later of 30 days after the Board publishes notice of its final action in the
§ 239.56 Vote by members.
(a) Mutual member approval of the plan of conversion. (1) After the Board approves the plan of conversion, the mutual holding company must submit the plan of conversion to its members for approval. The mutual holding company must obtain this approval at a meeting of its members.
(2) The members must approve the plan of conversion by a majority of the total outstanding votes.
(3) The members may vote in person or by proxy.
(4) The mutual holding company may notify eligible account holders or supplemental eligible account holders who are not voting members of the proposed conversion. The mutual holding company may include only the information in § 239.54(c) in the notice.
(b) Eligibility to vote for the plan of conversion. The mutual holding company determines members’ eligibility to vote by setting a voting record date. The mutual holding company must set a voting record date that is not more than 60 days nor less than 20 days before the meeting.
(c) Notifying members of the meeting. The mutual holding company must notify the members of the meeting to consider the conversion by sending the members a proxy statement.
(2) The mutual holding company must notify its members 20 to 45 days before the meeting.
(3) The mutual holding company must also notify each beneficial holder of an account at any subsidiary savings association held in a fiduciary capacity:
(i) If the subsidiary savings association is a federal association and the name of the beneficial holder is disclosed on the records of the subsidiary savings association; or
(ii) If the subsidiary savings association is a state-chartered association and the beneficial holder possesses voting rights under state law.
(d) Submissions to the Board after the members’ meeting. (1) Promptly after the members’ meeting, the mutual holding company must file all of the following information with the appropriate Reserve Bank:
(i) A certified copy of each adopted resolution on the conversion.
(ii) The total votes eligible to be cast.
(iii) The total votes represented in person or by proxy.
(iv) The total votes cast in favor of and against each matter.
(v) The percentage of votes necessary to approve each matter.
(vi) An opinion of counsel that the mutual holding company conducted the members’ meeting in compliance with all applicable state or federal laws and regulations.
(2) Promptly after completion of the conversion, the mutual holding company must submit to the appropriate Reserve Bank an opinion of counsel that the mutual holding company has complied with all laws applicable to the conversion.
§ 239.57 Proxy solicitation.
(a) Applicability of proxy solicitation provisions. (1) The mutual holding company must comply with these proxy solicitation provisions when the mutual holding company provides proxy solicitation material to members for the meeting to vote on the plan of conversion.
(2) Members of the mutual holding company must comply with these proxy solicitation provisions when they provide proxy solicitation materials to members for the meeting to vote on the conversion, pursuant to paragraph (f) of this section except where:
(i) The member solicits 50 people or fewer and does not solicit proxies on behalf of the mutual holding company; or
(ii) The member solicits proxies through newspaper advertisements after the board of directors adopts the plan of conversion. Any newspaper advertisements may include only the following information:
(A) The name of the mutual holding company;
(B) The reason for the advertisement;
(C) The proposal or proposals to be voted upon;
(D) Where a member may obtain a copy of the proxy solicitation material; and
(E) A request for the members of the mutual holding company to vote at the meeting.
(b) Form of proxy. The form of proxy must include all of the following:
(1) A statement in bold face type stating that management is soliciting the proxy.
(2) Blank spaces where the member must date and sign the proxy.
(3) Clear and impartial identification of each matter or group of related matters that members will vote upon. It must include any proposed charitable contribution as an item to be voted on separately.
(4) The phrase “Revocable Proxy” in bold face type (at least 18 point).
(5) A description of any charter or state law requirement that restricts or conditions votes by proxy.
(6) An acknowledgment that the member received a proxy statement before he or she signed the form of proxy.
(7) The date, time, and the place of the meeting, when available.
(8) A way for the member to specify by ballot whether he or she approves or disapproves of each matter that members will vote upon.
(9) A statement that management will vote the proxy in accordance with the member’s specifications.
(10) A statement in bold face type indicating how management will vote the proxy if the member does not specify a choice for a matter.
(c) Permissible use of proxies. (1) The mutual holding company may not use previously executed proxies for the plan of conversion vote. If members consider the plan of conversion at an annual meeting, the mutual holding company may vote proxies obtained through other proxy solicitations only on matters not related to the plan of conversion.
(2) The mutual holding company may vote a proxy obtained under this subpart on matters that are incidental to the conduct of the meeting. The mutual holding company or its management may not vote a proxy obtained under this subpart at any meeting other than the meeting (or any adjournment of the meeting) to vote on the plan of conversion.
(d) Proxy statement requirements – (1) Content requirements. The mutual holding company must prepare the proxy statement in compliance with this subpart and Form PS. The mutual holding company may obtain Form PS from the appropriate Reserve Bank and the Board’s Web site (http://www.federalreserve.gov).
(2) Other requirements. (i) The Board will review the proxy solicitation material in its review of the application for conversion.
(ii) The mutual holding company must provide a written proxy statement to the members before or at the same time the mutual holding company provides any other soliciting material. The mutual holding company must mail proxy solicitation material to the members no later than ten days after the Board approves the conversion.
(e) Filing revised proxy materials. (1) The mutual holding company must file revised proxy materials as an amendment to the application for conversion.
(2) To revise the proxy solicitation materials, the mutual holding company must file:
(i) Revised proxy materials as required by Form PS;
(ii) Revised form of proxy, if applicable; and
(iii) Any additional proxy solicitation material subject to paragraph (d) of this section.
(3) The mutual holding company must clearly indicate changes from the prior filing.
(4) The mutual holding company must file a definitive copy of all proxy solicitation material, in the form in which the mutual holding company furnishes the material to the members. The mutual holding company must file no later than the date that it sends or gives the proxy solicitation material to the members. The mutual holding company must indicate the date that it plans to release the materials.
(5) Unless the Board requests the mutual holding company to do so, the mutual holding company does not have to file copies of replies to inquiries from the members or copies of communications that merely request members to sign and return proxy forms.
(f) Mailing proxy solicitation material. (1) The mutual holding company must mail the member’s proxy solicitation material if:
(i) The board of directors adopted a plan of conversion;
(ii) A member requests in writing that the mutual holding company mail the proxy solicitation material; and
(iii) The member agrees to defray reasonable expenses of the mutual holding company.
(2) As soon as practicable after the mutual holding company receives a request under paragraph (f)(1) of this section, the mutual holding company must mail or otherwise furnish the following information to the member:
(i) The approximate number of members that the mutual holding company solicited or will solicit, or the approximate number of members of any group of account holders that the member designates; and
(ii) The estimated cost of mailing the proxy solicitation material for the member.
(3) The mutual holding company must mail proxy solicitation material to the designated members promptly after the member furnishes the materials, envelopes (or other containers), and postage (or payment for postage) to the mutual holding company.
(4) The mutual holding company is not responsible for the content of a member’s proxy solicitation material.
(5) A member may furnish other members its own proxy solicitation material, subject to the rules in this section.
(g) Prohibited solicitations. (1) False or misleading statements. (i) No one may use proxy solicitation material for the members’ meeting if the material contains any statement which, considering the time and the circumstances of the statement:
(A) Is false or misleading with respect to any material fact;
(B) Omits any material fact that is necessary to make the statements not false or misleading; or
(C) Omits any material fact that is necessary to correct a statement in an earlier communication that has become false or misleading.
(ii) No one may represent or imply that the Board determined that the proxy solicitation material is accurate, complete, not false or not misleading, or passed upon the merits of or approved any proposal.
(2) Other prohibited solicitations. No person may solicit:
(i) An undated or post-dated proxy;
(ii) A proxy that states it will be dated after the date it is signed by a member;
(iii) A proxy that is not revocable at will by the member; or
(iv) A proxy that is part of another document or instrument.
(3) If a solicitation violates this section, the Board may require remedial measures, including:
(i) Correction of the violation by a retraction and a new solicitation;
(ii) Rescheduling the members’ meeting; or
(iii) Any other actions necessary to ensure a fair vote.
(4) The Board may also bring an enforcement action against the violator for violations of this section.
(h) Re-soliciting proxies. If the mutual holding company amends its application for conversion, the Board may require it to re-solicit proxies for the members’ meeting as a condition of approval of the amendment.
§ 239.58 Offering circular.
(a) Filing requirements. (1) The mutual holding company must prepare and file the offering circular with the appropriate Reserve Bank in compliance with this subpart and Form OC. The mutual holding company may obtain Form OC from the Reserve Bank and the Board’s Web site (http://www.federalreserve.gov).
(2) The mutual holding company must condition the stock offering upon member approval of the plan of conversion.
(3) The Board will review the Form OC and may comment on the included disclosures and financial statements.
(4) The mutual holding company must file a revised offering circular, final offering circular, and any post-effective amendment to the final offering circular.
(5) The Board will not approve the adequacy or accuracy of the offering circular or the disclosures.
(b) Distribution of the offering circular. (1) The mutual holding company may distribute a preliminary offering circular at the same time as or after the mutual holding company mails the proxy statement to its members.
(2) The mutual holding company must distribute the offering circular in accordance with this subpart and with all applicable securities laws.
(3) The mutual holding company must distribute the offering circular to persons listed in the plan of conversion no later than ten days after the Board approves the conversion.
(c) Post-effective amendments to the offering circular. (1) The mutual holding company must file a post-effective amendment to the offering circular with the Board when a material event or change of circumstance occurs.
(2) After the Securities and Exchange Commission declares the post-effective amendment effective, the mutual holding company must immediately deliver the amendment to each person who subscribed for or ordered shares in the offering.
(3) The post-effective amendment must indicate that each person may increase, decrease, or rescind their subscription or order.
(4) The post-effective offering period must remain open no less than 10 days nor more than 20 days, unless the Board approves a longer rescission period.
§ 239.59 Offers and sales of stock.
(a) Purchase priorities. The mutual holding company must offer to sell the conversion shares in the following order:
(1) Eligible account holders.
(2) Tax-qualified employee stock ownership plans.
(3) Supplemental eligible account holders.
(4) Other voting members who have subscription rights.
(5) The community, the community and the general public, or the general public.
(b) Offering conversion shares. (1) The mutual holding company may offer to sell the conversion shares if the Board approves the conversion, subject to compliance with requirements of the Securities and Exchange Commission.
(2) The offer may commence at the same time as the proxy solicitation of the members begins.
(c) Pricing conversion shares. (1) The conversion shares must be sold at a uniform price per share and at a total price that is equal to the estimated pro forma market value of the shares after conversion.
(2) The maximum price must be no more than 15 percent above the midpoint of the estimated price range in the offering circular.
(3) The minimum price must be no more than 15 percent below the midpoint of the estimated price range in the offering circular.
(4) If the Board permits, the maximum price of conversion shares sold may be increased. The maximum price, as adjusted, must be no more than 15 percent above the maximum price computed under paragraph (c)(2) of this section.
(5) The maximum price must be between $5 and $50 per share.
(6) The mutual holding company must include the estimated price in any preliminary offering circular.
(d) Selling conversion shares. (1) The mutual holding company must distribute order forms to all eligible account holders, supplemental eligible account holders, and other voting members to enable them to subscribe for the conversion shares they are permitted under the plan of conversion. The mutual holding company may either send the order forms with the offering circular or after it distributes the offering circular.
(2) The mutual holding company may sell the conversion shares in a community offering, a public offering, or both. The mutual holding company may begin the community offering, the public offering, or both at any time during the subscription offering or upon conclusion of the subscription offering.
(3) The mutual holding company may pay underwriting commissions (including underwriting discounts). The Board may object to the payment of unreasonable commissions. The mutual holding company may reimburse an underwriter for accountable expenses in a subscription offering if the public offering is limited. If no public offering occurs, the mutual holding company may pay an underwriter a consulting fee. The Board may object to the payment of unreasonable consulting fees.
(4) If the mutual holding company conducts the community offering, the public offering, or both at the same time as the subscription offering, it must fill all subscription orders first.
(5) The mutual holding company must prepare the order form in compliance with this subpart and Form OF. The mutual holding company may obtain Form OF from the Reserve Bank and from the Board’s Web site (www.federalreserve.gov).
(e) Prohibited sales practices. (1) In connection with offers, sales, or purchases of conversion shares under this subpart, the mutual holding company and its directors, officers, agents, or employees may not:
(i) Employ any device, scheme, or artifice to defraud;
(ii) Obtain money or property by means of any untrue statement of a material fact or any omission of a material fact necessary to make the statements, in light of the circumstances under which they were made, not misleading; or
(iii) Engage in any act, transaction, practice, or course of business that operates or would operate as a fraud or deceit upon a purchaser or seller.
(2) During the conversion, no person may:
(i) Transfer, or enter into any agreement or understanding to transfer, the legal or beneficial ownership of subscription rights for the conversion shares or the underlying securities to the account of another;
(ii) Make any offer, or any announcement of an offer, to purchase any of the conversion shares from anyone but the mutual holding company; or
(iii) Knowingly acquire more than the maximum purchase allowable under the plan of conversion.
(3) The restrictions in paragraphs (e)(2)(i) and (e)(2)(ii) of this section do not apply to offers for more than 10 percent of any class of conversion shares by:
(i) An underwriter or a selling group, acting on behalf of the mutual holding company or resulting stock holding company, that makes the offer with a view toward public resale; or
(ii) One or more of the tax-qualified employee stock ownership plans so long as the plan or plans do not beneficially own more than 25 percent of any class of the equity securities in the aggregate.
(4) Any person that violates the restrictions in paragraphs (e)(2)(i) and (e)(2)(ii) of this section may face prosecution or other legal action.
(f) Payment for conversion shares. (1) A subscriber may purchase conversion shares with cash, by a withdrawal from a savings account, or a withdrawal from a certificate of deposit. If a subscriber purchases conversion shares by a withdrawal from a certificate of deposit, the mutual holding company or its subsidiary savings association may not assess a penalty for the withdrawal.
(2) The mutual holding company may not extend credit to any person to purchase the conversion shares.
(g) Interest on payments for conversion shares. (1) The mutual holding company or its subsidiary savings association must pay interest from the date it receives a payment for conversion shares until the date it completes or terminates the conversion. The mutual holding company or its subsidiary savings association must pay interest at no less than the passbook rate for amounts paid in cash, check, or money order.
(2) If a subscriber withdraws money from a savings account to purchase conversion shares, the mutual holding company or its subsidiary savings association must pay interest on the payment until the mutual holding company completes or terminates the conversion as if the withdrawn amount remained in the account.
(3) If a depositor fails to maintain the applicable minimum balance requirement because he or she withdraws money from a certificate of deposit to purchase conversion shares, the mutual holding company or its subsidiary savings association may cancel the certificate and pay interest at no less than the passbook rate on any remaining balance.
(h) Subscription rights for each eligible account holder and each supplemental eligible account holder. (1) The mutual holding company must give each eligible account holder subscription rights to purchase conversion shares in an amount equal to the greater of:
(i) The maximum purchase limitation established for the community offering or the public offering under paragraph (p) of this section;
(ii) One-tenth of one percent of the total stock offering; or
(iii) Fifteen times the following number: The total number of conversion shares that the mutual holding company will issue, multiplied by the following fraction: the numerator is the total qualifying deposit of the eligible account holder, and the denominator is the total qualifying deposits of all eligible account holders. The mutual holding company must round down the product of this multiplied fraction to the next whole number.
(2) The mutual holding company must give subscription rights to purchase shares to each supplemental eligible account holder in the same amount as described in paragraph (h)(1) of this section, except that the mutual holding company must compute the fraction described in paragraph (h)(1)(iii) of this section as follows: the numerator is the total qualifying deposit of the supplemental eligible account holder, and the denominator is the total qualifying deposits of all supplemental eligible account holders.
(i) Officers, directors, and their associates as eligible account holders. The officers, directors, and their associates of the mutual holding company and subsidiary savings association may be eligible account holders. However, if an officer, director, or his or her associate receives subscription rights based on increased deposits in the year before the eligibility record date, the mutual holding company must subordinate subscription rights for these deposits to subscription rights exercised by other eligible account holders.
(j) Other voting members eligible to purchase conversion shares. (1) The mutual holding company must give rights to purchase the conversion shares in the conversion to voting members who are neither eligible account holders nor supplemental eligible account holders. The mutual holding company must allocate rights to each voting member that are equal to the greater of:
(i) The maximum purchase limitation established for the community offering and the public offering under paragraph (p) of this section; or
(ii) One-tenth of one percent of the total stock offering.
(2) The mutual holding company must subordinate the voting members’ rights to the rights of eligible account holders, tax-qualified employee stock ownership plans, and supplemental eligible account holders.
(k) Purchase limitations for officers, directors, and their associates. (1) When the mutual holding company converts, the officers, directors, and their associates of the mutual holding company and subsidiary savings association may not purchase, in the aggregate, more than the following percentage of the total stock offering:
| Institution size | Officer and director purchases (percent) |
|---|---|
| $50,000,000 or less | 35 |
| $50,000,001-100,000,000 | 34 |
| $100,000,001-150,000,000 | 33 |
| $150,000,001-200,000,000 | 32 |
| $200,000,001-250,000,000 | 31 |
| $250,000,001-300,000,000 | 30 |
| $300,000,001-350,000,000 | 29 |
| $350,000,001-400,000,000 | 28 |
| $400,000,001-450,000,000 | 27 |
| $450,000,001-500,000,000 | 26 |
| Over $500,000,000 | 25 |
(2) The purchase limitations in this section do not apply to shares held in tax-qualified employee stock benefit plans that are attributable to the officers, directors, and their associates.
(l) Allocating conversion shares in the event of oversubscription. (1) If the conversion shares are oversubscribed by the eligible account holders, the mutual holding company must allocate shares among the eligible account holders so that each, to the extent possible, may purchase 100 shares.
(2) If the conversion shares are oversubscribed by the supplemental eligible account holders, the mutual holding company must allocate shares among the supplemental eligible account holders so that each, to the extent possible, may purchase 100 shares.
(3) If a person is an eligible account holder and a supplemental eligible account holder, the mutual holding company must include the eligible account holder’s allocation in determining the number of conversion shares that the mutual holding company may allocate to the person as a supplemental eligible account holder.
(4) For conversion shares that the mutual holding company does not allocate under paragraphs (l)(1) and (l)(2) of this section, the mutual holding company must allocate the shares among the eligible or supplemental eligible account holders equitably, based on the amounts of qualifying deposits. The mutual holding company must describe this method of allocation in its plan of conversion.
(5) If shares remain after the mutual holding company has allocated shares as provided in paragraphs (l)(1) and (l)(2) of this section, and if the voting members oversubscribe, the mutual holding company must allocate the conversion shares among those members equitably. The mutual holding company must describe the method of allocation in its plan of conversion.
(m) Employee stock ownership plan purchase of conversion shares. (1) The tax-qualified employee stock ownership plan of the mutual holding company may purchase up to 10 percent of the total offering of the conversion shares.
(2) If the Board approves a revised stock valuation range as described in paragraph (c)(5) of this section, and the final conversion stock valuation range exceeds the former maximum stock offering range, the mutual holding company may allocate conversion shares to the tax-qualified employee stock ownership plan, up to the 10 percent limit in paragraph (m)(1) of this section.
(3) If the tax-qualified employee stock ownership plan is not able to or chooses not to purchase stock in the offering, it may, with prior Board approval and appropriate disclosure in the offering circular, purchase stock in the open market, or purchase authorized but unissued conversion shares.
(4) The mutual holding company may include stock contributed to a charitable organization in the conversion in the calculation of the total offering of conversion shares under paragraphs (m)(1) and (m)(2) of this section, unless the Board objects on supervisory grounds.
(n) Purchase limitations. (1) The mutual holding company may limit the number of shares that any person, group of associated persons, or persons otherwise acting in concert, may subscribe to up to five percent of the total stock sold.
(2) If the mutual holding company sets a limit of five percent under paragraph (n)(1) of this section, it may modify that limit with Board approval to provide that any person, group of associated persons, or persons otherwise acting in concert subscribing for five percent, may purchase between five and ten percent as long as the aggregate amount that the subscribers purchase does not exceed 10 percent of the total stock offering.
(3) The mutual holding company may require persons exercising subscription rights to purchase a minimum number of conversion shares. The minimum number of shares must equal the lesser of the number of shares obtained by a $500 subscription or 25 shares.
(4) In setting purchase limitations under this section, the mutual holding company may not aggregate conversion shares attributed to a person in the tax-qualified employee stock ownership plan with shares purchased directly by, or otherwise attributable to, that person.
(o) Purchase preference for persons in the local community. (1) In the subscription offering, subject to the purchase priorities set forth in paragraph (a) of this section, the mutual holding company may give a purchase preference to eligible account holders, supplemental eligible account holders, and voting members residing in the local community.
(2) In the community offering, the mutual holding company must give a purchase preference to natural persons residing in the local community.
(p) Conditions on community offerings and public offerings. (1) If the mutual holding company offers conversion shares in a community offering, a public offering, or both, it must offer and sell the stock to achieve a widespread distribution of the stock.
(2) If the mutual holding company offers shares in a community offering, a public offering, or both, it must first fill orders for the stock up to a maximum of two percent of the conversion stock on a basis that will promote a widespread distribution of stock. The mutual holding company must allocate any remaining shares on an equal number of shares per order basis until it fills all orders.
§ 239.60 Completion of the offering.
(a) Deadline for completing the sale of stock. The mutual holding company must complete all sales of the stock within 45 calendar days after the last day of the subscription period, unless the offering is extended under paragraph (b) of this section.
(b) Offering period extension. (1) The mutual holding company must request, in writing, an extension of any offering period.
(2) The Board may grant extensions of time to sell the shares. The Board will not grant any single extension of more than 90 days.
(3) If the Board grants the request for an extension of time, the mutual holding company must provide a post-effective amendment to the offering circular under § 239.58(c) to each person who subscribed for or ordered stock. The amendment must indicate that the Board extended the offering period and that each person who subscribed for or ordered stock may increase, decrease, or rescind their subscription or order within the time remaining in the extension period.
§ 239.61 Completion of the conversion.
(a) Completion of the conversion. (1) In the plan of conversion, the mutual holding company must set a date by which the conversion must be completed. This date must not be more than 24 months from the date that the members approve the plan of conversion. The date, once set, may not be extended by the mutual holding company or by the Board. The mutual holding company must terminate the conversion if it is not completed by that date.
(2) The conversion is complete on the date that the mutual holding company accepts the offers for stock of the resulting stock holding company.
(b) Termination of the conversion. (1) The members may terminate the conversion by failing to approve the conversion at the members’ meeting.
(2) The mutual holding company may terminate the conversion before the members’ meeting.
(3) The mutual holding company may terminate the conversion after the members’ meeting only if the Board concurs.
(c) Voting rights for stockholders following conversion. The resulting stock holding company must provide the stockholders with exclusive voting rights.
(d) Rights of savings account holders. The resulting stock holding company must provide a liquidation account for each eligible and supplemental eligible account holder under § 239.62(a)(1)-(3).
§ 239.62 Liquidation accounts.
(a) Liquidation account. (1) A liquidation account represents the potential interest of eligible account holders and supplemental eligible account holders in the mutual holding company’s net worth at the time of conversion. The resulting stock holding company must maintain a sub-account to reflect the interest of each account holder.
(2) Before the resulting stock holding company may provide a liquidation distribution to common stockholders, the resulting stock holding company must give a liquidation distribution to those eligible account holders and supplemental eligible account holders who hold savings accounts from the time of conversion until liquidation.
(3) The resulting stock holding company may not record the liquidation account in the financial statements. The resulting stock holding company must disclose the liquidation account in the footnotes to the financial statements.
(4) The initial balance of the liquidation account is the net worth in the statement of financial condition included in the final offering circular.
(b) Liquidation sub-accounts. (1)(i) The resulting stock holding company determines the initial sub-account balance for a savings account held by an eligible account holder by multiplying the initial balance of the liquidation account by the following fraction: The numerator is the qualifying deposit in the savings account on the eligibility record date. The denominator is total qualifying deposits of all eligible account holders on that date.
(ii) The resulting stock holding company determines the initial sub-account balance for a savings account held by a supplemental eligible account holder by multiplying the initial balance of the liquidation account by the following fraction: The numerator is the qualifying deposit in the savings account on the supplemental eligibility record date. The denominator is total qualifying deposits of all supplemental eligible account holders on that date.
(iii) If an account holder holds a savings account on the eligibility record date and a separate savings account on the supplemental eligibility record date, the resulting stock holding company must compute separate sub-accounts for the qualifying deposits in the savings account on each record date.
(2) The resulting stock holding company may not increase the initial sub-account balances. The resulting stock holding company must decrease the initial balance under § 239.62(d) as depositors reduce or close their accounts.
(c) Retention of voting rights based on liquidation sub-accounts. Eligible account holders or supplemental eligible account holders do not retain any voting rights based on their liquidation sub-accounts.
(d) Adjusting liquidation sub-accounts. (1)(i) The resulting stock holding company must reduce the balance of an eligible account holder’s or supplemental eligible account holder’s sub-account if the deposit balance in the account holder’s savings account at the close of business on any annual closing date, which for purposes of this section is the fiscal year end, after the relevant eligibility record dates is less than:
(A) The deposit balance in the account holder’s savings account at the close of business on any other annual closing date after the relevant eligibility record date; or
(B) The qualifying deposits in the account holder’s savings account on the relevant eligibility record date.
(ii) The reduction must be proportionate to the reduction in the deposit balance.
(2) If the resulting stock holding company reduces the balance of a liquidation sub-account, the resulting stock holding company may not subsequently increase it if the deposit balance increases.
(3) The resulting stock holding company is not required to adjust the liquidation account and sub-account balances at each annual closing date if it maintains sufficient records to make the computations if a liquidation subsequently occurs.
(4) The resulting stock holding company must maintain the liquidation sub-account for each account holder as long as the account holder maintains an account with the same social security number or tax identification number, as applicable.
(5) If there is a complete liquidation, the resulting stock holding company must provide each account holder with a liquidation distribution in the amount of the sub-account balance.
(e) Liquidation defined. (1) For purposes of this subpart, a liquidation is a sale of the assets and settlement of the liabilities with the intent to cease operations and close. Upon liquidation, the resulting stock holding company must return the charter to the governmental agency that issued it. The government agency must cancel the charter.
(2) A merger, consolidation, or similar combination or transaction with another depository institution, is not a liquidation. If the resulting stock holding company is involved in such a transaction, the surviving institution must assume the liquidation account.
(f) Effect of liquidation on net worth. The liquidation account does not affect the net worth.
§ 239.63 Post-conversion.
(a) Management stock benefit plans. (1) During the 12 months after the conversion, the resulting stock holding company may implement a stock option plan (Option Plan), an employee stock ownership plan or other tax-qualified employee stock benefit plan (collectively, ESOP), and a management recognition plan (MRP), provided the resulting stock holding company meets all of the following requirements.
(i) The resulting stock holding company discloses the plans in the proxy statement and offering circular and indicates in the offering circular that there will be a separate shareholder vote on the Option Plan and the MRP at least six months after the conversion. No shareholder vote is required to implement the ESOP. The ESOP must be tax-qualified.
(ii) The Option Plan does not exceed more than ten percent of the number of shares that the resulting stock holding company issued in the conversion.
(iii)(A) The ESOP and MRP do not exceed, in the aggregate, more than ten percent of the number of shares that the resulting stock holding company issued in the conversion. If the resulting stock holding company has tangible capital of ten percent or more following the conversion, the Board may permit the ESOP and MRP to represent, in the aggregate, up to 12 percent of the number of shares issued in the conversion; and
(B) The MRP does not exceed more than three percent of the number of shares that the resulting stock holding company issued in the conversion. If the resulting stock holding company has tangible capital of ten percent or more after the conversion, the Board may permit the MRP to represent up to four percent of the number of shares that the resulting stock holding company issued in the conversion.
(iv) No individual receives more than 25 percent of the shares under any plan.
(v) The directors who are not the officers do not receive more than five percent of the shares of the MRP or Option Plan individually, or 30 percent of any such plan in the aggregate.
(vi) The shareholders approve each of the Option Plan and the MRP by a majority of the total votes eligible to be cast at a duly called meeting before the resulting stock holding company establishes or implements the plan. The resulting stock holding company may not hold this meeting until six months after the conversion.
(vii) When the resulting stock holding company distributes proxies or related material to shareholders in connection with the vote on a plan, the resulting stock holding company states that the plan complies with Board regulations and that the Board does not endorse or approve the plan in any way. The resulting stock holding company may not make any written or oral representations to the contrary.
(viii) The resulting stock holding company does not grant stock options at less than the market price at the time of grant.
(ix) The resulting stock holding company does not fund the Option Plan or the MRP at the time of the conversion.
(x) The plan does not begin to vest earlier than one year after shareholders approve the plan, and does not vest at a rate exceeding 20 percent per year.
(xi) The plan permits accelerated vesting only for disability or death, or if the resulting stock holding company undergoes a change of control.
(xii) The plan provides that the executive officers or directors must exercise or forfeit their options in the event the institution becomes critically undercapitalized under the applicable regulatory capital requirements, is subject to Board enforcement action, or receives a capital directive under § 263.83 of this chapter.
(xiii) The resulting stock holding company files a copy of the proposed Option Plan or MRP with the Board and certifies to the Board that the plan approved by the shareholders is the same plan that the resulting stock holding company filed with, and disclosed in, the proxy materials distributed to shareholders in connection with the vote on the plan.
(xiv) The resulting stock holding company files the plan and the certification with the Board within five calendar days after the shareholders approve the plan.
(2) The resulting stock holding company may provide dividend equivalent rights or dividend adjustment rights to allow for stock splits or other adjustments to the stock in the ESOP, MRP, and Option Plan.
(3) The restrictions in paragraph (a)(1) of this section do not apply to plans implemented more than 12 months after the conversion, provided that materials pertaining to any shareholder vote regarding such plans are not distributed within the 12 months after the conversion. If a plan adopted in conformity with paragraph (a)(1) of this section is amended more than 12 months following the conversion, the shareholders must ratify any material deviations to the requirements in paragraph (a)(1) of this section.
(b) Restrictions on the sale of conversion shares by directors, officers, and their associates. (1) Directors and officers who purchase conversion shares may not sell the shares for one year after the date of purchase, except that in the event of the death of the officer or director, the successor in interest may sell the shares.
(2) The resulting stock holding company must include notice of the restriction described in paragraph (b)(1) of this section on each certificate of stock that a director or officer purchases during the conversion or receives in connection with a stock dividend, stock split, or otherwise with respect to such restricted shares.
(3) The resulting stock holding company must instruct the stock transfer agent about the transfer restrictions in this section.
(4) For three years after the resulting stock holding company converts, the officers, directors, and their associates may purchase stock of the resulting stock holding company only from a broker or dealer registered with the Securities and Exchange Commission. However, the officers, directors, and their associates may engage in a negotiated transaction involving more than one percent of the outstanding stock, and may purchase stock through any of the management or employee stock benefit plans.
(c) Repurchase of conversion shares. (1) The resulting stock holding company may not repurchase its shares in the first year after the conversion except:
(i) In extraordinary circumstances, the resulting stock holding company may make open market repurchases of up to five percent of the outstanding stock in the first year after the conversion if the resulting stock holding company files a notice under paragraph (d)(1) of this section and the Board does not disapprove the repurchase. The Board will not approve such repurchases unless the repurchase meets the standards in paragraph (d)(3) of this section, and the repurchase is consistent with paragraph (c)(3) of this section.
(ii) The resulting stock holding company may repurchase qualifying shares of a director or conduct a Board approved repurchase pursuant to an offer made to all shareholders of the stock holding company.
(iii) Repurchases to fund management recognition plans that have been ratified by shareholders do not count toward the repurchase limitations in this section. Repurchases in the first year to fund such plans require prior written notification to the Board.
(iv) Purchases to fund tax qualified employee stock benefit plans do not count toward the repurchase limitations in this section.
(2) After the first year, the resulting stock holding company may repurchase the shares, subject to all other applicable regulatory and supervisory restrictions and paragraph (c)(3) of this section.
(3) All stock repurchases are subject to the following restrictions.
(i) The resulting stock holding company may not repurchase the shares if the repurchase will reduce its applicable capital levels below the amount required for the liquidation account under § 239.62(a). The resulting stock holding company must comply with the capital distribution requirements of this subpart.
(ii) The restrictions on share repurchases apply to a charitable organization under § 239.64(b). The resulting stock holding company must aggregate purchases of shares by the charitable organization with the repurchases.
(d) Board review of repurchase of conversion shares. (1) To repurchase stock in the first year following conversion, other than repurchases under paragraphs (c)(1)(iii) or (c)(1)(iv) of this section, the resulting stock holding company must file a written notice with the appropriate Reserve Bank. The resulting stock holding company must provide the following information:
(i) The proposed repurchase program;
(ii) The effect of the repurchases on the regulatory capital and other capital levels; and
(iii) The purpose of the repurchases and, if applicable, an explanation of the extraordinary circumstances necessitating the repurchases.
(2) The resulting stock holding company must file the notice with the appropriate Reserve Bank at least thirty days before the resulting stock holding company begins the repurchase program. The Board may extend its review of the notice for an additional sixty days.
(3) The resulting stock holding company may not repurchase the shares if the Board objects to the repurchase program. The Board will not object to the repurchase program if:
(i) The repurchase program will not adversely affect the financial condition of the resulting savings association;
(ii) The resulting stock holding company submits sufficient information to evaluate the proposed repurchases;
(iii) The resulting stock holding company demonstrate extraordinary circumstances and a compelling and valid business purpose for the share repurchases; and
(iv) The repurchase program would not be contrary to other applicable regulations.
(e) Declaring and paying dividends following conversion. The resulting stock holding company may declare or pay a dividend on its shares after it converts if:
(1) The dividend will not reduce the regulatory capital below the amount required for the liquidation account under § 239.62(a);
(2) The resulting stock holding company complies with all applicable regulatory capital requirements after it declares or pays dividends;
(3) The resulting stock holding company complies with the capital distribution requirements under this subpart; and
(4) The resulting stock holding company does not return any capital, other than ordinary dividends, to purchasers during the term of the business plan submitted with the conversion.
(f) Eligibility to acquire shares after conversion. (1) For three years after the resulting stock holding company converts, no person may, directly or indirectly, acquire or offer to acquire the beneficial ownership of more than ten percent of any class of the equity securities without the Board’s prior written approval. If a person violates this prohibition, the resulting stock holding company may not permit the person to vote shares in excess of ten percent, and may not count the shares in excess of ten percent in any shareholder vote.
(2) A person acquires beneficial ownership of more than ten percent of a class of shares when he or she holds any combination of the stock or revocable or irrevocable proxies under circumstances that give rise to a conclusive control determination or rebuttable control determination under §§ 238.21(a) and (d) of this chapter. The Board will presume that a person has acquired shares if the acquiror entered into a binding written agreement for the transfer of shares. For purposes of this section, an offer is made when it is communicated. An offer does not include non-binding expressions of understanding or letters of intent regarding the terms of a potential acquisition.
(3) Notwithstanding the restrictions in this section:
(i) Paragraphs (f)(1) and (f)(2) of this section do not apply to any offer with a view toward public resale made exclusively to the resulting stock holding company, to the underwriters, or to a selling group acting on behalf of the resulting savings association.
(ii) Unless the Board objects in writing, any person may offer or announce an offer to acquire up to one percent of any class of shares. In computing the one percent limit, the person must include all of his or her acquisitions of the same class of shares during the prior 12 months.
(iii) A corporation whose ownership is, or will be, substantially the same as the ownership may acquire or offer to acquire more than ten percent of the common stock, if it makes the offer or acquisition more than one year after the resulting stock holding company converts.
(iv) One or more of the tax-qualified employee stock benefit plans may acquire the shares, if the plan or plans do not beneficially own more than 25 percent of any class of shares of the resulting savings association in the aggregate.
(v) An acquiror does not have to file a separate application to obtain Board approval under paragraph (f)(1) of this section, if the acquiror files an application under part 238 of this chapter that specifically addresses the criteria listed under paragraph (f)(4) of this section and the resulting stock holding company does not oppose the proposed acquisition.
(4) The Board may deny an application under paragraph (f)(1) of this section if the proposed acquisition:
(i) Is contrary to the purposes of this subpart;
(ii) Is manipulative or deceptive;
(iii) Subverts the fairness of the conversion;
(iv) Is likely to injure the resulting stock holding company;
(v) Is inconsistent with the plan to meet the credit and lending needs of the proposed market area;
(vi) Otherwise violates laws or regulations; or
(vii) Does not prudently deploy the conversion proceeds.
(g) Additional requirements that apply following conversion. After conversion, the resulting stock holding company must:
(1) Promptly register the shares under the Securities Exchange Act of 1934 (15 U.S.C. 78a-78jj, as amended). The resulting stock holding company may not deregister the shares for three years.
(2) Encourage and assist a market maker to establish and to maintain a market for the shares. A market maker for a security is a dealer who:
(i) Regularly publishes bona fide competitive bid and offer quotations for the security in a recognized inter-dealer quotation system;
(ii) Furnishes bona fide competitive bid and offer quotations for the security on request; or
(iii) May effect transactions for the security in reasonable quantities at quoted prices with other brokers or dealers.
(3) Use the best efforts to list the shares on a national or regional securities exchange or on the National Association of Securities Dealers Automated Quotation system.
(4) File all post-conversion reports that the Board requires.
§ 239.64 Contributions to charitable organizations.
(a) Forming a charitable organization as part of a conversion. When a mutual holding company converts to the stock form, it may form a charitable organization. Its contributions to the charitable organization are governed by the requirements of paragraphs (b) through (f) of this section.
(b) Donating conversion shares or conversion proceeds to a charitable organization. Some of the conversion shares or proceeds may be contributed to a charitable organization if:
(1) The plan of conversion provides for the proposed contribution;
(2) The members approve the proposed contribution; and
(3) The IRS either has approved, or approves within two years after formation, the charitable organization as a tax-exempt charitable organization under the Internal Revenue Code.
(c) Member approval of charitable contributions. At the meeting to consider conversion of the mutual holding company, the members must separately approve by at least a majority of the total eligible votes, a contribution of conversion shares or proceeds. If the mutual holding company has a subsidiary holding company with minority shareholders, or if the subsidiary savings association has minority shareholders, and the mutual holding company is adding a charitable contribution as part of a second step stock conversion, it must also have the minority shareholders separately approve the charitable contribution by a majority of their total eligible votes.
(d) Charitable organization contribution limits. A reasonable amount of conversion shares or proceeds may be contributed to a charitable organization, if the contribution will not exceed limits for charitable deductions under the Internal Revenue Code and the Board does not object on supervisory grounds. If the mutual holding company or resulting stock holding company is well-capitalized pursuant to § 238.62 of this chapter, the Board generally will not object if it contributes an aggregate amount of eight percent or less of the conversion shares or proceeds.
(e) Charitable organization requirements. The charitable organization’s charter (or trust agreement) and gift instrument must provide that:
(1) The charitable organization’s primary purpose is to serve and make grants in the local community;
(2) As long as the charitable organization controls shares, it must vote those shares in the same ratio as all other shares voted on each proposal considered by the shareholders;
(3) For at least five years after its organization, one seat on the charitable organization’s board of directors (or board of trustees) is reserved for an independent director (or trustee) from the local community. This director may not be the officer, director, or employee, or the affiliate’s officer, director, or employee, and should have experience with local community charitable organizations and grant making; and
(4) For at least five years after its organization, one seat on the charitable organization’s board of directors (or board of trustees) is reserved for a director from the board of directors or the board of directors of an acquiror or resulting institution in the event of a merger or acquisition of the organization.
(5) The Board may examine the charitable organization at the charitable organization’s expense;
(6) The charitable organization must comply with all supervisory directives that the Board imposes;
(7) The charitable organization must annually provide the Board with a copy of the annual report that the charitable organization submitted to the IRS;
(8) The charitable organization must operate according to written policies adopted by its board of directors (or board of trustees), including a conflict of interest policy; and
(9) The charitable organization may not engage in self-dealing, and must comply with all laws necessary to maintain its tax-exempt status under the Internal Revenue Code.
(f) Conflicts of interest involving the directors of the mutual holding company or resulting stock holding company. (1) An individual who is the director, officer, or employee, or a person who has the power to direct the management or policies, or otherwise owes a fiduciary duty to the mutual holding company or resulting stock holding company and who will serve as an officer, director, or employee of the charitable organization, is subject to the following obligations:
(i) The individual must not advance their own personal or business interests, or those of others with whom the individual has a personal or business relationship, at the expense of the mutual holding company or resulting stock holding company;
(ii) If the individual has an interest in a matter or transaction before the board of directors, the individual must:
(A) Disclose to the board all material nonprivileged information relevant to the board’s decision on the matter or transaction, including the existence, nature and extent of the individual’s interests, and the facts known to the individual as to the matter or transaction under consideration;
(B) Refrain from participating in the board’s discussion of the matter or transaction; and
(C) Recuse themselves from voting on the matter or transaction (if the individual is a director). See Form AC, which provides further information or operating plans and conflict of interest plans. The mutual holding company may obtain Form AC from the appropriate Reserve Bank and the Board’s Web site at http://www.federalreserve.gov.
(2) Before the board of directors may adopt a plan of conversion that includes a charitable organization, the mutual holding company must identify the directors that will serve on the charitable organization’s board. These directors may not participate in the board’s discussions concerning contributions to the charitable organization, and may not vote on the matter.
(3) The stock certificates of shares contributed to the charitable organization or that the charitable organization otherwise acquires must bear the following legend: “The board of directors must consider the shares that this stock certificate represents as voted in the same ratio as all other shares voted on each proposal considered by the shareholders, as long as the shares are controlled by the charitable organization.”
(4) As long as the charitable organization controls shares, the resulting stock holding company must consider those shares as voted in the same ratio as all of the shares voted on each proposal considered by the shareholders.
(5) After the stock offering is complete, the resulting stock holding company must submit an executed copy of the following documents to the appropriate Reserve Bank: the charitable organization’s charter and bylaws (or trust agreement), operating plan (within six months after the stock offering), conflict of interest policy, and the gift instrument for the contributions of either stock or cash to the charitable organization.
§ 239.65 Voluntary supervisory conversions.
(a) Voluntary supervisory conversion. (1) The mutual holding company must comply with this section and § 239.66 to engage in a voluntary supervisory conversion. This subpart applies to all voluntary supervisory conversions under sections 10(o)(7) and 10(p) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o) and (p)).
(2) Sections 239.50 through 239.64 also apply to a voluntary supervisory conversion, unless a requirement is clearly inapplicable.
(b) Conducting a voluntary supervisory conversion. In conducting a voluntary supervisory conversion, the mutual holding company may:
(1) Sell its shares to the public;
(2) Convert into stock form by merging into a state-chartered corporation; or
(3) Sell its shares directly to an acquiror, who may be an individual, company, depository institution, or depository institution holding company.
(c) Member rights in a voluntary supervisory conversion. Members of the mutual holding company do not have the right to approve or participate in a voluntary supervisory conversion, and will not have any legal or beneficial ownership interests in the converted association, unless the Board provides otherwise. The members may have interests in a liquidation account, if one is established.
(d) Eligibility for a voluntary supervisory conversion. A mutual holding company may be eligible to engage in a voluntary supervisory conversion if:
(1) Either the mutual holding company or its subsidiary savings association is significantly undercapitalized under applicable regulatory capital requirements (or the mutual holding company or its subsidiary savings association is undercapitalized under applicable regulatory capital requirements and a standard conversion that would make it adequately capitalized is not feasible) and will be a viable entity following the conversion;
(2) Severe financial conditions threaten stability of the mutual holding company, and a conversion is likely to improve its financial condition.
(e) A mutual holding company or its subsidiary savings association will be a viable entity following the conversion if it satisfies all of the following:
(1) It will be adequately capitalized as a result of the conversion;
(2) It, the proposed conversion, and its acquiror(s) comply with applicable supervisory policies;
(3) The transaction is in the best interest of the mutual holding company and its subsidiary savings associations, and the best interest of the Deposit Insurance Fund and the public; and
(4) The transaction will not injure or be detrimental to the mutual holding company and its subsidiary savings associations, the Deposit Insurance Fund, or the public interest.
(f) Plan of voluntary supervisory conversion. A majority of the board of directors of the mutual holding company must approve a plan of voluntary supervisory conversion. The mutual holding company must include all of the following information in the plan of voluntary supervisory conversion.
(1) The name and address of the mutual holding company.
(2) The name, address, date and place of birth, and social security number or tax identification number, as applicable, of each proposed purchaser of conversion shares and a description of that purchaser’s relationship to the mutual holding company.
(3) The title, per-unit par value, number, and per-unit and aggregate offering price of shares that the mutual holding company will issue.
(4) The number and percentage of shares that each investor will purchase.
(5) The aggregate number and percentage of shares that each director, officer, and any affiliates or associates of the director or officer will purchase.
(6) A description of any liquidation account.
(7) Certified copies of all resolutions of the board of directors relating to the conversion.
(g) Voluntary supervisory conversion application. The mutual holding company must include all of the following information and documents in a voluntary supervisory conversion application to the Board under this subpart:
(1) Eligibility. (i) Evidence establishing that the mutual holding company meets the eligibility requirements under paragraph (d) of this section.
(ii) An opinion of qualified, independent counsel or an independent, certified public accountant regarding the tax consequences of the conversion, or an IRS ruling indicating that the transaction qualifies as a tax-free reorganization.
(2) Plan of conversion. A plan of voluntary supervisory conversion that complies with paragraph (e) of this section.
(3) Business plan. A business plan that complies with § 239.53(b), when required by the Board.
(4) Financial data. (i) The most recent audited financial statements and Thrift Financial Report. The mutual holding company must explain how its current capital levels or the capital levels of its subsidiary savings associations make it eligible to engage in a voluntary supervisory conversion under paragraph (d) of this section.
(ii) A description of the estimated conversion expenses.
(iii) Evidence supporting the value of any non-cash asset contributions. Appraisals must be acceptable to the Board and the non-cash asset must meet all other Board policy guidelines.
(iv) Pro forma financial statements that reflect the effects of the transaction. The mutual holding company must identify the tangible, core, and risk-based capital levels and show the adjustments necessary to compute the capital levels. The mutual holding company must prepare the pro forma statements in conformance with Board regulations and policy.
(5) Proposed documents. (i) The proposed charter and bylaws.
(ii) The proposed stock certificate form.
(6) Agreements. (i) A copy of any agreements between the mutual holding company and proposed purchasers.
(ii) A copy and description of all existing and proposed employment contracts. The mutual holding company must describe the term, salary, and severance provisions of the contract, the identity and background of the officer or employee to be employed, and the amount of any conversion shares to be purchased by the officer or employee or his or her affiliates or associates.
(7) Related applications. (i) All filings required under the securities offering rules of subpart E of this part.
(ii) Any required Holding Company Act application or Control Act notice under part 238 of this chapter.
(iii) A subordinated debt application, if applicable.
(iv) Applications for permission to organize a stock savings and loan holding company and for approval of a merger.
(v) A statement describing any other applications required under federal or state banking laws for all transactions related to the conversion, copies of all dispositive documents issued by regulatory authorities relating to the applications, and, if requested by the Board, copies of the applications and related documents.
(8) Waiver request. A description of any of the features of the application that do not conform to the requirements of this subpart, including any request for waiver of any of these requirements.
(h) Offers and sales of stock. If the mutual holding company converts under this subpart, the conversion shares must be offered and sold in compliance with § 239.59.
(i) Post-conversion acquisition of shares. For three years after the completion of a voluntary supervisory conversion, neither the resulting stock holding company nor the principal shareholder(s) may acquire shares from minority shareholders without the Board’s prior approval.
§ 239.66 Board review of the voluntary supervisory conversion application.
(a) Board review of a voluntary supervisory conversion application. The Board will generally approve the application to engage in a voluntary supervisory conversion unless it determines:
(1) The mutual holding company does not meet the eligibility requirements for a voluntary supervisory conversion under §§ 239.65(d) or because the proceeds from the sale of the conversion stock, less the expenses of the conversion, would be insufficient to satisfy any applicable viability requirement;
(2) The transaction is detrimental to or would cause potential injury to the mutual holding company, its subsidiary savings association, or the Deposit Insurance Fund or is contrary to the public interest;
(3) The mutual holding company or the acquiror, or the controlling parties or directors and officers of the mutual holding company or the acquiror, have engaged in unsafe or unsound practices in connection with the voluntary supervisory conversion; or
(4) The mutual holding company fails to justify an employment contract incidental to the conversion, or the employment contract will be an unsafe or unsound practice or represent a sale of control. In a voluntary supervisory conversion, the Board generally will not approve employment contracts of more than one year for the existing management.
(b) Conditions the Board may impose on an approval. (1) The Board will condition approval of a voluntary supervisory conversion application on all of the following.
(i) The conversion stock sale must be complete within three months after the Board approves the application. The Board may grant an extension for good cause.
(ii) The mutual holding company and the resulting stock holding company must comply with all filing requirements of subpart E of this part.
(iii) The mutual holding company must submit an opinion of independent legal counsel indicating that the sale of the shares complies with all applicable state securities law requirements.
(iv) The mutual holding company and the resulting stock holding company must comply with all applicable laws, rules, and regulations.
(v) The mutual holding company and the resulting stock holding company must satisfy any other requirements or conditions the Board may impose.
(2) The Board may condition approval of a voluntary supervisory conversion application on either of the following:
(i) The mutual holding company and the resulting stock holding company must satisfy any conditions and restrictions the Board imposes to prevent unsafe or unsound practices, to protect the Deposit Insurance Fund and the public interest, and to prevent potential injury or detriment to the mutual holding company before and after the conversion. The Board may impose these conditions and restrictions on the mutual holding company and the resulting stock holding company (before and after the conversion), the acquiror, controlling parties, or directors and officers of the mutual holding company or the acquiror; or
(ii) The mutual holding company or the resulting stock holding company must infuse a larger amount of capital, if necessary, for safety and soundness reasons.
Appendix A to Part 239 – Mutual Holding Company Model Charter
Section 1: Corporate title. The name of the mutual holding company is __(the “Mutual Holding Company”).
Section 2: Duration. The duration of the Mutual Holding Company is perpetual.
Section 3: Purpose and powers. The purpose of the Mutual Holding Company is to pursue any or all of the lawful objectives of a federal mutual savings and loan holding company chartered under section 10(o) of the Home Owners’ Loan Act, 12 U.S.C. 1467a(o), and to exercise all of the express, implied, and incidental powers conferred thereby and all acts amendatory thereof and supplemental thereto, subject to the Constitution and the laws of the United States as they are now in effect, or as they may hereafter be amended, and subject to all lawful and applicable rules, regulations, and orders of the Federal Reserve Board (“Board”).
Section 4: Capital. The Mutual Holding Company shall have no capital stock.
Section 5: Members. [The content of this section 5 shall be identical to the content of the parallel section in the charter of the reorganizing association, with the following exceptions: (A) Any provisions conferring membership rights upon borrowers of the reorganizing association shall be eliminated and replaced with provisions grandfathering those rights in accordance with 12 CFR 239.5; and (B) appropriate changes shall be made to indicate that membership rights in the mutual holding company derive from deposit accounts in and, to the extent of any grandfather provisions, borrowings from the resulting association. Set forth below is an example of how section 5 should appear in the charter of a mutual holding company formed by a reorganizing association whose charter conforms to the model charter prescribed for federal mutual savings associations for calendar year 1989. Additional changes to this section 5 may be required whenever a mutual holding company reorganization involves an acquiree association, or a mutual holding company makes a post-reorganization acquisition of a mutual savings association, so as to preserve the membership rights of the members of the acquired association consistent with 12 CFR 239.5.]
All holders of the savings, demand, or other authorized accounts of __[insert the name of the resulting association] (the “Association”) are members of the Mutual Holding Company. With respect to all questions requiring action by the members of the Mutual Holding Company, each holder of an account in the Association shall be permitted to cast one vote for each $100, or fraction thereof, of the withdrawal value of the member’s account. In addition, borrowers from the Association as of __[insert the date of the reorganization or any earlier date as of which new borrowings ceased to result in membership rights] shall be entitled to one vote for the period of time during which such borrowings are in existence. [The foregoing sentence should be included only if the charter of the reorganizing association confers voting rights on any borrowers.] No member, however, shall cast more than one thousand votes. All accounts shall be nonassessable.
Section 6. Directors. The Mutual Holding Company shall be under the direction of a board of directors. The authorized number of directors shall not be fewer than five nor more than fifteen, as fixed in the Mutual Holding Company’s bylaws, except that the number of directors may be decreased to a number less than five or increased to a number greater than fifteen with the prior approval of the Board.
Section 7: Capital, surplus, and distribution of earnings. [The content of this section 7 shall be identical to the content of the parallel section in the charter of the reorganizing association, except for changes made to indicate that distribution rights in the mutual holding company derive from deposit accounts in the resulting association, any changes required to provide that the Board shall be the approving authority in instances where the charter requires regulatory approval of distributions, and any other changes necessary to accommodate the mutual holding company format. Set forth below is an example of how section 7 should appear in the charter of a mutual holding company formed by a reorganizing association whose charter conforms to the model charter prescribed for federal mutual savings associations for calendar year 1989. Additional changes to this section 7 may be required whenever a mutual holding company reorganization involves an acquiree association, or a mutual holding company makes a post-reorganization acquisition of a mutual savings association, so as to preserve the membership rights of the members of the acquired association consistent with 12 CFR 239.5].
The Mutual Holding Company shall distribute net earnings to account holders of the Association on such basis and in accordance with such terms and conditions as may from time to time be authorized by the Board, provided that the Mutual Holding Company may establish minimum account balance requirements for account holders to be eligible for distributions of earnings.
All holders of accounts of the Association shall be entitled to equal distribution of the assets of the Mutual Holding Company, pro rata to the value of their accounts in the Association, in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Mutual Holding Company.
Section 8. Amendment. Adoption of any preapproved charter amendment shall be effective after such preapproved amendment has been approved by the members at a legal meeting. Any other amendment, addition, change, or repeal of this charter must be approved by the Board prior to approval by the members at a legal meeting and shall be effective upon filing with the Board in accordance with regulatory procedures.
Appendix B to Part 239 – Subsidiary Holding Company of a Mutual Holding Company Model Charter
Section 1. Corporate title. The full corporate title of the mutual holding company (“MHC”) subsidiary holding company is XXX.
Section 2. Domicile. The domicile of the MHC subsidiary holding company shall be in the city of _, in the State of _.
Section 3. Duration. The duration of the MHC subsidiary holding company is perpetual.
Section 4. Purpose and powers. The purpose of the MHC subsidiary holding company is to pursue any or all of the lawful objectives of a federal mutual holding company chartered under section 10(o) of the Home Owners’ Loan Act, 12 U.S.C. 1467a(o), and to exercise all of the express, implied, and incidental powers conferred thereby and by all acts amendatory thereof and supplemental thereto, subject to the Constitution and laws of the United States as they are now in effect, or as they may hereafter be amended, and subject to all lawful and applicable rules, regulations, and orders of the Board of Governors of the Federal Reserve System (“Board”).
Section 5. Capital stock. The total number of shares of all classes of the capital stock that the MHC subsidiary holding company has the authority to issue is _, all of which shall be common stock of par [or if no par is specified then shares shall have a stated] value of _ per share. The shares may be issued from time to time as authorized by the board of directors without the approval of its shareholders, except as otherwise provided in this section 5 or to the extent that such approval is required by governing law, rule, or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the par [or stated] value. Neither promissory notes nor future services shall constitute payment or part payment for the issuance of shares of the MHC subsidiary holding company. The consideration for the shares shall be cash, tangible or intangible property (to the extent direct investment in such property would be permitted to the MHC subsidiary holding company), labor, or services actually performed for the MHC subsidiary holding company, or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such property, labor, or services, as determined by the board of directors of the MHC subsidiary holding company, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, that part of the retained earnings of the MHC subsidiary holding company that is transferred to common stock or paid-in capital accounts upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance.
Except for shares issued in the initial organization of the MHC subsidiary holding company, no shares of capital stock (including shares issuable upon conversion, exchange, or exercise of other securities) shall be issued, directly or indirectly, to officers, directors, or controlling persons (except for shares issued to the parent mutual holding company) of the MHC subsidiary holding company other than as part of a general public offering or as qualifying shares to a director, unless the issuance or the plan under which they would be issued has been approved by a majority of the total votes eligible to be cast at a legal meeting.
The holders of the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holder, except as to the cumulation of votes for the election of directors, unless the charter provides that there shall be no such cumulative voting. Subject to any provision for a liquidation account, in the event of any liquidation, dissolution, or winding up of the MHC subsidiary holding company, the holders of the common stock shall be entitled, after payment or provision for payment of all debts and liabilities of the MHC subsidiary holding company, to receive the remaining assets of the MHC subsidiary holding company available for distribution, in cash or in kind. Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock.
Section 6. Preemptive rights. Holders of the capital stock of the MHC subsidiary holding company shall not be entitled to preemptive rights with respect to any shares of the MHC subsidiary holding company which may be issued.
Section 7. Directors. The MHC subsidiary holding company shall be under the direction of a board of directors. The authorized number of directors, as stated in the MHC subsidiary holding company’s bylaws, shall not be fewer than five nor more than fifteen except when a greater or lesser number is approved by the Board, or his or her delegate.
Section 8. Amendment of charter. Except as provided in Section 5, no amendment, addition, alteration, change or repeal of this charter shall be made, unless such is proposed by the board of directors of the MHC subsidiary holding company, approved by the shareholders by a majority of the votes eligible to be cast at a legal meeting, unless a higher vote is otherwise required, and approved or preapproved by the Board.
Appendix C to Part 239 – Mutual Holding Company Model Bylaws
The term “trustees” may be substituted for the term “directors.”
1. Annual meeting of members. The annual meeting of the members of the mutual holding company for the election of directors and for the transaction of any other business of the mutual holding company shall be held, as designated by the board of directors, at a location within the state that constitutes the principal place of business of the mutual holding company, or at any other convenient place the board of directors may designate, at (insert date and time within 150 days after the end of the mutual holding company’s fiscal year, if not a legal holiday, or if a legal holiday then on the next succeeding day not a legal holiday). At each annual meeting, the officers shall make a full report of the financial condition of the mutual holding company and of its progress for the preceding year and shall outline a program for the succeeding year.
2. Special meetings of members. Special meetings of the members of the mutual holding company may be called at any time by the president or the board of directors and shall be called by the president, a vice president, or the secretary upon the written request of members of record, holding in the aggregate at least one-tenth of the voting capital of the mutual holding company. Such written request shall state the purpose of the meeting and shall be delivered at the principal place of business of the mutual holding company addressed to the president. For purposes of this section, “voting capital” means FDIC-insured deposits as of the voting record date. Annual and special meetings shall be conducted in accordance with the most current edition of Robert’s Rules of Order or any other set of written procedures agreed to by the board of directors.
3. Notice of meeting of members. Notice of each meeting shall be either published once a week for the two successive calendar weeks (in each instance on any day of the week) immediately prior to the week in which such meeting shall convene, in a newspaper printed in the English language and of general circulation in the city or county in which the principal place of business of the mutual holding company is located, or mailed postage prepaid at least (insert number no less than 15) days and not more than (insert number not more than 45) days prior to the date on which such meeting shall convene, to each of its members of record at the last address appearing on the books of the mutual holding company. Such notice shall state the name of the mutual holding company, the place of the meeting, the date and time when it shall convene, and the matters to be considered. A similar notice shall be posted in a conspicuous place in each of the offices of the mutual holding company during the 14 days immediately preceding the date on which such meeting shall convene. If any member, in person or by authorized attorney, shall waive in writing notice of any meeting of members, notice thereof need not be given to such member. When any meeting is adjourned for 30 days or more, notice of the adjournment and reconvening of the meeting shall be given as in the case of the original meeting.
4. Fixing of record date. For the purpose of determining members entitled to notice of or to vote at any meeting of members or any adjournment thereof, or in order to make a determination of members for any other proper purpose, the board of directors shall fix in advance a record date for any such determination of members. Such date shall be not more than 60 days nor fewer than 10 days prior to the date on which the action, requiring such determination of members, is to be taken. The member entitled to participate in any such action shall be the member of record on the books of the mutual holding company on such record date. The number of votes which each member shall be entitled to cast at any meeting of the members shall be determined from the books of the mutual holding company as of such record date. Any member of such record date who ceases to be a member prior to such meeting shall not be entitled to vote at that meeting. The same determination shall apply to any adjourned meeting.
5. Member quorum. Any number of members present and voting, represented in person or by proxy, at a regular or special meeting of the members shall constitute a quorum. A majority of all votes cast at any meeting of the members shall determine any question, unless otherwise required by regulation. Directors, however, are elected by a plurality of the votes cast at an election of directors. At any adjourned meeting any business may be transacted which might have been transacted at the meeting as originally called. Members present at a duly constituted meeting may continue to transact business until adjournment.
6. Voting by proxy. Voting at any annual or special meeting of the members may be by proxy pursuant to the rules and regulations of the Board of Governors of the Federal Reserve System (Board), provided, that no proxies shall be voted at any meeting unless such proxies shall have been placed on file with the secretary of the mutual holding company, for verification, prior to the convening of such meeting. Proxies may be given telephonically or electronically as long as the holder uses a procedure for verifying the identity of the member. All proxies with a term greater than eleven months or solicited at the expense of the mutual holding company must run to the board of directors as a whole, or to a committee appointed by a majority of such board. Accounts held by an administrator, executor, guardian, conservator or receiver may be voted in person or by proxy by such person. Accounts held by a trustee may be voted by such trustee either in person or by proxy, in accordance with the terms of the trust agreement, but no trustee shall be entitled to vote accounts without a transfer of such accounts into the trustee name. Accounts held in trust in an IRA or Keogh Account, however, may be voted by the mutual holding company if no other instructions are received. Joint accounts shall be entitled to no more than 1000 votes, and any owner may cast all the votes unless the mutual holding company has otherwise been notified in writing.
7. Communication between members. Communication between members shall be subject to any applicable rules or regulations of the Board. No member, however, shall have the right to inspect or copy any portion of any books or records of a mutual holding company containing: (i) a list of depositors in or borrowers from such mutual holding company; (ii) their addresses; (iii) individual deposit or loan balances or records; or (iv) any data from which such information could reasonably be constructed.
8. Number of directors, membership. The number of directors shall be __[not fewer than five nor more than fifteen], except where authorized by the Board. Each director shall be a member of the mutual holding company. Directors shall be elected for periods of one to three years and until their successors are elected and qualified, but if a staggered board is chosen, provision shall be made for the election of approximately one-third or one-half of the board each year, as appropriate.
9. Meetings of the board. The board of directors shall meet regularly without notice at the principal place of business of the mutual holding company at least once each month at an hour and date fixed by resolution of the board, provided that the place of meeting may be changed by the directors. Special meetings of the board may be held at any place specified in a notice of such meeting and shall be called by the secretary upon the written request of the chairman or of three directors. All special meetings shall be held upon at least 24 hours written notice to each director unless notice is waived in writing before or after such meeting. Such notice shall state the place, date, time, and purposes of such meeting. A majority of the authorized directors shall constitute a quorum for the transaction of business. The act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board. Action may be taken without a meeting if unanimous written consent is obtained for such action. The board may also permit telephonic participation at meetings. The meetings shall be under the direction of a chairman, appointed annually by the board, or in the absence of the chairman, the meetings shall be under the direction of the president.
10. Officers, employees, and agents. Annually at the meeting of the board of directors of the mutual holding company following the annual meeting of the members of the mutual holding company, the board shall elect a president, one or more vice presidents, a secretary, and a treasurer or comptroller: Provided, that the offices of president and secretary may not be held by the same person and a vice president may also be the treasurer or comptroller. The board may appoint such additional officers, employees, and agents as it may from time to time determine. The term of office of all officers shall be one year or until their respective successors are elected and qualified. Any officer may be removed at any time by the board with or without cause, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the person so removed. In the absence of designation from time to time of powers and duties by the board, the officers shall have such powers and duties as generally pertain to their respective offices. Any indemnification by the mutual holding company of the mutual holding company’s personnel is subject to any applicable rules or regulations of the Board.
11. Vacancies, resignation or removal of directors. Members of the mutual holding company shall elect directors by ballot: Provided, that in the event of a vacancy on the board between meetings of members, the board of directors may, by their affirmative vote, fill such vacancy, even if the remaining directors constitute less than a quorum. A director elected to fill a vacancy shall be elected to serve only until the next election of directors by the members. Any director may resign at any time by sending a written notice of such resignation to the mutual holding company delivered to the secretary. Unless otherwise specified therein such resignation shall take effect upon receipt by the secretary. More than three consecutive absences from regular meetings of the board, unless excused by resolution of the board, shall automatically constitute a resignation, effective when such resignation is accepted by the board. At a meeting of members called expressly for that purpose, directors or the entire board may be removed, only with cause, by a vote of the holders of a majority of the shares then entitled to vote at an election of directors.
12. Powers of the board. The board of directors shall have the power: (a) By resolution, to appoint from among its members and remove an executive committee, which committee shall have and may exercise the powers of the board between the meetings of the board, but no such committee shall have the authority of the board to amend the charter or bylaws, adopt a plan of merger, consolidation, dissolution, or provide for the disposition of all or substantially all the property and assets of the mutual holding company. Such committee shall not operate to relieve the board, or any member thereof, of any responsibility imposed by law; (b) To appoint and remove by resolution the members of such other committees as may be deemed necessary and prescribe the duties thereof; (c) To fix the compensation of directors, officers, and employees; and to remove any officer or employee at any time with or without cause; (d) To limit payments on capital which may be accepted; and (e) To exercise any and all of the powers of the mutual holding company not expressly reserved by the charter to the members.
13. Execution of instruments, generally. All documents and instruments or writings of any nature shall be signed, executed, verified, acknowledged, and delivered by such officers, agents, or employees of the mutual holding company or any one of them and in such manner as from time to time may be determined by resolution of the board. All notes, drafts, acceptances, checks, endorsements, and all evidences of indebtedness of the mutual holding company whatsoever shall be signed by such officer or officers or such agent or agents of the mutual holding company and in such manner as the board may from time to time determine. Endorsements for deposit to the credit of the mutual holding company in any of its duly authorized depositories shall be made in such manner as the board may from time to time determine. Proxies to vote with respect to shares or accounts of other mutual holding companies or stock of other corporations owned by, or standing in the name of, the mutual holding company may be executed and delivered from time to time on behalf of the mutual holding company by the president or a vice president and the secretary or an assistant secretary of the mutual holding company or by any other persons so authorized by the board.
14. Nominating committee. The chairman, at least 30 days prior to the date of each annual meeting, shall appoint a nominating committee of three individuals who are members of the mutual holding company. Such committee shall make nominations for directors in writing and deliver to the secretary such written nominations at least 15 days prior to the date of the annual meeting, which nominations shall then be posted in a prominent place in the principal place of business for the 15-day period prior to the date of the annual meeting, except in the case of a nominee substituted as a result of death or other incapacity. Provided such committee is appointed and makes such nominations, no nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by members are made in writing and delivered to the secretary of the mutual holding company at least 10 days prior to the date of the annual meeting, which nominations shall then be posted in a prominent place in the principal place of business for the 10-day period prior to the date of the annual meeting, except in the case of a nominee substituted as a result of death or other incapacity. Ballots bearing the names of all individuals nominated by the nominating committee and by other members prior to the annual meeting shall be provided for use by the members at the annual meeting. If at any time the chairman shall fail to appoint such nominating committee, or the nominating committee shall fail or refuse to act at least 15 days prior to the annual meeting, nominations for directors may be made at the annual meeting by any member and shall be voted upon.
15. New business. Any new business to be taken up at the annual meeting, including any proposal to increase or decrease the number of directors of the mutual holding company, shall be stated in writing and filed with the secretary of the mutual holding company at least 30 days before the date of the annual meeting, and all business so stated, proposed, and filed shall be considered at the annual meeting; but no other proposal shall be acted upon at the annual meeting. Any member may make any other proposal at the annual meeting and the same may be discussed and considered; but unless stated in writing and filed with the secretary 30 days before the meeting, such proposal shall be laid over for action at an adjourned, special, or regular meeting of the members taking place at least 30 days thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of the reports of officers and committees, but in connection with such reports no new business shall be acted upon at such annual meeting unless stated and filed as herein provided.
16. Seal. The seal shall be two concentric circles between which shall be the name of the mutual holding company. The year of incorporation, the word “Incorporated” or an emblem may appear in the center.
17. Amendment. Adoption of any bylaw amendment pursuant to § 239.15 of the Board’s regulations, as long as consistent with applicable law, rules and regulations, and which adequately addresses the subject and purpose of the stated by law section, shall be effective after (i) approval of the amendment by a majority vote of the authorized board, or by a vote of the members of the mutual holding company at a legal meeting; and (ii) receipt of any applicable regulatory approval. When a mutual holding company fails to meet its quorum requirement solely due to vacancies on the board, the bylaws may be amended by an affirmative vote of a majority of the sitting board.
18. Age limitations. [Bylaws on age limitations must comply with all Federal laws, such as the Age Discrimination in Employment Act and the Employee Retirement Income Security Act.]
(a) Directors. No individual __ years of age shall be eligible for election, reelection, appointment, or reappointment to the board of the mutual holding company. No director shall serve as such beyond the annual meeting of the mutual holding company immediately following the director becoming __(fill in age used above), except that a director serving on __(fill in bylaw adoption date) may complete the term as director. This age limitation does not apply to an advisory director.
(b) Officers. No individual __ years of age shall be eligible for election, reelection, appointment, or reappointment as an officer of the mutual holding company. No officer shall serve beyond the annual meeting of the mutual holding company immediately following the officer becoming __(fill in age used above), except that an officer serving on __(fill in bylaw adoption date) may complete the term. However, an officer shall, at the option of the board, retire at age __ if the officer has served in an executive or high policy-making post for at least two years immediately prior to retirement and is immediately entitled to nonforfeitable annual retirement benefits of at least __.
Appendix D to Part 239 – Subsidiary Holding Company of a Mutual Holding Company Model Bylaws
The home office of the Subsidiary Holding Company shall be at ________ [set forth the full address] in the County of ________ , in the State of ________ .
Section 1. Place of Meetings. All annual and special meetings of shareholders shall be held at the home office of the Subsidiary Holding Company or at such other convenient place as the board of directors may determine.
Section 2. Annual Meeting. A meeting of the shareholders of the Subsidiary Holding Company for the election of directors and for the transaction of any other business of the Subsidiary Holding Company shall be held annually within 150 days after the end of the Subsidiary Holding Company’s fiscal year on the __of __ if not a legal holiday, and if a legal holiday, then on the next day following which is not a legal holiday, at __, or at such other date and time within such 150-day period as the board of directors may determine.
Section 3. Special Meetings. Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by the regulations of the Board of Governors of the Federal Reserve System (“Board”), may be called at any time by the chairman of the board, the president, or a majority of the board of directors, and shall be called by the chairman of the board, the president, or the secretary upon the written request of the holders of not less than one-tenth of all of the outstanding capital stock of the Subsidiary Holding Company entitled to vote at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered to the home office of the Subsidiary Holding Company addressed to the chairman of the board, the president, or the secretary.
Section 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with the most current edition of Robert’s Rules of Order unless otherwise prescribed by regulations of the Board or these bylaws or the board of directors adopts another written procedure for the conduct of meetings. The board of directors shall designate, when present, either the chairman of the board or president to preside at such meetings.
Section 5. Notice of Meetings. Written notice stating the place, day, and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered not fewer than 20 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, or the secretary, or the directors calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the Subsidiary Holding Company as of the record date prescribed in section 6 of this article II with postage prepaid. When any shareholders’ meeting, either annual or special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 30 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken.
Section 6. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days and, in case of a meeting of shareholders, not fewer than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment.
Section 7. Voting Lists. At least 20 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the Subsidiary Holding Company shall make a complete list of the shareholders of record entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address and the number of shares held by each. This list of shareholders shall be kept on file at the home office of the Subsidiary Holding Company and shall be subject to inspection by any shareholder of record or the shareholder’s agent at any time during usual business hours for a period of 20 days prior to such meeting. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder of record or any shareholder’s agent during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. In lieu of making the shareholder list available for inspection by shareholders as provided in the preceding paragraph, the board of directors may elect to follow the procedures prescribed in § 239.26(d) of the Board’s regulations as now or hereafter in effect.
Section 8. Quorum. A majority of the outstanding shares of the Subsidiary Holding Company entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to constitute less than a quorum. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number of shareholders voting together or voting by classes is required by law or the charter. Directors, however, are elected by a plurality of the votes cast at an election of directors.
Section 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his or her duly authorized attorney in fact. Proxies may be given telephonically or electronically as long as the holder uses a procedure for verifying the identity of the shareholder. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid more than eleven months from the date of its execution except for a proxy coupled with an interest.
Section 10. Voting of Shares in the Name of Two or More Persons. When ownership stands in the name of two or more persons, in the absence of written directions to the Subsidiary Holding Company to the contrary, at any meeting of the shareholders of the Subsidiary Holding Company any one or more of such shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree.
Section 11. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent, or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name. Shares held in trust in an IRA or Keogh Account, however, may by voted by the Subsidiary Holding Company if no other instructions are received. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer into his or her name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. Neither treasury shares of its own stock held by the Subsidiary Holding Company nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Subsidiary Holding Company, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. [If charter authorizes cumulative voting, the following Section 12 shall apply, otherwise renumber Sections 13-16 as Sections 12-15.]
Section 12. Cumulative Voting. Every shareholder entitled to vote at an election for directors shall have the right to vote, in person or by proxy, the number of shares owned by the shareholder for as many persons as there are directors to be elected and for whose election the shareholder has a right to vote, or to cumulate the votes by giving one candidate as many votes as the number of such directors to be elected multiplied by the number of shares shall equal or by distributing such votes on the same principle among any number of candidates.
Section 13. Inspectors of Election. In advance of any meeting of shareholders, the board of directors may appoint any individual other than nominees for office as inspectors of election to act at such meeting or any adjournment. The number of inspectors shall be either one or three. Any such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board or the president may, or on the request of not fewer than 10 percent of the votes represented at the meeting shall, make such appointment at the meeting. If appointed at the meeting, the majority of the votes present shall determine whether one or three inspectors are to be appointed. In case any individual appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting or at the meeting by the chairman of the board or the president. Unless otherwise prescribed by regulations of the Board, the duties of such inspectors shall include: determining the number of shares and the voting power of each share, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the rights to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders.
Section 14. Nominating Committee. The board of directors shall act as a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least 20 days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Subsidiary Holding Company. No nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders are made in writing and delivered to the secretary of the Subsidiary Holding Company at least five days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Subsidiary Holding Company. Ballots bearing the names of all persons nominated by the nominating committee and by shareholders shall be provided for use at the annual meeting. However, if the nominating committee shall fail or refuse to act at least 20 days prior to the annual meeting, nominations for directors may be made at the annual meeting by any shareholder entitled to vote and shall be voted upon.
Section 15. New Business. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary of the Subsidiary Holding Company at least five days before the date of the annual meeting, and all business so stated, proposed, and filed shall be considered at the annual meeting; but no other proposal shall be acted upon at the annual meeting. Any shareholder may make any other proposal at the annual meeting and the same may be discussed and considered, but unless stated in writing and filed with the secretary at least five days before the meeting, such proposal shall be laid over for action at an adjourned, special, or annual meeting of the shareholders taking place 30 days or more thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors, and committees; but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided.
Section 16. Informal Action by Shareholders. Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of shareholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the shareholders entitled to vote with respect to the subject matter.
Section 1. General Powers. The business and affairs of the Subsidiary Holding Company shall be under the direction of its board of directors. The board of directors shall annually elect a chairman of the board and a president from among its members and shall designate, when present, either the chairman of the board or the president to preside at its meetings.
Section 2. Number and Term. The board of directors shall consist of __ [not fewer than five nor more than fifteen] members, and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually.
Section 3. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this bylaw following the annual meeting of shareholders. The board of directors may provide, by resolution, the time and place, for the holding of additional regular meetings without other notice than such resolution. Directors may participate in a meeting by means of a conference telephone or similar communications device through which all individuals participating can hear each other at the same time. Participation by such means shall constitute presence in person for all purposes.
Section 4. Qualification. Each director shall at all times be the beneficial owner of not less than 100 shares of capital stock of the Subsidiary Holding Company unless the Subsidiary Holding Company is a wholly owned subsidiary of a holding company.
Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the president, or one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place, within the Subsidiary Holding Company’s normal lending territory, as the place for holding any special meeting of the board of directors called by such persons. Members of the board of directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person for all purposes.
Section 6. Notice. Written notice of any special meeting shall be given to each director at least 24 hours prior thereto when delivered personally or by telegram or at least five days prior thereto when delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage prepaid if mailed, when delivered to the telegraph company if sent by telegram, or when the Subsidiary Holding Company receives notice of delivery if electronically transmitted. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice of waiver of notice of such meeting.
Section 7. Quorum. A majority of the number of directors fixed by section 2 of this article III shall constitute a quorum for the transaction of business at any meeting of the board of directors; but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by section 5 of this article III.
Section 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by regulation of the Board or by these bylaws.
Section 9. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors.
Section 10. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Subsidiary Holding Company addressed to the chairman of the board or the president. Unless otherwise specified, such resignation shall take effect upon receipt by the chairman of the board or the president. More than three consecutive absences from regular meetings of the board of directors, unless excused by resolution of the board of directors, shall automatically constitute a resignation, effective when such resignation is accepted by the board of directors.
Section 11. Vacancies. Any vacancy occurring on the board of directors may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve only until the next election of directors by the shareholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the board of directors for a term of office continuing only until the next election of directors by the shareholders.
Section 12. Compensation. Directors, as such, may receive a stated salary for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for attendance at committee meetings as the board of directors may determine.
Section 13. Presumption of Assent. A director of the Subsidiary Holding Company who is present at a meeting of the board of directors at which action on any Subsidiary Holding Company matter is taken shall be presumed to have assented to the action taken unless his or her dissent or abstention shall be entered in the minutes of the meeting or unless he or she shall file a written dissent to such action with the individual acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Subsidiary Holding Company within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action.
Section 14. Removal of Directors. At a meeting of shareholders called expressly for that purpose, any director may be removed only for cause by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. If less than the entire board is to be removed, no one of the directors may be removed if the votes cast against the removal would be sufficient to elect a director if then cumulatively voted at an election of the class of directors of which such director is a part. [If cumulative voting has been deleted, the preceding sentence should be deleted.] Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the charter or supplemental sections thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole.
Section 1. Appointment. The board of directors, by resolution adopted by a majority of the full board, may designate the chief executive officer and two or more of the other directors to constitute an executive committee. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the board of directors, or any director, of any responsibility imposed by law or regulation.
Section 2. Authority. The executive committee, when the board of directors is not in session, shall have and may exercise all of the authority of the board of directors except to the extent, if any, that such authority shall be limited by the resolution appointing the executive committee; and except also that the executive committee shall not have the authority of the board of directors with reference to: the declaration of dividends; the amendment of the charter or bylaws of the Subsidiary Holding Company, or recommending to the shareholders a plan of merger, consolidation, or conversion; the sale, lease, or other disposition of all or substantially all of the property and assets of the Subsidiary Holding Company otherwise than in the usual and regular course of its business; a voluntary dissolution of the Subsidiary Holding Company; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest.
Section 3. Tenure. Subject to the provisions of section 8 of this article IV, each member of the executive committee shall hold office until the next regular annual meeting of the board of directors following his or her designation and until a successor is designated as a member of the executive committee.
Section 4. Meetings. Regular meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof upon not less than one day’s notice stating the place, date, and hour of the meeting, which notice may be written or oral. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting.
Section 5. Quorum. A majority of the members of the executive committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present.
Section 6. Action Without a Meeting. Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee.
Section 7. Vacancies. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full board of directors.
Section 8. Resignations and Removal. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full board of directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the president or secretary of the Subsidiary Holding Company. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective. No notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting.
Section 9. Procedure. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure, which shall not be inconsistent with these bylaws. It shall keep regular minutes of its proceedings and report the same to the board of directors for its information at the meeting held next after the proceedings shall have occurred.
Section 10. Other Committees. The board of directors may by resolution establish an audit, loan, or other committee composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the Subsidiary Holding Company and may prescribe the duties, constitution, and procedures thereof.
Section 1. Positions. The officers of the Subsidiary Holding Company shall be a president, one or more vice presidents, a secretary, and a treasurer or comptroller, each of whom shall be elected by the board of directors. The board of directors may also designate the chairman of the board as an officer. The offices of the secretary and treasurer or comptroller may be held by the same individual and a vice president may also be either the secretary or the treasurer or comptroller. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the Subsidiary Holding Company may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices.
Section 2. Election and Term of Office. The officers of the Subsidiary Holding Company shall be elected annually at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officer’s death, resignation, or removal in the manner hereinafter provided. Election or appointment of an officer, employee, or agent shall not of itself create contractual rights. The board of directors may authorize the Subsidiary Holding Company to enter into an employment contract with any officer in accordance with regulations of the Board; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with section 3 of this article V.
Section 3. Removal. Any officer may be removed by the board of directors whenever in its judgment the best interests of the Subsidiary Holding Company will be served thereby, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the officer so removed.
Section 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise may be filled by the board of directors for the unexpired portion of the term.
Section 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors.
Section 1. Contracts. To the extent permitted by regulations of the Board, and except as otherwise prescribed by these bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the Subsidiary Holding Company to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Subsidiary Holding Company. Such authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the Subsidiary Holding Company and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances.
Section 3. Checks; Drafts. etc. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Subsidiary Holding Company shall be signed by one or more officers, employees or agents of the Subsidiary Holding Company in such manner as shall from time to time be determined by the board of directors.
Section 4. Deposits. All funds of the Subsidiary Holding Company not otherwise employed shall be deposited from time to time to the credit of the Subsidiary Holding Company in any duly authorized depositories as the board of directors may select.
Section 1. Certificates for Shares. Certificates representing shares of capital stock of the Subsidiary Holding Company shall be in such form as shall be determined by the board of directors and approved by the Board. Such certificates shall be signed by the chief executive officer or by any other officer of the Subsidiary Holding Company authorized by the board of directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar other than the Subsidiary Holding Company itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Subsidiary Holding Company. All certificates surrendered to the Subsidiary Holding Company for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and canceled, except that in the case of a lost or destroyed certificate, a new certificate may be issued upon such terms and indemnity to the Subsidiary Holding Company as the board of directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of capital stock of the Subsidiary Holding Company shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his or her legal representative, who shall furnish proper evidence of such authority, or by his or her attorney authorized by a duly executed power of attorney and filed with the Subsidiary Holding Company. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Subsidiary Holding Company shall be deemed by the Subsidiary Holding Company to be the owner for all purposes.
The fiscal year of the Subsidiary Holding Company shall end on the ________of________each year. The appointment of accountants shall be subject to annual ratification by the shareholders.
Subject to the terms of the Subsidiary Holding Company’s charter and the regulations and orders of the Board, the board of directors may, from time to time, declare, and the Subsidiary Holding Company may pay, dividends on its outstanding shares of capital stock.
The board of directors shall provide a Subsidiary Holding Company seal, which shall be two concentric circles between which shall be the name of the Subsidiary Holding Company. The year of incorporation or an emblem may appear in the center.
These bylaws may be amended in a manner consistent with regulations of the Board and shall be effective after: (i) approval of the amendment by a majority vote of the authorized board of directors, or by a majority vote of the votes cast by the shareholders of the Subsidiary Holding Company at any legal meeting, and (ii) receipt of any applicable regulatory approval. When a Subsidiary Holding Company fails to meet its quorum requirements, solely due to vacancies on the board, then the affirmative vote of a majority of the sitting board will be required to amend the bylaws.
PART 240 – RETAIL FOREIGN EXCHANGE TRANSACTIONS (REGULATION NN)
§ 240.1 Authority, purpose and scope.
(a) Authority. This part is issued by the Board of Governors of the Federal Reserve System (the Board) under the authority of section 2(c)(2)(E) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(E)), sections 9 and 11 of the Federal Reserve Act (12 U.S.C. 321-338 and 248), section 5(b) of the Bank Holding Company Act of 1956 (12 U.S.C. 1844(b)), sections 9 and 13a of the International Banking Act of 1978 (12 U.S.C. 3106a and 3108), and sections 3(q) and 8 of the Federal Deposit Insurance Act (12 U.S.C. 1813(q) and 1818).
(b) Purpose. This part establishes rules applicable to retail foreign exchange transactions engaged in by banking institutions on or after May 13, 2013.
(c) Scope. Except as provided in paragraph (d) of this section, this part applies to banking institutions, as defined in section 240.2(b) of this part, and any branches or offices of those institutions wherever located. This part applies to subsidiaries of banking institutions organized under the laws of the United States or any U.S. state that are not subject to the jurisdiction of another federal regulatory agency authorized to prescribe rules or regulations under section 2(c)(2)(E) of the Commodity Exchange Act (7 U.S.C. (2)(c)(2)(E)).
(d) International applicability. Sections 240.3 and 240.5 through 240.16 do not apply to retail foreign exchange transactions between a foreign branch or office of a banking institution and a non-U.S. customer. With respect to those transactions, the foreign branch or office remains subject to any disclosure, recordkeeping, capital, margin, reporting, business conduct, documentation, and other requirements of applicable foreign law.
§ 240.2 Definitions.
For purposes of this part, the following terms have the same meaning as in the Commodity Exchange Act (7 U.S.C. 1 et seq.): “affiliated person of a futures commission merchant”; “associated person”; “contract of sale”; “commodity”; “futures commission merchant”; “future delivery”; “option”; “security”; and “security futures product.”
(a) Affiliate has the same meaning as in section 2(k) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(k)).
(b) Banking institution means:
(1) A state member bank (as defined in 12 CFR 208.2);
(2) An uninsured state-licensed U.S. branch or agency of a foreign bank;
(3) A financial holding company (as defined in section 2 of the Bank Holding Company Act of 1956; 12 U.S.C. 1841);
(4) A bank holding company (as defined in section 2 of the Bank Holding Company Act of 1956; 12 U.S.C. 1841);
(5) A savings and loan holding company (as defined in section 10 of the Home Owners Loan Act; 12 U.S.C. 1467a)
(6) A corporation operating under the fifth undesignated paragraph of section 25 of the Federal Reserve Act (12 U.S.C. 603), commonly known as “an agreement corporation;” and
(7) A corporation organized under section 25A of the Federal Reserve Act (12 U.S.C. 611 et seq.), commonly known as an “Edge Act corporation.”
(c) Commodity Exchange Act means the Commodity Exchange Act (7 U.S.C. 1 et seq.).
(d) Eligible contract participant has the same meaning as in the Commodity Exchange Act (7 U.S.C. 1 et seq., as implemented in 17 CFR 1.3(m).
(e) Forex means foreign exchange.
(f) Identified banking product has the same meaning as in section 401(b) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)).
(g) Institution-affiliated party or IAP has the same meaning as in 12 U.S.C. 1813(u)(1), (2), or (3).
(h) Introducing broker means any person who solicits or accepts orders from a retail forex customer in connection with retail forex transactions.
(i) Related person, when used in reference to a retail forex counterparty, means:
(1) Any general partner, officer, director, or owner of ten percent or more of the capital stock of the retail forex counterparty;
(2) An associated person or employee of the retail forex counterparty, if the retail forex counterparty is not an insured depository institution;
(3) An IAP, if the retail forex counterparty is an insured depository institution; and
(4) Any relative or spouse of any of the foregoing persons, or any relative of such spouse, who shares the same home as any of the foregoing persons.
(j) Retail foreign exchange dealer means any person other than a retail forex customer that is, or that offers to be, the counterparty to a retail forex transaction, except for a person described in item (aa), (bb), (cc)(AA), (dd), or (ff) of section 2(c)(2)(B)(i)(II) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(B)(i)(II)).
(k) Retail forex account means the account of a retail forex customer, established with a banking institution, in which retail forex transactions with the banking institution as counterparty are undertaken, or the account of a retail forex customer that is established in order to enter into such transactions.
(l) Retail forex account agreement means the contractual agreement between a banking institution and a retail forex customer that contains the terms governing the customer’s retail forex account with the banking institution.
(m) Retail forex business means engaging in one or more retail forex transactions with the intent to derive income from those transactions, either directly or indirectly.
(n) Retail forex counterparty includes, as appropriate:
(1) A banking institution;
(2) A retail foreign exchange dealer;
(3) A futures commission merchant;
(4) An affiliated person of a futures commission merchant; and
(5) A broker or dealer registered under section 15(b) (except paragraph (11) thereof) or 15C of the Securities Exchange Act of 1934 (15 U.S.C. 78o(b), 78o-5) or a U.S. financial institution other than a banking institution, provided the counterparty is subject to a rule or regulation of a Federal regulatory agency covering retail forex transactions.
(o) Retail forex customer means a customer that is not an eligible contract participant, acting on his, her, or its own behalf and engaging in retail forex transactions.
(p) Retail forex proprietary account means a retail forex account carried on the books of a banking institution for one of the following persons; a retail forex account of which 10 percent or more is owned by one of the following persons; or a retail forex account of which an aggregate of 10 percent or more of which is owned by more than one of the following persons:
(1) The banking institution;
(2) An officer, director or owner of ten percent or more of the capital stock of the banking institution; or
(3) An employee of the banking institution, whose duties include:
(i) The management of the banking institution’s business;
(ii) The handling of the banking institution’s retail forex transactions;
(iii) The keeping of records, including without limitation the software used to make or maintain those records, pertaining to the banking institution’s retail forex transactions; or
(iv) The signing or co-signing of checks or drafts on behalf of the banking institution;
(4) A spouse or minor dependent living in the same household as of any of the foregoing persons; or
(5) An affiliate of the banking institution;
(q) Retail forex transaction means an agreement, contract, or transaction in foreign currency, other than an identified banking product or a part of an identified banking product, that is offered or entered into by a banking institution with a person that is not an eligible contract participant and that is:
(1) A contract of sale of a commodity for future delivery or an option on such a contract; or
(2) An option, other than an option executed or traded on a national securities exchange registered pursuant to section 6(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78f(a)); or
(3) Offered or entered into on a leveraged or margined basis, or financed by a banking institution, its affiliate, or any person acting in concert with the banking institution or its affiliate on a similar basis, other than:
(i) A security that is not a security futures product as defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)); or
(ii) A contract of sale that –
(A) Results in actual delivery within two days; or
(B) Creates an enforceable obligation to deliver between a seller and buyer that have the ability to deliver and accept delivery, respectively, in connection with their line of business; or
(iii) An agreement, contract, or transaction that the Board determines is not functionally or economically similar to an agreement, contract, or transaction described in paragraph (p)(1) or (p)(2) of this section.
§ 240.3 Prohibited transactions.
(a) Fraudulent conduct prohibited. No banking institution or its related persons may, directly or indirectly, in or in connection with any retail forex transaction:
(1) Cheat or defraud or attempt to cheat or defraud any person;
(2) Knowingly make or cause to be made to any person any false report or statement or cause to be entered for any person any false record; or
(3) Knowingly deceive or attempt to deceive any person by any means whatsoever.
(b) Acting as counterparty and exercising discretion prohibited. A banking institution that has authority to cause retail forex transactions to be effected for a retail forex customer without the retail forex customer’s specific authorization may not (and an affiliate of such an institution may not) act as the counterparty for any retail forex transaction with that retail forex customer.
§ 240.4 Notification.
(a) Notification required. Before commencing a retail forex business, a banking institution shall provide the Board with prior written notice in compliance with this section. The notice will become effective 60 days after a complete notice is received by the Board, provided the Board does not request additional information or object in writing. In the event the Board requests additional information, the notice will become effective 60 days after all information requested by the Board is received by the Board unless the Board objects in writing.
(b) Notification requirements. A banking institution shall provide the following in its written notification:
(1) Information concerning customer due diligence, including without limitation credit evaluations, customer appropriateness, and “know your customer” documentation;
(2) The haircuts to be applied to noncash margin as provided in 240.9(b)(2);
(3) Information concerning new product approvals;
(4) Information on addressing conflicts of interest; and
(5) A resolution by the banking institution’s Board of Directors that the banking institution has established and implemented written policies, procedures, and risk measurement and management systems and controls for the purpose of ensuring that it conducts retail forex transactions in a safe and sound manner and in compliance with this part.
(c) Treatment of existing retail forex businesses. A banking institution that is engaged in a retail forex business on the effective date of this part may continue to do so, until and unless the Board objects in writing, so long as the institution submits the information required to be submitted under paragraphs (b)(1) through (5) of this section within 30 days of the effective date of this part, subject to an extension of time by the Board, and such additional information as requested by the Board thereafter.
(d) Compliance with the Commodity Exchange Act. A banking institution that is engaged in a retail forex business on the effective date of this part and complies with paragraph (c) of this section shall be deemed to be acting pursuant to a rule or regulation described in section 2(c)(2)(E)(ii)(I) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(E)(ii)(I)).
§ 240.5 Application and closing out of offsetting long and short positions.
(a) Application of purchases and sales. Any banking institution that –
(1) Engages in a retail forex transaction involving the purchase of any currency for the account of any retail forex customer when the account of such retail forex customer at the time of such purchase has an open retail forex transaction for the sale of the same currency;
(2) Engages in a retail forex transaction involving the sale of any currency for the account of any retail forex customer when the account of such retail forex customer at the time of such sale has an open retail forex transaction for the purchase of the same currency;
(3) Purchases a put or call option involving foreign currency for the account of any retail forex customer when the account of such retail forex customer at the time of such purchase has a short put or call option position with the same underlying currency, strike price, and expiration date as that purchased; or
(4) Sells a put or call option involving foreign currency for the account of any retail forex customer when the account of such retail forex customer at the time of such sale has a long put or call option position with the same underlying currency, strike price, and expiration date as that sold shall:
(i) Immediately apply such purchase or sale against such previously held opposite transaction with the same customer; and
(ii) Promptly furnish such retail forex customer with a statement showing the financial result of the transactions involved and the name of any introducing broker to the account.
(b) Close-out against oldest open position. In all instances in which the short or long position in a customer’s retail forex account immediately prior to an offsetting purchase or sale is greater than the quantity purchased or sold, the banking institution shall apply such offsetting purchase or sale to the oldest portion of the previously held short or long position.
(c) Transactions to be applied as directed by customer. Notwithstanding paragraphs (a) and (b) of this section, the offsetting transaction shall be applied as directed by a retail forex customer’s specific instructions. These instructions may not be made by the banking institution or a related person.
§ 240.6 Disclosure.
(a) Risk disclosure statement required. No banking institution may open or maintain an account for a retail forex customer for the purpose of engaging in retail forex transactions unless the banking institution has furnished the retail forex customer with a separate written disclosure statement containing only the language set forth in paragraph (d) of this section and the disclosures required by paragraphs (e), (f), and (g) of this section.
(b) Acknowledgement of risk disclosure statement required. The banking institution must receive from the retail forex customer a written acknowledgement signed and dated by the customer that the customer received and understood the written disclosure statement required by paragraph (a) of this section.
(c) Placement of risk disclosure statement. The disclosure statement may be attached to other documents as the initial page(s) of such documents and as the only material on such page(s).
(d) Content of risk disclosure statement. The language set forth in the written disclosure statement required by paragraph (a) of this section shall be as follows:
Retail forex transactions generally involve the leveraged trading of contracts denominated in foreign currency with a banking institution as your counterparty. Because of the leverage and the other risks disclosed here, you can rapidly lose all of the funds or property you give the banking institution as margin for such trading and you may lose more than you pledge as margin. You should be aware of and carefully consider the following points before determining whether such trading is appropriate for you.
(1) Trading foreign currencies is a not on a regulated market or exchange – your banking institution is your trading counterparty and has conflicting interests. The retail forex transaction you are entering into is not conducted on an interbank market, nor is it conducted on a futures exchange subject to regulation by the Commodity Futures Trading Commission. The foreign currency trades you transact are trades with your banking institution as the counterparty. When you sell, the banking institution is the buyer. When you buy, the banking institution is the seller. As a result, when you lose money trading, your banking institution is making money on such trades, in addition to any fees, commissions, or spreads the banking institution may charge.
(2) Any electronic trading platform that you may use for retail foreign currency transactions with your banking institution is not a regulated exchange. It is an electronic connection for accessing your banking institution. The terms of availability of such a platform are governed only by your contract with your banking institution. Any trading platform that you may use to enter into off-exchange foreign currency transactions is only connected to your banking institution. You are accessing that trading platform only to transact with your banking institution. You are not trading with any other entities or customers of the banking institution by accessing such platform. The availability and operation of any such platform, including the consequences of the unavailability of the trading platform for any reason, is governed only by the terms of your account agreement with the banking institution.
(3) You may be able to offset or liquidate any trading positions only through your banking institution because the transactions are not made on an exchange, and your banking institution may set its own prices. Your ability to close your transactions or offset positions is limited to what your banking institution will offer to you, as there is no other market for these transactions. Your banking institution may offer any prices it wishes. Your banking institution may establish its prices by offering spreads from third party prices, but it is under no obligation to do so or to continue to do so. Your banking institution may offer different prices to different customers at any point in time on its own terms. The terms of your account agreement alone govern the obligations your banking institution has to you to offer prices and offer offset or liquidating transactions in your account and make any payments to you. The prices offered by your banking institution may or may not reflect prices available elsewhere at any exchange, interbank, or other market for foreign currency.
(4) Paid solicitors may have undisclosed conflicts. The banking institution may compensate introducing brokers for introducing your account in ways that are not disclosed to you. Such paid solicitors are not required to have, and may not have, any special expertise in trading, and may have conflicts of interest based on the method by which they are compensated. You should thoroughly investigate the manner in which all such solicitors are compensated and be very cautious in granting any person or entity authority to trade on your behalf. You should always consider obtaining dated written confirmation of any information you are relying on from your banking institution in making any trading or account decisions.
(5) Retail forex transactions are not insured by the Federal Deposit Insurance Corporation.
(6) Retail forex transactions are not a deposit in, or guaranteed by, a banking institution.
(7) Retail forex transactions are subject to investment risks, including possible loss of all amounts invested.
Finally, you should thoroughly investigate any statements by any banking institution that minimize the importance of, or contradict, any of the terms of this risk disclosure. Such statements may indicate sales fraud.
This brief statement cannot, of course, disclose all the risks and other aspects of trading off-exchange foreign currency with a banking institution. I hereby acknowledge that I have received and understood this risk disclosure statement.
(e)(1) Disclosure of profitable accounts ratio. Immediately following the language set forth in paragraph (d) of this section, the statement required by paragraph (a) of this section shall include, for each of the most recent four calendar quarters during which the banking institution maintained retail forex customer accounts:
(i) The total number of retail forex customer accounts maintained by the banking institution over which the banking institution does not exercise investment discretion;
(ii) The percentage of such accounts that were profitable for retail forex customer accounts during the quarter; and
(iii) The percentage of such accounts that were not profitable for retail forex customer accounts during the quarter.
(2) Statement of profitable trades. (i) The banking institution’s statement of profitable trades shall include the following legend: Past performance is not necessarily indicative of future results.
(ii) Each banking institution shall provide, upon request, to any retail forex customer or prospective retail forex customer the total number of retail forex accounts maintained by the banking institution for which the banking institution does not exercise investment discretion, the percentage of such accounts that were profitable, and the percentage of such accounts that were not profitable for each calendar quarter during the most recent five-year period during which the banking institution maintained such accounts.
(f) Disclosure of fees and other charges. Immediately following the language required by paragraph (e) of this section, the statement required by paragraph (a) of this section shall include:
(1) The amount of any fee, charge, spread, or commission that the banking institution may impose on the retail forex customer in connection with a retail forex account or retail forex transaction;
(2) An explanation of how the banking institution will determine the amount of such fees, charges, spreads, or commissions; and
(3) The circumstances under which the banking institution may impose such fees, charges, spreads, or commissions.
(g) Set-off. Immediately following the language required by paragraph (f) of this section, the statement required by paragraph (a) of this section shall include:
(1) A statement as to whether the banking institution will or will not retain the right to set off obligations of the retail forex customer arising from the customer’s retail forex transactions, including margin calls and losses, against the customer’s other assets held by the banking institution;
(2) If the banking institution states that it reserves its right to set off obligations of the retail forex customer arising from the customer’s retail forex transactions against the customer’s other assets, the banking institution must receive from the retail forex customer a written acknowledgement signed and dated by the customer that the customer received and understood the written disclosure required by paragraph (g)(1) of this section.
(h) Future disclosure requirements. If, with regard to a retail forex customer, the banking institution changes any fee, charge, or commission required to be disclosed under paragraph (f) of this section, then the banking institution shall mail or deliver to the retail forex customer a notice of the changes at least 15 days prior to the effective date of the change.
(i) Form of disclosure requirements. The disclosures required by this section shall be clear and conspicuous and designed to call attention to the nature and significance of the information provided.
(j) Other disclosure requirements unaffected. This section does not relieve a banking institution from any other disclosure obligation it may have under applicable law.
§ 240.7 Recordkeeping.
(a) General rule. A banking institution engaging in retail forex transactions shall keep full, complete and systematic records, together with all pertinent data and memoranda, of all transactions relating to its retail forex business, including:
(1) Retail forex account records. For each retail forex account:
(i) The name and address of the person for whom such retail forex account is carried or introduced and the principal occupation or business of the person;
(ii) The name of any other person guaranteeing the account or exercising trading control with respect to the account;
(iii) The establishment or termination of the account;
(iv) A means to identify the person who has solicited and is responsible for the account or assign account numbers in such a manner as to identify that person;
(v) The funds in the account, net of any commissions and fees;
(vi) The account’s net profits and losses on open trades;
(vii) The funds in the account plus or minus the net profits and losses on open trades, adjusted for the net option value in the case of open options positions;
(viii) Financial ledger records that show separately for each retail forex customer all charges against and credits to such retail forex customer’s account, including but not limited to retail forex customer funds deposited, withdrawn, or transferred, and charges or credits resulting from losses or gains on closed transactions; and
(ix) A list of all retail forex transactions executed for the account, with the details specified in paragraph (a)(2) of this section.
(2) Retail forex transaction records. For each retail forex transaction:
(i) The date and time the banking institution received the order;
(ii) The price at which the banking institution placed the order, or, in the case of an option, the premium that the retail forex customer paid;
(iii) The customer account identification information;
(iv) The currency pair;
(v) The size or quantity of the order;
(vi) Whether the order was a buy or sell order;
(vii) The type of order, if the order was not a market order;
(viii) The size and price at which the order is executed, or in the case of an option, the amount of the premium paid for each option purchased, or the amount credited for each option sold;
(ix) For options, whether the option is a put or call, expiration date, quantity, underlying contract for future delivery or underlying physical, strike price, and details of the purchase price of the option, including premium, mark-up, commission, and fees;
(x) For futures, the delivery date; and
(xi) If the order was made on a trading platform:
(A) The price quoted on the trading platform when the order was placed, or, in the case of an option, the premium quoted;
(B) The date and time the order was transmitted to the trading platform; and
(C) The date and time the order was executed.
(3) Price changes on a trading platform. If a trading platform is used, daily logs showing each price change on the platform, the time of the change to the nearest second, and the trading volume at that time and price.
(4) Methods or algorithms. Any method or algorithm used to determine the bid or asked price for any retail forex transaction or the prices at which customers orders are executed, including, but not limited to, any mark-ups, fees, commissions or other items which affect the profitability or risk of loss of a retail forex customer’s transaction.
(5) Daily records which show for each business day complete details of:
(i) All retail forex transactions that are futures transactions executed on that day, including the date, price, quantity, market, currency pair, delivery date, and the person for whom such transaction was made;
(ii) All retail forex transactions that are option transactions executed on that day, including the date, whether the transaction involved a put or call, the expiration date, quantity, currency pair, delivery date, strike price, details of the purchase price of the option, including premium, mark-up, commission and fees, and the person for whom the transaction was made; and
(iii) All other retail forex transactions executed on that day for such account, including the date, price, quantity, currency and the person for whom such transaction was made.
(6) Other records. Written acknowledgements of receipt of the risk disclosure statement required by § 240.6(b), offset instructions pursuant to § 240.5(c), records required under paragraphs (b) through (f) of this section, trading cards, signature cards, street books, journals, ledgers, payment records, copies of statements of purchase, and all other records, data and memoranda that have been prepared in the course of the banking institution’s retail forex business.
(b) Ratio of profitable accounts. (1) With respect to its active retail forex customer accounts over which it did not exercise investment discretion and that are not retail forex proprietary accounts open for any period of time during the quarter, a banking institution shall prepare and maintain on a quarterly basis (calendar quarter):
(i) A calculation of the percentage of such accounts that were profitable;
(ii) A calculation of the percentage of such accounts that were not profitable; and
(iii) Data supporting the calculations described in paragraphs (b)(1)(i) and (b)(1)(ii) of this section.
(2) In calculating whether a retail forex account was profitable or not profitable during the quarter, the banking institution shall compute the realized and unrealized gains or losses on all retail forex transactions carried in the retail forex account at any time during the quarter, and subtract all fees, commissions, and any other charges posted to the retail forex account during the quarter, and add any interest income and other income or rebates credited to the retail forex account during the quarter. All deposits and withdrawals of funds made by the retail forex customer during the quarter must be excluded from the computation of whether the retail forex account was profitable or not profitable during the quarter. Computations that result in a zero or negative number shall be considered a retail forex account that was not profitable. Computations that result in a positive number shall be considered a retail forex account that was profitable.
(3) A retail forex account shall be considered “active” for purposes of paragraph (b)(1) of this section if and only if, for the relevant calendar quarter, a retail forex transaction was executed in that account or the retail forex account contained an open position resulting from a retail forex transaction.
(c) Records related to possible violations of law. A banking institution engaging in retail forex transactions shall make a record of all communications received by the banking institution or its related persons concerning facts giving rise to possible violations of law related to the banking institution’s retail forex business. The record shall contain: the name of the complainant, if provided; the date of the communication; the relevant agreement, contract, or transaction; the substance of the communication; and the name of the person who received the communication and the final disposition of the matter.
(d) Records for noncash margin. A banking institution shall maintain a record of all noncash margin collected pursuant to § 240.9. The record shall show separately for each retail forex customer:
(1) A description of the securities or property received;
(2) The name and address of such retail forex customer;
(3) The dates when the securities or property were received;
(4) The identity of the depositories or other places where such securities or property are segregated or held, if applicable;
(5) The dates on which the banking institution placed or removed such securities or property into or from such depositories; and
(6) The dates of return of such securities or property to such retail forex customer, or other disposition thereof, together with the facts and circumstances of such other disposition.
(e) Order tickets. (1) Except as provided in paragraph (e)(2) of this section, immediately upon the receipt of a retail forex transaction order, a banking institution shall prepare an order ticket for the order (whether unfulfilled, executed or canceled). The order ticket shall include:
(i) Account identification (account or customer name with which the retail forex transaction was effected);
(ii) Order number;
(iii) Type of order (market order, limit order, or subject to special instructions);
(iv) Date and time, to the nearest minute, the retail forex transaction order was received (as evidenced by timestamp or other timing device);
(v) Time, to the nearest minute, the retail forex transaction order was executed; and
(vi) Price at which the retail forex transaction was executed.
(2) Post-execution allocation of bunched orders. Specific identifiers for retail forex accounts included in bunched orders need not be recorded at time of order placement or upon report of execution as required under paragraph (e)(1) of this section if the following requirements are met:
(i) The banking institution placing and directing the allocation of an order eligible for post-execution allocation has been granted written investment discretion with regard to participating customer accounts and makes the following information available to customers upon request:
(A) The general nature of the post-execution allocation methodology the banking institution will use;
(B) Whether the banking institution has any interest in accounts which may be included with customer accounts in bunched orders eligible for post-execution allocation; and
(C) Summary or composite data sufficient for that customer to compare the customer’s results with those of other comparable customers and, if applicable, any account in which the banking institution has an interest.
(ii) Post-execution allocations are made as soon as practicable after the entire transaction is executed;
(iii) Post-execution allocations are fair and equitable, with no account or group of accounts receiving consistently favorable or unfavorable treatment; and
(iv) The post-execution allocation methodology is sufficiently objective and specific to permit the Board to verify fairness of the allocations using that methodology.
(f) Record of monthly statements and confirmations. A banking institution shall retain a copy of each monthly statement and confirmation required by § 240.10.
(g) Form of record and manner of maintenance. The records required by this section must clearly and accurately reflect the information required and provide an adequate basis for the audit of the information. A banking institution must create and maintain audio recordings of oral orders and oral offset instructions. Record maintenance may include the use of automated or electronic records provided that the records are easily retrievable, and readily available for inspection.
(h) Length of maintenance. A banking institution shall keep each record required by this section for at least five years from the date the record is created.
§ 240.8 Capital requirements.
(a) Capital required for a state member bank. A banking institution defined in section 240.2(b)(1) offering or entering into retail forex transactions must be well-capitalized as defined in section 208.43 of Regulation H (12 CFR 208.43).
(b) Capital required for an uninsured state-licensed branch of a foreign bank. A banking institution defined in § 240.2(b)(2) offering or entering into retail forex transactions must be well-capitalized under the capital rules made applicable to it pursuant to § 225.2(r)(3) of Regulation Y (12 CFR 225.2(r)(3)).
(c) Capital required for financial holding companies and bank holding companies. A banking institution defined in § 240.2(b)(3) or (4) offering or entering into retail forex transactions must be well-capitalized as defined in § 225.2(r) of Regulation Y (12 CFR 225.2(r)).
(d) Capital required for savings and loan holding companies. A banking institution defined in § 240.2(b)(5) offering or entering into retail forex transactions must be well-capitalized as defined in § 238.2(s) of Regulation LL (12 CFR 238.2(s)).
(e) Capital required for an agreement corporation or Edge Act corporation. A banking institution defined in § 240.2(b)(6) or (7) offering or entering into retail forex transactions must maintain capital in compliance with the capital adequacy guidelines that are made applicable to an Edge corporation engaged in banking pursuant to § 211.12 (c)(2) of Regulation K (12 CFR 211.12(c)(2)).
§ 240.9 Margin requirements
(a) Margin required. A banking institution engaging, or offering to engage, in retail forex transactions must collect from each retail forex customer an amount of margin not less than:
(1) Two percent of the notional value of the retail forex transaction for major currency pairs and 5 percent of the notional value of the retail forex transaction for all other currency pairs;
(2) For short options, 2 percent for major currency pairs and 5 percent for all other currency pairs of the notional value of the retail forex transaction, plus the premium received by the retail forex customer; or
(3) For long options, the full premium charged and received by the banking institution.
(b)(1) Form of margin. Margin collected under paragraph (a) of this section or pledged by a retail forex customer for retail forex transactions in excess of the requirements of paragraph (a) of this section must be in the form of cash or the following financial instruments:
(i) Obligations of the United States and obligations fully guaranteed as to principal and interest by the United States;
(ii) General obligations of any State or of any political subdivision thereof;
(iii) General obligations issued or guaranteed by any enterprise, as defined in 12 U.S.C. 4502(10);
(iv) Certificates of deposit issued by an insured depository institution, as defined in section 3(c)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)(2));
(v) Commercial paper;
(vi) Corporate notes or bonds;
(vii) General obligations of a sovereign nation;
(viii) Interests in money market mutual funds; and
(ix) Such other financial instruments as the Board deems appropriate.
(2) Haircuts. A banking institution shall establish written policies and procedures that include:
(i) Haircuts for noncash margin collected under this section; and
(ii) Annual evaluation, and, if appropriate, modification of the haircuts.
(c) Major currencies. (1) for the purposes of paragraphs (a)(1) and (a)(2) of this section, major currency means:
(i) United States Dollar (USD)
(ii) Canadian Dollar (CAD)
(iii) Euro (EUR)
(iv) United Kingdom Pound (GBP)
(v) Japanese Yen (JPY)
(vi) Swiss Franc (CHF)
(vii) New Zealand Dollar (NZD)
(viii) Australian Dollar (AUD)
(ix) Swedish Kronor (SEK)
(x) Danish Kroner (DKK)
(xi) Norwegian Krone (NOK), and
(xii) Any other currency as determined by the Board.
(d) Margin calls; liquidation of position. For each retail forex customer, at least once per day, a banking institution shall:
(1) Mark the value of the retail forex customer’s open retail forex positions to market;
(2) Mark the value of the margin collected under this section from the retail forex customer to market;
(3) Determine whether, based on the marks in paragraphs (d)(1) and (d)(2) of this section, the banking institution has collected margin from the retail forex customer sufficient to satisfy the requirements of this section; and
(4) If, pursuant to paragraph (d)(3) of this section, the banking institution determines that it has not collected margin from the retail forex customer sufficient to satisfy the requirements of this section then, within a reasonable period of time, the banking institution shall either:
(i) Collect margin from the retail forex customer sufficient to satisfy the requirements of this section; or
(ii) Liquidate the retail forex customer’s retail forex transactions.
§ 240.10 Required reporting to customers.
(a) Monthly statements. Each banking institution must promptly furnish to each retail forex customer, as of the close of the last business day of each month or as of any regular monthly date selected, except for accounts in which there are neither open positions at the end of the statement period nor any changes to the account balance since the prior statement period, but in any event not less frequently than once every three months, a statement that clearly shows:
(1) For each retail forex customer:
(i) The open retail forex transactions with prices at which acquired;
(ii) The net unrealized profits or losses in all open retail forex transactions marked to the market;
(iii) Any money, securities or other property held as margin for retail forex transactions; and
(iv) A detailed accounting of all financial charges and credits to the retail forex customer’s retail forex accounts during the monthly reporting period, including: money, securities, or property received from or disbursed to such customer; realized profits and losses; and fees, charges, and commissions.
(2) For each retail forex customer engaging in retail forex transactions that are options:
(i) All such options purchased, sold, exercised, or expired during the monthly reporting period, identified by underlying retail forex transaction or underlying currency, strike price, transaction date, and expiration date;
(ii) The open option positions carried for such customer and arising as of the end of the monthly reporting period, identified by underlying retail forex transaction or underlying currency, strike price, transaction date, and expiration date;
(iii) All such option positions marked to the market and the amount each position is in the money, if any;
(iv) Any money, securities or other property held as margin for retail forex transactions; and
(v) A detailed accounting of all financial charges and credits to the retail forex customer’s retail forex accounts during the monthly reporting period, including: money, securities, or property received from or disbursed to such customer; realized profits and losses; premiums and mark-ups; and fees, charges, and commissions.
(b) Confirmation statement. Each banking institution must, not later than the next business day after any retail forex transaction, send:
(1) To each retail forex customer, a written confirmation of each retail forex transaction caused to be executed by it for the customer, including offsetting transactions executed during the same business day and the rollover of an open retail forex transaction to the next business day;
(2) To each retail forex customer engaging in forex option transactions, a written confirmation of each forex option transaction, containing at least the following information:
(i) The retail forex customer’s account identification number;
(ii) A separate listing of the actual amount of the premium, as well as each mark-up thereon, if applicable, and all other commissions, costs, fees and other charges incurred in connection with the forex option transaction;
(iii) The strike price;
(iv) The underlying retail forex transaction or underlying currency;
(v) The final exercise date of the forex option purchased or sold; and
(vi) The date the forex option transaction was executed.
(3) To each retail forex customer engaging in forex option transactions, upon the expiration or exercise of any option, a written confirmation statement thereof, which statement shall include the date of such occurrence, a description of the option involved, and, in the case of exercise, the details of the retail forex or physical currency position which resulted therefrom including, if applicable, the final trading date of the retail forex transaction underlying the option.
(c) Notwithstanding the provisions of paragraphs (b)(1) through (3) of this section, a retail forex transaction that is caused to be executed for a pooled investment vehicle that engages in retail forex transactions need be confirmed only to the operator of such pooled investment vehicle.
(d) Controlled accounts. With respect to any account controlled by any person other than the retail forex customer for whom such account is carried, each banking institution shall promptly furnish in writing to such other person the information required by paragraphs (a) and (b) of this section.
(e) Introduced accounts. Each statement provided pursuant to the provisions of this section must, if applicable, show that the account for which the banking institution was introduced by an introducing broker and the name of the introducing broker.
§ 240.11 Unlawful representations.
(a) No implication or representation of limiting losses. No banking institution engaged in retail foreign exchange transactions or its related persons may imply or represent that it will, with respect to any retail customer forex account, for or on behalf of any person:
(1) Guarantee such person or account against loss;
(2) Limit the loss of such person or account; or
(3) Not call for or attempt to collect margin as established for retail forex customers.
(b) No implication of representation of engaging in prohibited acts. No banking institution or its related persons may in any way imply or represent that it will engage in any of the acts or practices described in paragraph (a) of this section.
(c) No Federal government endorsement. No banking institution or its related persons may represent or imply in any manner whatsoever that any retail forex transaction or retail forex product has been sponsored, recommended, or approved by the Board, the Federal government, or any agency thereof.
(d) Assuming or sharing of liability from bank error. This section shall not be construed to prevent a banking institution from assuming or sharing in the losses resulting from the banking institution’s error or mishandling of a retail forex transaction.
(e) Certain guaranties unaffected. This section shall not affect any guarantee entered into prior to the effective date of this part, but this section shall apply to any extension, modification or renewal thereof entered into after such date.
§ 240.12 Authorization to trade.
(a) Specific authorization required. No banking institution may directly or indirectly effect a retail forex transaction for the account of any retail forex customer unless, before the transaction occurs, the retail forex customer specifically authorized the banking institution to effect the retail forex transaction.
(b) A retail forex transaction is “specifically authorized” for purposes of this section if the retail forex customer specifies:
(1) The precise retail forex transaction to be effected;
(2) The exact amount of the foreign currency to be purchased or sold; and
(3) In the case of an option, the identity of the foreign currency or contract that underlies the option.
§ 240.13 Trading and operational standards.
(a) Internal rules, procedures, and controls required. A banking institution engaging in retail forex transactions shall establish and implement internal rules, procedures, and controls designed, at a minimum, to:
(1) Ensure, to the extent reasonable, that each order received from a retail forex customer that is executable at or near the price that the banking institution has quoted to the customer is entered for execution before any order in any retail forex transaction for:
(i) A proprietary account;
(ii) An account in which a related person has an interest, or any account for which such a related person may originate orders without the prior specific consent of the account owner, if the related person has gained knowledge of the retail forex customer’s order prior to the transmission of an order for a proprietary account;
(iii) An account in which a related person has an interest, if the related person has gained knowledge of the retail forex customer’s order prior to the transmission of an order for a proprietary account; or
(iv) An account in which a related person may originate orders without the prior specific consent of the account owner, if the related person has gained knowledge of the retail forex customer’s order prior to the transmission of an order for a proprietary account;
(2) Prevent banking institution related persons from placing orders, directly or indirectly, with another person in a manner designed to circumvent the provisions of paragraph (a)(1) of this section; and
(3) Fairly and objectively establish settlement prices for retail forex transactions.
(b) Disclosure of retail forex transactions. No banking institution engaging in retail forex transactions may disclose that an order of another person is being held by the banking institution, unless the disclosure is necessary to the effective execution of such order or the disclosure is made at the request of the Board.
(c) Handling of retail forex accounts of related persons of retail forex counterparties. No banking institution engaging in retail forex transactions shall knowingly handle the retail forex account of any related person of another retail forex counterparty unless the banking institution:
(1) Receives written authorization from a person designated by such other retail forex counterparty with responsibility for the surveillance over such account;
(2) Prepares immediately upon receipt of an order for the account a written record of the order, including the account identification and order number, and records thereon to the nearest minute, by time-stamp or other timing device, the date and time the order is received; and
(3) Transmits on a regular basis to the other retail forex counterparty copies of all statements for the account and of all written records prepared upon the receipt of orders for the account pursuant to paragraph (c)(2) of this section.
(d) Related person of banking institution establishing account at another retail forex counterparty. No related person of a banking institution working in the banking institution’s retail forex business may have an account, directly or indirectly, with another retail forex counterparty unless the other retail forex counterparty:
(1) Receives written authorization to open and maintain the account from a person designated by the banking institution of which it is a related person with responsibility for the surveillance over the account pursuant to paragraph (a)(2) of this section;
(2) Prepares immediately upon receipt of an order for the account a written record of the order, including the account identification and order number, and records thereon to the nearest minute, by time-stamp or other timing device, the date and time the order is received; and
(3) Transmits on a regular basis to the banking institution copies of all statements for the account and of all written records prepared by the other retail forex counterparty upon receipt of orders for such account pursuant to paragraph (d)(2) of this section.
(e) Prohibited trading practices. No banking institution engaging in retail forex transactions may:
(1) Enter into a retail forex transaction, to be executed pursuant to a market or limit order at a price that is not at or near the price at which other retail forex customers, during that same time period, have executed retail forex transactions with the banking institution;
(2) Adjust or alter prices for a retail forex transaction after the transaction has been confirmed to the retail forex customer;
(3) Provide a retail forex customer a new bid price for a retail forex transaction that is higher than its previous bid without providing a new asked price that is also higher than its previous asked price by a similar amount;
(4) Provide a retail forex customer a new bid price for a retail forex transaction that is lower than its previous bid without providing a new asked price that is also lower than its previous asked price by a similar amount; or
(5) Establish a new position for a retail forex customer (except one that offsets an existing position for that retail forex customer) where the banking institution holds outstanding orders of other retail forex customers for the same currency pair at a comparable price.
§ 240.14 Supervision.
(a) Supervision by the banking institution. A banking institution engaging in retail forex transactions shall diligently supervise the handling by its officers, employees, and agents (or persons occupying a similar status or performing a similar function) of all retail forex accounts carried, operated, or advised by the banking institution and all activities of its officers, employees, and agents (or persons occupying a similar status or performing a similar function) relating to its retail forex business.
(b) Supervision by officers, employees, or agents. An officer, employee, or agent of a banking institution must diligently supervise his or her subordinates’ handling of all retail forex accounts at the banking institution and all the subordinates’ activities relating to the banking institution’s retail forex business.
§ 240.15 Notice of transfers.
(a) Prior notice generally required. Except as provided in paragraph (b) of this section, a banking institution must provide a retail forex customer with 30 days’ prior notice of any assignment of any position or transfer of any account of the retail forex customer. The notice must include a statement that the retail forex customer is not required to accept the proposed assignment or transfer and may direct the banking institution to liquidate the positions of the retail forex customer or transfer the account to a retail forex counterparty of the retail forex customer’s selection.
(b) Exceptions. The requirements of paragraph (a) of this section shall not apply to transfers:
(1) Requested by the retail forex customer;
(2) Made by the Federal Deposit Insurance Corporation as receiver or conservator under the Federal Deposit Insurance Act or other law; or
(3) Otherwise authorized by applicable law.
(c) Obligations of transferee banking institution. A banking institution to which retail forex accounts or positions are assigned or transferred under paragraph (a) of this section must provide to the affected retail forex customers the risk disclosure statements and forms of acknowledgment required by this part and receive the required signed acknowledgments within sixty days of such assignments or transfers. This requirement shall not apply if the banking institution has clear written evidence that the retail forex customer has received and acknowledged receipt of the required disclosure statements.
§ 240.16 Customer dispute resolution.
(a) No banking institution shall enter into any agreement or understanding with a retail forex customer in which the customer agrees, prior to the time a claim or grievance arises, to submit any claim or grievance regarding any retail forex transaction or disclosure to any settlement procedure.
(b) Election of forum. (1) Within 10 business days after the receipt of notice from the retail forex customer that the customer intends to submit a claim to arbitration, the banking institution shall provide the customer with a list of persons qualified in dispute resolution.
(2) The customer must, within 45 days after receipt of such list, notify the banking institution of the person selected. The customer’s failure to provide such notice shall give the banking institution the right to select a person from the list.
(c) Enforceability. A dispute settlement procedure may require parties using the procedure to agree, under applicable state law, submission agreement, or otherwise, to be bound by an award rendered in the procedure if the agreement to submit the claim or grievance to the procedure was made after the claim or grievance arose. Any award so rendered by the procedure will be enforceable in accordance with applicable law.
(d) Time limits for submission of claims. The dispute settlement procedure used by the parties may not include any unreasonably short limitation period foreclosing submission of a customer’s claims or grievances or counterclaims.
(e) Counterclaims. A procedure for the settlement of a retail forex customer’s claims or grievances against a banking institution or employee thereof may permit the submission of a counterclaim in the procedure by a person against whom a claim or grievance is brought if the counterclaim:
(1) Arises out of the transaction or occurrence that is the subject of the retail forex customer’s claim or grievance; and
(2) Does not require for adjudication the presence of essential witnesses, parties, or third persons over which the settlement process lacks jurisdiction.
(f) Cross-border transactions. This section shall not apply to transactions within the scope of sections 202, 302, and 305 of the Federal Arbitration Act (9 U.S.C. 202, 302, and 305).
The Board may modify the disclosure, recordkeeping, capital and margin, reporting, business conduct, documentation, or other standards or requirements under this part for a specific retail forex transaction or a class of retail forex transactions if the Board determines that the modification is consistent with safety and soundness and the protection of retail forex customers.
PART 241 – SECURITIES HOLDING COMPANIES (REGULATION OO)
§ 241.1 Authority and purpose.
(a) Authority. This part is issued by the Board pursuant to section 618 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 1850a).
(b) Purpose. This part establishes the procedures by which a securities holding company may elect to register to be supervised by the Board.
§ 241.2 Definitions.
Except as defined below, terms used in this part have the same meaning given them in 12 CFR 225.2.
(a) Securities holding company. (1) A securities holding company means –
(i) Any company that directly or indirectly owns or controls, is controlled by, or is under common control with, one or more brokers or dealers registered with the Securities and Exchange Commission; and
(ii) Is required by a foreign regulator or provision of foreign law to be subject to comprehensive consolidated supervision.
(2) A securities holding company does not include a company that is –
(i) A nonbank financial company supervised by the Board pursuant to title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5301 et seq.);
(ii) An insured bank (other than an institution described in subparagraphs (D), (F), or (H) of section 2(c)(2) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(c)(2))) or a savings association;
(iii) An affiliate of an insured bank (other than an institution described in subparagraphs (D), (F), or (H) of section 2(c)(2) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(c)(2))) or an affiliate of a savings association;
(iv) A foreign bank, foreign company, or company that is described in section 8(a) of the International Banking Act of 1978 (12 U.S.C. 3106(a));
(v) A foreign bank that controls, directly or indirectly, a corporation chartered under section 25A of the Federal Reserve Act (12 U.S.C. 611 et seq.); or
(vi) Currently subject to comprehensive consolidated supervision by a foreign regulator.
(b) Supervised securities holding company means a securities holding company that is supervised by the Board pursuant to this part.
§ 241.3 Registration as a supervised securities holding company.
(a) Registration – (1) Filing requirement. A securities holding company may elect to register to become a supervised securities holding company by filing the appropriate form with the responsible Reserve Bank. The responsible Reserve Bank is determined by the Director of Banking Supervision and Regulation at the Board, or the Director’s delegee.
(2) Request for additional information. The Board may, at any time, request additional information that it believes is necessary to complete the registration.
(3) Complete filing. A registration by a securities holding company is considered to be filed on the date that all information required on the appropriate form is received.
(b) Effective date of registration – (1) In general. A registration filed by a securities holding company under paragraph (a) of this section is effective on the 45th calendar day after the date that a complete filing is received by the responsible Reserve Bank.
(2) Earlier notification that a registration is effective. The Board may notify a securities holding company that its registration to become a supervised securities holding company is effective prior to the 45th calendar day after the date that a complete filing is received by the responsible Reserve Bank. Such a notification must be in writing.
(3) Supervision and regulation of securities holding companies. (i) Upon an effective registration and except as otherwise provided by order of the Board, a supervised securities holding company shall be treated, and shall be subject to supervision and regulation by the Board, as if it were a bank holding company, or as otherwise appropriate to protect the safety and soundness of the supervised securities holding company and address the risks posed by such company to financial stability.
(ii) The provisions of section 4 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.) do not apply to a supervised securities holding company.
PART 242 – DEFINITIONS RELATING TO TITLE I OF THE DODD-FRANK ACT (REGULATION PP)
§ 242.1 Authority and purpose.
(a) Authority. This part is issued by the Board pursuant to sections 102(a)(7) and (b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) (12 U.S.C. 5311(a)(7) and (b)).
(b) Purpose. (1) This part establishes the criteria for determining if a company is “predominantly engaged in financial activities” as required under section 102(b) of the Dodd-Frank Act (12 U.S.C. 5311(b)) for purposes of Title I of the Dodd-Frank Act.
(2) This part defines the terms “significant nonbank financial company” and “significant bank holding company” as provided in section 102(a)(6) of the Dodd-Frank Act for purposes of –
(i) Section 113 of the Dodd-Frank Act (12 U.S.C. 5323) relating to the designation of nonbank financial companies by the Financial Stability Oversight Council (Council) for supervision by the Board; and
(ii) Section 165(d)(2) of the Dodd-Frank Act (12 U.S.C. 5365(d)(2)) relating to the credit exposure reports required to be filed by –
(A) A nonbank financial company supervised by the Board; and
(B) A bank holding company or foreign bank subject to the Bank Holding Company Act (BHC Act) (12 U.S.C. 1841 et seq.) that is a bank holding company described in section 165(a) of the Dodd-Frank Act (12 U.S.C. 5365(a)).
§ 242.2 Definitions.
For purposes of this part, the following definitions shall apply:
Applicable accounting standards. The term “applicable accounting standards” with respect to a company means:
(1) U.S. generally accepted accounting principles (GAAP), if the company uses GAAP in the ordinary course of its business in preparing its consolidated financial statements;
(2) International Financial Reporting Standards (IFRS), if the company uses IFRS in the ordinary course of its business in preparing its consolidated financial statements, or
(3) Such other accounting standards that the Council, with respect to the definition of a nonbank financial company for purposes of Title I of the Dodd-Frank Act (other than with respect to the definition of a significant nonbank financial company), or the Board, with respect to the definition of a significant nonbank financial company, determines are appropriate on a case-by-case basis.
Foreign nonbank financial company. The term “foreign nonbank financial company” means a company (other than a company that is, or is treated in the United States, as a bank holding company) that is –
(1) Incorporated or organized in a country other than the United States; and
(2) Predominantly engaged in (including through a branch in the United States) financial activities as defined in § 242.3 of this part.
Nonbank financial company. The term “nonbank financial company” means a U.S. nonbank financial company and a foreign nonbank financial company.
Nonbank financial company supervised by the Board. The term “nonbank financial company supervised by the Board” means a nonbank financial company or other company that the Council has determined under section 113 of the Dodd-Frank Act (12 U.S.C. 5323) should be supervised by the Board and for which such determination is still in effect.
State. The term “State” includes any State, commonwealth, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, and the United States Virgin Islands.
U.S. nonbank financial company. The term “U.S. nonbank financial company” means a company that –
(1) Is incorporated or organized under the laws of the United States or any State;
(2) Is predominantly engaged in financial activities as defined in § 242.3 of this part; and
(3) Is not –
(i) A bank holding company;
(ii) A Farm Credit System institution chartered and subject to the provisions of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.);
(iii) A national securities exchange (or parent thereof), clearing agency (or parent thereof, unless the parent is a bank holding company), security-based swap execution facility, or security-based swap data repository that, in each case, is registered with the Securities and Exchange Commission as such; or
(iv) A board of trade designated as a contract market (or parent thereof), a derivatives clearing organization (or parent thereof, unless the parent is a bank holding company), a swap execution facility, or a swap data repository that, in each case, is registered with the Commodity Futures Trading Commission as such.
§ 242.3 Nonbank companies “predominantly engaged” in financial activities.
(a) In general. A company is “predominantly engaged in financial activities” for purposes of this section if –
(1) The consolidated annual gross financial revenues of the company in either of its two most recently completed fiscal years represent 85 percent or more of the company’s consolidated annual gross revenues (as determined in accordance with applicable accounting standards) in that fiscal year;
(2) The consolidated total financial assets of the company as of the end of either of its two most recently completed fiscal years represent 85 percent or more of the company’s consolidated total assets (as determined in accordance with applicable accounting standards) as of the end of that fiscal year; or
(3) The Council, with respect to the definition of a nonbank financial company for purposes of Title I of the Dodd-Frank Act (other than with respect to the definition of a significant nonbank financial company), or the Board, with respect to the definition of a significant nonbank financial company, determines, based on all the facts and circumstances, that –
(i) The consolidated annual gross financial revenues of the company represent 85 percent or more of the company’s consolidated annual gross revenues; or
(ii) The consolidated total financial assets of the company represent 85 percent or more of the company’s consolidated total assets.
(b) Consolidated annual gross financial revenues. For purposes of this section, the “consolidated annual gross financial revenues” of a company means that portion of the consolidated annual gross revenues of the company (as determined in accordance with applicable accounting standards) that are derived, directly or indirectly, by the company or any of its subsidiaries from –
(1) Activities that are financial in nature; or
(2) The ownership, control, or activities of an insured depository institution or any subsidiary of an insured depository institution.
(c) Consolidated total financial assets. For purposes of this section, the “consolidated total financial assets” of a company means that portion of the consolidated total assets of the company (as determined in accordance with applicable accounting standards) that are related to –
(1) Activities that are financial in nature; or
(2) The ownership, control, or activities of an insured depository institution or any subsidiary of an insured depository institution.
(d) Activities that are financial in nature – (1) In general. For purposes of determining whether a company is predominantly engaged in financial activities under this section, activities that are financial in nature are set forth in the appendix to this part. Nothing in this part limits the authority of the Board under any other provision of law or regulation to modify the activities determined to be financial in nature for purposes of this section or for purposes of the BHC Act or to provide interpretations of section 4(k) of the BHC Act.
(2) Effect of other authority. Any activity described in the appendix is financial in nature for purposes of this part regardless of whether –
(i) A bank holding company (including a financial holding company or a company that is, or is treated in the United States as, a bank holding company) may be authorized to engage in the activity, or own or control shares of a company engaged in such activity, under any other provisions of the BHC Act or other Federal law including, but not limited to, section 4(a)(2), section 4(c)(5), section 4(c)(6), section 4(c)(7), section 4(c)(9), or section 4(c)(13) of the BHC Act (12 U.S.C. 1843(a)(2), (c)(5), (c)(6), (c)(7), (c)(9), or (c)(13)) and the Board’s implementing regulations; or
(ii) Other provisions of Federal or state law or regulations prohibit, restrict, or otherwise place conditions on the conduct of the activity by a bank holding company (including a financial holding company or a company that is, or is treated in the United States, as a bank holding company) or bank holding companies generally.
(e) Rules of construction. For purposes of determining whether a company is predominantly engaged in financial activities under this section –
(1) Unconsolidated investments. (i) Unless otherwise determined by the Council or the Board in accordance with paragraph (e)(1)(ii) of this section, revenues derived from, and assets related to, an investment by the company in an entity whose financial statements are not consolidated with those of the company are presumed to be financial in nature.
(ii) A company may seek to rebut the presumption described in paragraph (e)(1)(i) of this section by providing evidence to the Council, with respect to the definition of a nonbank financial company for purposes of Title I of the Dodd-Frank Act (other than with respect to the definition of a significant nonbank financial company), or the Board, with respect to the definition of a significant nonbank financial company, that the shares or ownership interests are not held in connection with a bona fide merchant or investment banking activity, are not held in connection with the activity of investing for others, do not represent an investment in an entity engaged in activities that are financial in nature as defined in the appendix, or are not otherwise related to a financial activity.
(2) Accounts receivable. (i) Unless otherwise determined by the Council or the Board in accordance with paragraph (e)(2)(ii) of this section, an account receivable is presumed to be an asset related to the financial activity of extending credit.
(ii) A company may seek to rebut the presumption described in paragraph (e)(2)(i) of this section by providing evidence to the Council, with respect to the definition of a nonbank financial company for purposes of Title I of the Dodd-Frank Act (other than with respect to the definition of a significant nonbank financial company), or the Board, with respect to the definition of a significant nonbank financial company, that the account receivable is not related to a financial activity.
(3) Goodwill. Goodwill is excluded from a company’s consolidated total assets and consolidated total financial assets.
(4) Cash and cash equivalents. (i) Cash is excluded from a company’s consolidated total assets and consolidated total financial assets.
(ii) Cash equivalents are assets related to a financial activity.
(5) Intangible assets. Intangible assets are treated in the same manner as the transaction or asset that gives rise to the intangible asset.
§ 242.4 Significant nonbank financial companies and significant bank holding companies.
For purposes of Title I of the Dodd-Frank Act, the following definitions shall apply:
(a) Significant nonbank financial company. A “significant nonbank financial company” means –
(1) Any nonbank financial company supervised by the Board; and
(2) Any other nonbank financial company that had $100 billion or more in total consolidated assets (as determined in accordance with applicable accounting standards) as of the end of its most recently completed fiscal year.
(b) Significant bank holding company. A “significant bank holding company” means any bank holding company or company that is, or is treated in the United States as, a bank holding company, that had $100 billion or more in total consolidated assets as of the end of the most recently completed calendar year, as reported on either the Federal Reserve’s FR Y-9C (Consolidated Financial Statement for Holding Companies), or any successor form thereto, or the Federal Reserve’s Form FR Y-7Q (Capital and Asset Report for Foreign Banking Organizations), or any successor form thereto.
Appendix A to Part 242 – Financial Activities for Purposes of Title I of the Dodd-Frank Act
(a) Lending, exchanging, transferring, investing for others, or safeguarding money or securities.
(b) Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker for purposes of the foregoing, in any state.
(c) Providing financial, investment, or economic advisory services, including advising an investment company (as defined in section 3 of the Investment Company Act of 1940).
(d) Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly.
(e) Underwriting, dealing in, or making a market in securities.
(f) Engaging in any activity that the Board has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto, which include –
(1) Extending credit and servicing loans. Making, acquiring, brokering, or servicing loans or other extensions of credit (including factoring, issuing letters of credit and accepting drafts) for the company’s account or for the account of others.
(2) Activities related to extending credit. Any activity usual in connection with making, acquiring, brokering or servicing loans or other extensions of credit, including the following activities:
(i) Real estate and personal property appraising. Performing appraisals of real estate and tangible and intangible personal property, including securities.
(ii) Arranging commercial real estate equity financing. Acting as intermediary for the financing of commercial or industrial income-producing real estate by arranging for the transfer of the title, control, and risk of such a real estate project to one or more investors.
(iii) Check-guaranty services. Authorizing a subscribing merchant to accept personal checks tendered by the merchant’s customers in payment for goods and services, and purchasing from the merchant validly authorized checks that are subsequently dishonored.
(iv) Collection agency services. Collecting overdue accounts receivable, either retail or commercial.
(v) Credit bureau services. Maintaining information related to the credit history of consumers and providing the information to a credit grantor who is considering a borrower’s application for credit or who has extended credit to the borrower.
(vi) Asset management, servicing, and collection activities. Engaging under contract with a third party in asset management, servicing, and collection
(vii) Acquiring debt in default. Acquiring debt that is in default at the time of acquisition.
(viii) Real estate settlement servicing. Providing real estate settlement services.
(3) Leasing personal or real property. Leasing personal or real property or acting as agent, broker, or adviser in leasing such property if:
(i) The lease is on a nonoperating basis;
(ii) The initial term of the lease is at least 90 days; and
(iii) In the case of leases involving real property:
(A) At the inception of the initial lease, the effect of the transaction will yield a return that will compensate the lessor for not less than the lessor’s full investment in the property plus the estimated total cost of financing the property over the term of the lease from rental payments, estimated tax benefits, and the estimated residual value of the property at the expiration of the initial lease; and
(B) The estimated residual value of property for purposes of paragraph (f)(3)(iii)(A) of this section shall not exceed 25 percent of the acquisition cost of the property to the lessor.
(4) Operating nonbank depository institutions.
(i) Industrial banking. Owning, controlling, or operating an industrial bank, Morris Plan bank, or industrial loan company that is not a bank for purposes of the BHC Act.
(ii) Operating savings associations. Owning, controlling, or operating a savings association.
(5) Trust company functions. Performing functions or activities that may be performed by a trust company (including activities of a fiduciary, agency, or custodial nature), in the manner authorized by federal or state law that is not a bank for purposes of section 2(c) of the Bank Holding Company Act.
(6) Financial and investment advisory activities. Acting as investment or financial advisor to any person, including (without, in any way, limiting the foregoing):
(i) Serving as investment adviser (as defined in section 2(a)(20) of the Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(20)), to an investment company registered under that act, including sponsoring, organizing, and managing a closed-end investment company;
(ii) Furnishing general economic information and advice, general economic statistical forecasting services, and industry studies;
(iii) Providing advice in connection with mergers, acquisitions, divestitures, investments, joint ventures, leveraged buyouts, recapitalizations, capital structurings, financing transactions and similar transactions, and conducting financial feasibility studies;
(iv) Providing information, statistical forecasting, and advice with respect to any transaction in foreign exchange, swaps, and similar transactions, commodities, and any forward contract, option, future, option on a future, and similar instruments;
(v) Providing educational courses, and instructional materials to consumers on individual financial management matters; and
(vi) Providing tax-planning and tax-preparation services to any person.
(7) Agency transactional services for customer investments.
(i) Securities brokerage. Providing securities brokerage services (including securities clearing and/or securities execution services on an exchange), whether alone or in combination with investment advisory services, and incidental activities (including related securities credit activities and custodial services).
(ii) Riskless principal transactions. Buying and selling in the secondary market all types of securities on the order of customers as a “riskless principal” to the extent of engaging in a transaction in which the company, after receiving an order to buy (or sell) a security from a customer, purchases (or sells) the security for its own account to offset a contemporaneous sale to (or purchase from) the customer.
(iii) Private placement services. Acting as agent for the private placement of securities in accordance with the requirements of the Securities Act of 1933 (1933 Act) and the rules of the Securities and Exchange Commission.
(iv) Futures commission merchant. Acting as a futures commission merchant for unaffiliated persons in the execution, clearance, or execution and clearance of any futures contract and option on a futures contract.
(v) Other transactional services. Providing to customers as agent transactional services with respect to swaps and similar transactions, any transaction described in paragraph (f)(8) of this appendix, any transaction that is permissible for a state member bank, and any other transaction involving a forward contract, option, futures, option on a futures or similar contract (whether traded on an exchange or not) relating to a commodity that is traded on an exchange.
(8) Investment transactions as principal.
(i) Underwriting and dealing in government obligations and money market instruments. Underwriting and dealing in obligations of the United States, general obligations of states and their political subdivisions, and other obligations that state member banks of the Federal Reserve System may be authorized to underwrite and deal in under 12 U.S.C. 24 and 335, including banker’s acceptances and certificates of deposit.
(ii) Investing and trading activities. Engaging as principal in:
(A) Foreign exchange;
(B) Forward contracts, options, futures, options on futures, swaps, and similar contracts, whether traded on exchanges or not, based on any rate, price, financial asset (including gold, silver, platinum, palladium, copper, or any other metal), nonfinancial asset, or group of assets, other than a bank-ineligible security,
(1) A state member bank is authorized to invest in the asset underlying the contract;
(2) The contract requires cash settlement;
(3) The contract allows for assignment, termination, or offset prior to delivery or expiration, and the company –
(i) Makes every reasonable effort to avoid taking or making delivery of the asset underlying the contract; or
(ii) Receives and instantaneously transfers title to the underlying asset, by operation of contract and without taking or making physical delivery of the asset; or
(4) The contract does not allow for assignment, termination, or offset prior to delivery or expiration and is based on an asset for which futures contracts or options on futures contracts have been approved for trading on a U.S. contract market by the Commodity Futures Trading Commission, and the company –
(i) Makes every reasonable effort to avoid taking or making delivery of the asset underlying the contract; or
(ii) Receives and instantaneously transfers title to the underlying asset, by operation of contract and without taking or making physical delivery of the asset.
(C) Forward contracts, options,
(iii) Buying and selling bullion, and related activities. Buying, selling and storing bars, rounds, bullion, and coins of gold, silver, platinum, palladium, copper, and any other metal for the company’s own account and the account of others, and providing incidental services such as arranging for storage, safe custody, assaying, and shipment.
(9) Management consulting and counseling activities.
(i) Management consulting. (A) Providing management consulting advice:
(1) On any matter to unaffiliated depository institutions, including commercial banks, savings and loan associations, savings banks, credit unions, industrial banks, Morris Plan banks, cooperative banks, industrial loan companies, trust companies, and branches or agencies of foreign banks;
(2) On any financial, economic, accounting, or audit matter to any other company.
(B) Revenues derived from, or assets related to, a company’s management consulting activities under this subparagraph will not be considered to be financial if the company:
(1) Owns or controls, directly or indirectly, more than 5 percent of the voting securities of the client institution; or
(2) Allows a management official, as defined in 12 CFR 212.2(h), of the company or any of its affiliates to serve as a management official of the client institution, except where such interlocking relationship is permitted pursuant to an exemption permitted by the Board.
(C) Up to 30 percent of a nonbank company’s assets or revenues related to management consulting services provided to customers not described in paragraph (f)(9)(i)(A)(1) or regarding matters not described in paragraph (f)(9)(i)(A)(2) of this appendix will be included in the company’s financial assets or revenues.
(ii) Employee benefits consulting services. Providing consulting services to employee benefit, compensation and insurance plans, including designing plans, assisting in the implementation of plans, providing administrative services to plans, and developing employee communication programs for plans.
(iii) Career counseling services. Providing career counseling services to:
(A) A financial organization
(B) Individuals who are seeking employment at a financial organization; and
(C) Individuals who are currently employed in or who seek positions in the finance, accounting, and audit departments of any company.
(10) Support services.
(i) Courier services. Providing courier services for:
(A) Checks, commercial papers, documents, and written instruments (excluding currency or bearer-type negotiable instruments) that are exchanged among banks and financial institutions; and
(B) Audit and accounting media of a banking or financial nature and other business records and documents used in processing such media.
(ii) Printing and selling MICR-encoded items. Printing and selling checks and related documents, including corporate image checks, cash tickets, voucher checks, deposit slips, savings withdrawal packages, and other forms that require Magnetic Ink Character Recognition (MICR) encoding.
(11) Insurance agency and underwriting.
(i) Credit insurance. Acting as principal, agent, or broker for insurance (including home mortgage redemption insurance) that is:
(A) Directly related to an extension of credit by the company or any of its subsidiaries; and
(B) Limited to ensuring the repayment of the outstanding balance due on the extension of credit
(ii) Finance company subsidiary. Acting as agent or broker for insurance directly related to an extension of credit by a finance company
(A) The insurance is limited to ensuring repayment of the outstanding balance on such extension of credit in the event of loss or damage to any property used as collateral for the extension of credit; and
(B) The extension of credit is not more than $10,000, or $25,000 if it is to finance the purchase of a residential manufactured home
(C) The applicant commits to notify borrowers in writing that:
(1) They are not required to purchase such insurance from the applicant;
(2) Such insurance does not insure any interest of the borrower in the collateral; and
(3) The applicant will accept more comprehensive property insurance in place of such single-interest insurance.
(iii) Insurance in small towns. Engaging in any insurance agency activity in a place where the company or a subsidiary has a lending office and that:
(A) Has a population not exceeding 5,000 (as shown in the preceding decennial census); or
(B) Has inadequate insurance agency facilities, as determined by the Board, after notice and opportunity for hearing.
(iv) Insurance-agency activities conducted on May 1, 1982. Engaging in any specific insurance-agency activity
(A) Engages in such specific insurance agency activity only at locations:
(1) In the state in which the company has its principal place of business (as defined in 12 U.S.C. 1842(d));
(2) In any state or states immediately adjacent to such state; and
(3) In any state in which the specific insurance-agency activity was conducted (or was approved to be conducted) by such company or subsidiary thereof or by any other subsidiary of such company on May 1, 1982; and
(B) Provides other insurance coverages that may become available after May 1, 1982, so long as those coverages insure against the types of risks as (or are otherwise functionally equivalent to) coverages sold or approved to be sold on May 1, 1982, by the company or subsidiary.
(v) Supervision of retail insurance agents. Supervising on behalf of insurance underwriters the activities of retail insurance agents who sell:
(A) Fidelity insurance and property and casualty insurance on the real and personal property used in the operations of the company or its subsidiaries; and
(B) Group insurance that protects the employees of the company or its subsidiaries.
(vi) Small companies. Engaging in any insurance-agency activity if the company has total consolidated assets of $50 million or less. Revenues derived from, or assets related to, a company’s insurance-agency activities under this paragraph will be considered financial only if the company does not engage in the sale of life insurance or annuities except as provided in paragraphs (f)(11) (i) and (iii) of this appendix, and does not continue to engage in insurance-agency activities pursuant to this provision more than 90 days after the end of the quarterly reporting period in which total assets of the company and its subsidiaries exceed $50 million.
(vii) Insurance-agency activities conducted before 1971. Engaging in any insurance-agency activity performed at any location in the United States directly or indirectly by a company that was engaged in insurance-agency activities prior to January 1, 1971, as a consequence of approval by the Board prior to January 1, 1971.
(12) Community development activities.
(i) Financing and investment activities. Making equity and debt investments in corporations or projects designed primarily to promote community welfare, such as the economic rehabilitation and development of low-income areas by providing housing, services, or jobs for residents.
(ii) Advisory activities. Providing advisory and related services for programs designed primarily to promote community welfare.
(13) Money orders, savings bonds, and traveler’s checks. The issuance and sale at retail of money orders and similar consumer-type payment instruments; the sale of U.S. savings bonds; and the issuance and sale of traveler’s checks.
(14) Data processing.
(i) Providing data processing, data storage and data transmission services, facilities (including data processing, data storage and data transmission hardware, software, documentation, or operating personnel), databases, advice, and access to such services, facilities, or data-bases by any technological means, if the data to be processed, stored or furnished are financial, banking or economic.
(ii) Up to 30 percent of a nonbank company’s assets or revenues related to providing general purpose hardware in connection with providing data processing products or services described in paragraph (f)(14)(i) of this appendix will be included in the company’s financial assets or revenues.
(15) Administrative services. Providing administrative and other services to mutual funds.
(16) Securities exchange. Owning shares of a securities exchange.
(17) Certification authority. Acting as a certification authority for digital signatures and authenticating the identity of persons conducting financial and nonfinancial transactions.
(18) Employment histories. Providing employment histories to third parties for use in making credit decisions and to depository institutions and their affiliates for use in the ordinary course of business.
(19) Check cashing and wire transmission. Check cashing and wire transmission services.
(20) Services offered in connection with banking services. In connection with offering banking services, providing notary public services, selling postage stamps and postage-paid envelopes, providing vehicle registration services, and selling public transportation tickets and tokens.
(21) Real estate title abstracting.
(g) Engaging, in the United States, in any activity that a bank holding company may engage in outside of the United States; and the Board has determined, under regulations prescribed or interpretations issued pursuant to section 4(c)(13) of the BHC Act (12 U.S.C. 1843(c)(13)) to be usual in connection with the transaction of banking or other financial operations abroad. Those activities include –
(1) Providing management consulting services, including to any person with respect to nonfinancial matters, so long as the management consulting services are advisory and do not allow the company to control the person to which the services are provided.
(2) Operating a travel agency in connection with financial services.
(3) Organizing, sponsoring, and managing a mutual fund.
(4) Commercial banking and other banking activities.
(h) Directly, or indirectly acquiring or controlling, whether as principal, on behalf of 1 or more entities, or otherwise, shares, assets, or ownership interests (including debt or equity securities, partnership interests, trust certificates, or other instruments representing ownership) of a company or other entity, whether or not constituting control of such company or entity, engaged in any activity not financial in nature as defined in this appendix if:
(1) Such shares, assets, or ownership interests are acquired and held as part of a bona fide underwriting or merchant or investment banking activity, including investment activities engaged in for the purpose of appreciation and ultimate resale or disposition of the investment;
(2) Such shares, assets, or ownership interests are held for a period of time to enable the sale or disposition thereof on a reasonable basis consistent with the financial viability of the activities described in paragraph (h)(1) of this appendix; and
(3) During the period such shares, assets, or ownership interests are held, the company does not routinely manage or operate such company or entity except as may be necessary or required to obtain a reasonable return on investment upon resale or disposition.
(i) Directly or indirectly acquiring or controlling, whether as principal, on behalf of 1 or more entities, or otherwise, shares, assets, or ownership interests (including debt or equity securities, partnership interests, trust certificates or other instruments representing ownership) of a company or other entity, whether or not constituting control of such company or entity, engaged in any activity not financial in nature as defined in this appendix if –
(1) Such shares, assets, or ownership interests are acquired and held by an insurance company that is predominantly engaged in underwriting life, accident and health, or property and casualty insurance (other than credit-related insurance) or providing and issuing annuities;
(2) Such shares, assets, or ownership interests represent an investment made in the ordinary course of business of such insurance company in accordance with relevant state law governing such investments; and
(3) During the period such shares, assets, or ownership interests are held, the company does not routinely manage or operate such company except as may be necessary or required to obtain a reasonable return on investment.
(j) Lending, exchanging, transferring, investing for others, or safeguarding financial assets other than money or securities.
(k) Providing any device or other instrumentality for transferring money or other financial assets.
(l) Arranging, effecting, or facilitating financial transactions for the account of third parties.
PART 243 – RESOLUTION PLANS (REGULATION QQ)
§ 243.1 Authority and scope.
(a) Authority. This part is issued pursuant to section 165(d)(8) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, 124 Stat. 1376, 1426-1427), as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act (Pub. L. 115-174, 132 Stat. 1296) (the Dodd-Frank Act), 12 U.S.C. 5365(d)(8), which requires the Board of Governors of the Federal Reserve System (Board) and the Federal Deposit Insurance Corporation (Corporation) to jointly issue rules implementing the provisions of section 165(d) of the Dodd-Frank Act. The Board is also issuing this part pursuant to section 165(a)(2)(C) of the Dodd-Frank Act.
(b) Scope. This part applies to each covered company and establishes rules and requirements regarding the submission and content of a resolution plan, as well as procedures for review by the Board and Corporation of a resolution plan.
§ 243.2 Definitions.
For purposes of this part:
Bankruptcy Code means Title 11 of the United States Code.
Biennial filer is defined in § 243.4(a)(1).
Category II banking organization means a covered company that is a category II banking organization pursuant to § 252.5 of this title.
Category III banking organization means a covered company that is a category III banking organization pursuant to § 252.5 of this title.
Company means a corporation, partnership, limited liability company, depository institution, business trust, special purpose entity, association, or similar organization, but does not include any organization, the majority of the voting securities of which are owned by the United States.
Control. A company controls another company when the first company, directly or indirectly, owns, or holds with power to vote, 25 percent or more of any class of the second company’s outstanding voting securities.
Core business lines means those business lines of the covered company, including associated operations, services, functions and support, that, in the view of the covered company, upon failure would result in a material loss of revenue, profit, or franchise value.
Core elements mean the information required to be included in a full resolution plan pursuant to § 243.5(c), (d)(1)(i), (iii), and (iv), (e)(1)(ii), (e)(2), (3), and (5), (f)(1)(v), and (g) regarding capital, liquidity, and the covered company’s plan for executing any recapitalization contemplated in its resolution plan, including updated quantitative financial information and analyses important to the execution of the covered company’s resolution strategy.
Council means the Financial Stability Oversight Council established by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
Covered company – (1) In general. A covered company means:
(i) Any nonbank financial company supervised by the Board;
(ii) Any global systemically important BHC;
(iii) Any bank holding company, as that term is defined in section 2 of the Bank Holding Company Act, as amended (12 U.S.C. 1841), and part 225 of this title (the Board’s Regulation Y), that has $250 billion or more in total consolidated assets, as determined based on the average of the company’s four most recent Consolidated Financial Statements for Holding Companies as reported on the Federal Reserve’s Form FR Y-9C; provided that in the case of a company whose total consolidated assets have increased as the result of a merger, acquisition, combination, or similar transaction, the Board and the Corporation may alternatively consider, in their discretion, to the extent and in the manner the Board and the Corporation jointly consider to be appropriate, one or more of the four most recent Consolidated Financial Statements for Holding Companies as reported on the Federal Reserve’s Form FR Y-9C or Capital and Asset Reports for Foreign Banking Organizations as reported on the Federal Reserve’s Form FR Y-7Q of the companies that were party to the merger, acquisition, combination or similar transaction;
(iv) Any foreign bank or company that is a bank holding company or is treated as a bank holding company under section 8(a) of the International Banking Act of 1978 (12 U.S.C. 3106(a)), and that has $250 billion or more in total consolidated assets, as determined annually based on the foreign bank’s or company’s most recent annual or, as applicable, quarterly based on the average of the foreign bank’s or company’s four most recent quarterly Capital and Asset Reports for Foreign Banking Organizations as reported on the Federal Reserve’s Form FR Y-7Q; provided that in the case of a company whose total consolidated assets have increased as the result of a merger, acquisition, combination, or similar transaction, the Board and the Corporation may alternatively consider, in their discretion, to the extent and in the manner the Board and the Corporation jointly consider to be appropriate, one or more of the four most recent Consolidated Financial Statements for Holding Companies as reported on the Federal Reserve’s Form FR Y-9C or Capital and Asset Reports for Foreign Banking Organizations as reported on the Federal Reserve’s Form FR Y-7Q of the companies that were party to the merger, acquisition, combination or similar transaction; and
(v) Any additional covered company as determined pursuant to § 243.13.
(2) Cessation of covered company status for nonbank financial companies supervised by the Board and global systemically important BHCs. Once a covered company meets the requirements described in paragraph (1)(i) or (ii) of this definition of covered company, the company shall remain a covered company until it no longer meets any of the requirements described in paragraph (1) of this definition of covered company.
(3) Cessation of covered company status for other covered companies. Once a company meets the requirements described in paragraph (1)(iii) or (iv) of this definition of covered company, the company shall remain a covered company until –
(i) In the case of a covered company described in paragraph (1)(iii) of this definition of covered company or a covered company described in paragraph (1)(iv) of this definition of covered company that files quarterly Capital and Asset Reports for Foreign Banking Organizations on the Federal Reserve’s Form FR Y-7Q, the company has reported total consolidated assets that are below $250 billion for each of four consecutive quarters, as determined based on its total consolidated assets as reported on each of its four most recent Consolidated Financial Statements for Holding Companies on the Federal Reserve’s Form FR Y-9C or Capital and Asset Reports for Foreign Banking Organizations on the Federal Reserve’s Form FR Y-7Q, as applicable; or
(ii) In the case of a covered company described in paragraph (1)(iv) of this definition of covered company that does not file quarterly Capital and Asset Reports for Foreign Banking Organizations on the Federal Reserve’s Form FR Y-7Q, the company has reported total consolidated assets that are below $250 billion for each of two consecutive years, as determined based on its total consolidated assets as reported on each of its two most recent annual Capital and Asset Reports for Foreign Banking Organizations on the Federal Reserve’s Form FR Y-7Q, or such earlier time as jointly determined by the Board and the Corporation.
(4) Multi-tiered holding company. In a multi-tiered holding company structure, covered company means the top-tier of the multi-tiered holding company unless the Board and the Corporation jointly identify a different holding company to satisfy the requirements that apply to the covered company. In making this determination, the Board and the Corporation shall consider:
(i) The ownership structure of the foreign banking organization, including whether the foreign banking organization is owned or controlled by a foreign government;
(ii) Whether the action would be consistent with the purposes of this part; and
(iii) Any other factors that the Board and the Corporation determine are relevant.
(5) Asset threshold for bank holding companies and foreign banking organizations. The Board may, pursuant to a recommendation of the Council, raise any asset threshold specified in paragraph (1)(iii) or (iv) of this definition of covered company.
(6) Exclusion. A bridge financial company chartered pursuant to 12 U.S.C. 5390(h) shall not be deemed to be a covered company hereunder.
Critical operations means those operations of the covered company, including associated services, functions and support, the failure or discontinuance of which would pose a threat to the financial stability of the United States.
Deficiency is defined in § 243.8(b).
Depository institution has the same meaning as in section 3(c)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)(1)) and includes a state-licensed uninsured branch, agency, or commercial lending subsidiary of a foreign bank.
Foreign banking organization means –
(1) A foreign bank, as defined in section 1(b)(7) of the International Banking Act of 1978 (12 U.S.C. 3101(7)), that:
(i) Operates a branch, agency, or commercial lending company subsidiary in the United States;
(ii) Controls a bank in the United States; or
(iii) Controls an Edge corporation acquired after March 5, 1987; and
(2) Any company of which the foreign bank is a subsidiary.
Foreign-based covered company means any covered company that is not incorporated or organized under the laws of the United States.
Full resolution plan means a full resolution plan described in § 243.5.
Functionally regulated subsidiary has the same meaning as in section 5(c)(5) of the Bank Holding Company Act, as amended (12 U.S.C. 1844(c)(5)).
Global systemically important BHC means a covered company that is a global systemically important BHC pursuant to § 252.5 of this title.
Identified critical operations means the critical operations of the covered company identified by the covered company or jointly identified by the Board and the Corporation under § 243.3(b)(2).
Material change means an event, occurrence, change in conditions or circumstances, or other change that results in, or could reasonably be foreseen to have, a material effect on:
(1) The resolvability of the covered company;
(2) The covered company’s resolution strategy; or
(3) How the covered company’s resolution strategy is implemented. Such changes include, but are not limited to:
(i) The identification of a new critical operation or core business line;
(ii) The identification of a new material entity or the de-identification of a material entity;
(iii) Significant increases or decreases in the business, operations, or funding or interconnections of a material entity; or
(iv) Changes in the primary regulatory authorities of a material entity or the covered company on a consolidated basis.
Material entity means a subsidiary or foreign office of the covered company that is significant to the activities of an identified critical operation or core business line, or is financially or operationally significant to the resolution of the covered company.
Material financial distress with regard to a covered company means that:
(1) The covered company has incurred, or is likely to incur, losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the company to avoid such depletion;
(2) The assets of the covered company are, or are likely to be, less than its obligations to creditors and others; or
(3) The covered company is, or is likely to be, unable to pay its obligations (other than those subject to a bona fide dispute) in the normal course of business.
Nonbank financial company supervised by the Board means a nonbank financial company or other company that the Council has determined under section 113 of the Dodd-Frank Act (12 U.S.C. 5323) shall be supervised by the Board and for which such determination is still in effect.
Rapid and orderly resolution means a reorganization or liquidation of the covered company (or, in the case of a covered company that is incorporated or organized in a jurisdiction other than the United States, the subsidiaries and operations of such foreign company that are domiciled in the United States) under the Bankruptcy Code that can be accomplished within a reasonable period of time and in a manner that substantially mitigates the risk that the failure of the covered company would have serious adverse effects on financial stability in the United States.
Reduced resolution plan means a reduced resolution plan described in § 243.7.
Shortcoming is defined in § 243.8(e).
Subsidiary means a company that is controlled by another company, and an indirect subsidiary is a company that is controlled by a subsidiary of a company.
Targeted resolution plan means a targeted resolution plan described in § 243.6.
Triennial full filer is defined in § 243.4(b)(1).
Triennial reduced filer is defined in § 243.4(c)(1).
United States means the United States and includes any state of the United States, the District of Columbia, any territory of the United States, Puerto Rico, Guam, American Samoa, and the Virgin Islands.
§ 243.3 Critical operations.
(a) Identification of critical operations by covered companies – (1) Process and methodology required. (i) Each biennial filer and triennial full filer shall establish and implement a process designed to identify each of its critical operations. After July 1, 2022, each triennial reduced filer that has any identified critical operation shall establish and implement a process designed to identify each of its critical operations. The scale of the process must be appropriate to the nature, size, complexity, and scope of the covered company’s operations. The covered company must review its process periodically and update it as necessary to ensure its continued effectiveness. The covered company shall describe its process and how it is applied as part of its corporate governance relating to resolution planning under § 243.5(d)(1). The covered company must conduct the process described in this paragraph (a)(1) sufficiently in advance of its next resolution plan submission so that the covered company is prepared to submit the information required under §§ 243.5 through 243.7 for each identified critical operation.
(ii) The process required under paragraph (a)(1)(i) of this section must include a methodology for evaluating the covered company’s participation in activities and markets that may be critical to the financial stability of the United States. The methodology must be designed, taking into account the nature, size, complexity, and scope of the covered company’s operations, to identify and assess:
(A) The markets and activities in which the covered company participates or has operations;
(B) The significance of those markets and activities with respect to the financial stability of the United States; and
(C) The significance of the covered company as a provider or other participant in those markets and activities.
(2) Waiver requests. A covered company that has previously submitted a resolution plan under this part may request a waiver of the requirement to have a process and methodology under paragraph (a)(1) of this section by submitting a waiver request in accordance with this paragraph (a)(2) if the covered company does not have an identified critical operation as of the date it submits the waiver request.
(i) Each waiver request shall be divided into a public section and a confidential section. A covered company shall segregate and separately identify the public section from the confidential section. A covered company shall include in the confidential section of a waiver request its rationale for why a waiver of the requirement would be appropriate, including an explanation of why the process and methodology are not likely to identify any critical operation given its business model, operations, and organizational structure. A covered company shall describe in the public section of a waiver request that it is seeking to waive the requirement.
(ii) Any waiver request must be made in writing no later than 18 months before the date by which the covered company is required to submit its next resolution plan. Notwithstanding the foregoing, with respect to any resolution plan that a covered company is required to submit on or before July 1, 2021, any waiver request must be made in writing no later than 17 months before that date.
(iii) The Board and Corporation may jointly approve or deny a waiver request in their discretion. Unless the Board and the Corporation have jointly approved a waiver request, the waiver request will be deemed denied on the date that is 12 months before the date by which the covered company is required to submit the resolution plan that immediately follows submission of the waiver request.
(iv) An approved waiver request under this paragraph (a)(2) is effective for the resolution plan submission that immediately follows submission of the waiver request and for any resolution plan submitted thereafter until, but not including, the covered company’s next full resolution plan submission.
(3) Limited exemption. A foreign-based covered company is exempt from the requirement to have a process and methodology under paragraph (a)(1) of this section in connection with any requirement to submit a resolution plan on or before July 1, 2021 if the foreign-based covered company does not have an identified critical operation as of the date that is 17 months before the date by which the covered company is required to submit the resolution plan.
(b) Joint identification of critical operations by the Board and the Corporation. (1) The Board and the Corporation shall, not less frequently than every six years, jointly review the operations of covered companies to determine whether to jointly identify critical operations of any covered company in accordance with paragraph (b)(2) of this section, or to jointly rescind any currently effective joint identification in accordance with paragraph (b)(3) of this section.
(2) If the Board and the Corporation jointly identify a covered company’s operation as a critical operation, the Board and the Corporation shall jointly notify the covered company in writing. A covered company is not required to include the information required under §§ 243.5 through 243.7 for the identified critical operation in any resolution plan that the covered company is required to submit within 12 months after the joint notification unless the operation had been identified by the covered company as a critical operation on or before the date the Board and the Corporation jointly notified the covered company.
(3) The Board and the Corporation may jointly rescind a joint identification under paragraph (b)(2) of this section by providing the covered company with joint notice of the rescission. Upon the notification, the covered company is not required to include the information regarding the operation required for identified critical operations under §§ 243.5 through 243.7 in any subsequent resolution plan unless:
(i) The covered company identifies the operation as a critical operation; or
(ii) The Board and the Corporation subsequently provide a joint notification under paragraph (b)(2) of this section to the covered company regarding the operation.
(4) A joint notification provided by the Board and the Corporation to a covered company before [effective date of final rule] that identifies any of its operations as a critical operation and not previously jointly rescinded is deemed to be a joint identification under paragraph (b)(2) of this section.
(c) Request for reconsideration of jointly identified critical operations. A covered company may request that the Board and the Corporation reconsider a joint identification under paragraph (b)(2) of this section in accordance with this paragraph (c).
(1) Written request for reconsideration. The covered company must submit a written request for reconsideration to the Board and the Corporation that includes a clear and complete statement of all arguments and all relevant, material information that the covered company expects to have considered. If a covered company has previously requested reconsideration regarding the operation, the written request must also describe the material differences between the new request and the most recent prior request.
(2) Timing. (i) If a covered company submits a request for reconsideration on or before the date that is 18 months before the date by which it is required to submit its next resolution plan, the Board and the Corporation will complete their reconsideration no later than 12 months before the date by which the covered company is required to submit its next resolution plan. Notwithstanding the foregoing, if the Board and the Corporation jointly find that additional information from the covered company is required to complete their reconsideration, the Board and the Corporation will jointly request in writing the additional information from the covered company. The Board and the Corporation will then complete their reconsideration no later than the later of:
(A) Ninety (90) days after receipt of all additional information from the covered company; and
(B) Twelve (12) months before the date by which the covered company is required to submit its next resolution plan.
(ii) If a covered company submits a request for reconsideration less than 18 months before the date by which it is required to submit its next resolution plan, the Board and the Corporation may, in their discretion, defer reconsideration of the joint identification until after the submission of that resolution plan, with the result that the covered company must include the identified critical operation in that resolution plan and the Board and the Corporation will complete their reconsideration in accordance with paragraph (c)(2)(i) of this section as though the covered company had submitted the request after the date by which the covered company is required to submit that resolution plan.
(3) Joint communication following reconsideration. The Board and the Corporation will communicate jointly the results of their reconsideration in writing to the covered company.
(d) De-identification by covered company of self-identified critical operations. A covered company may cease to include in its resolution plans the information required under §§ 243.5 through 243.7 regarding an operation previously identified only by the covered company (and not also jointly by the Board and the Corporation) as a critical operation only in accordance with this paragraph (d).
(1) Notice of de-identification. If a covered company ceases to identify an operation as a critical operation, the covered company must notify the Board and the Corporation of its de-identification. The notice must be in writing and include a clear and complete explanation of:
(i) Why the covered company previously identified the operation as a critical operation; and
(ii) Why the covered company no longer identifies the operation as a critical operation.
(2) Timing. Notwithstanding a covered company’s de-identification, and unless otherwise notified in writing jointly by the Board and the Corporation, a covered company shall include the applicable information required under §§ 243.5 through 243.7 regarding an operation previously identified by the covered company as a critical operation in any resolution plan the covered company is required to submit during the period ending 12 months after the covered company notifies the Board and the Corporation in accordance with paragraph (d)(1) of this section.
(3) No effect on joint identifications. Neither a covered company’s de-identification nor notice thereof under paragraph (d)(1) of this section rescinds a joint identification made by the Board and the Corporation under paragraph (b)(2) of this section.
§ 243.4 Resolution plan required.
(a) Biennial filers – (1) Group members. Biennial filer means:
(i) Any global systemically important BHC; and
(ii) Any nonbank financial company supervised by the Board that has not been jointly designated a triennial full filer by the Board and Corporation under paragraph (a)(2) of this section or that has been jointly re-designated a biennial filer by the Board and the Corporation under paragraph (a)(2) of this section.
(2) Nonbank financial companies. The Board and the Corporation may jointly designate a nonbank financial company supervised by the Board as a triennial full filer in their discretion, taking into account facts and circumstances that each of the Board and the Corporation in its discretion determines to be relevant. The Board and the Corporation may in their discretion jointly re-designate as a biennial filer a nonbank financial company that the Board and the Corporation had previously designated as a triennial filer, taking into account facts and circumstances that each of the Board and the Corporation in its discretion determines to be relevant.
(3) Frequency of submission. Biennial filers shall each submit a resolution plan to the Board and the Corporation every two years.
(4) Submission date. Biennial filers shall submit their resolution plans on or before July 1 of each year in which a resolution plan is due.
(5) Type of resolution plan required to be submitted. Biennial filers shall alternate submitting a full resolution plan and a targeted resolution plan.
(6) New covered companies that are biennial filers. A company that becomes a covered company and a biennial filer after [effective date of final rule] shall submit a full resolution plan on or before the next date by which the other biennial filers are required to submit resolution plans pursuant to paragraph (a)(4) of this section that occurs no earlier than 12 months after the date as of which the company became a covered company. The company’s subsequent resolution plans shall be of the type required to be submitted by the other biennial filers.
(b) Triennial full filers – (1) Group members. Triennial full filer means:
(i) Any category II banking organization;
(ii) Any category III banking organization; and
(iii) Any nonbank financial company supervised by the Board that is jointly designated a triennial full filer by the Board and Corporation under paragraph (a)(2) of this section.
(2) Frequency of submission. Triennial full filers shall each submit a resolution plan to the Board and the Corporation every three years.
(3) Submission date. Triennial full filers shall submit their resolution plans on or before July 1 of each year in which a resolution plan is due.
(4) Type of resolution plan required to be submitted. Triennial full filers shall alternate submitting a full resolution plan and a targeted resolution plan.
(5) New covered companies that are triennial full filers. A company that becomes a covered company and a triennial full filer after [effective date of final rule] shall submit a full resolution plan on or before the next date by which the other triennial full filers are required to submit resolution plans pursuant to paragraph (b)(3) of this section that occurs no earlier than 12 months after the date as of which the company became a covered company. The company’s subsequent resolution plans shall be of the type required to be submitted by the other triennial full filers.
(c) Triennial reduced filers – (1) Group members. Triennial reduced filer means any covered company that is not a global systemically important BHC, nonbank financial company supervised by the Board, category II banking organization, or category III banking organization.
(2) Frequency of submission. Triennial reduced filers shall each submit a resolution plan to the Board and the Corporation every three years.
(3) Submission date. Triennial reduced filers shall submit their resolution plans on or before July 1 of each year in which a resolution plan is due.
(4) Type of resolution plan required to be submitted. Triennial reduced filers shall submit a reduced resolution plan.
(5) New covered companies that are triennial reduced filers. A company that becomes a covered company and a triennial reduced filer after December 31, 2019 shall submit a full resolution plan on or before the next date by which the other triennial reduced filers are required to submit resolution plans pursuant to paragraph (c)(3) of this section that occurs no earlier than 12 months after the date as of which the company became a covered company. The company’s subsequent resolution plans shall be reduced resolution plans.
(d) General – (1) Changing filing groups. If a covered company that is a member of a filing group specified in paragraphs (a) through (c) of this section (“original group filer”) becomes a member of a different filing group specified in paragraphs (a) through (c) of this section (“new group filer”), then the covered company shall submit its next resolution plan as follows:
(i) If the next date by which the original group filers are required to submit their next resolution plans is the same date by which the other new group filers are required to submit their next resolution plans and:
(A) That date is less than 12 months after the date as of which the covered company became a new group filer, the covered company shall submit its next resolution plan on or before that date. The resolution plan may be the type of resolution plan that the original group filers are required to submit on or before that date or the type of resolution plan that the other new group filers are required to submit on or before that date.
(B) That date is 12 months or more after the date as of which the covered company became a new group filer, the covered company shall submit on or before that date the type of resolution plan the other new group filers are required to submit on or before that date.
(ii) If the next date by which the original group filers are required to submit their next resolution plans is different from the date by which the new group filers are required to submit their next resolution plans, the covered company shall submit its next resolution plan on or before the next date by which the other new group filers are required to submit a resolution plan that occurs no earlier than 12 months after the date as of which the covered company became a new group filer. The covered company shall submit the type of resolution plan that the other new group filers are required to submit on or before the date the covered company is required to submit its next resolution plan.
(iii) Notwithstanding paragraph (d)(1)(i) or (ii) of this section, any triennial reduced filer that becomes a biennial filer or a triennial full filer shall submit a full resolution plan on or before the next date by which the other new group filers are required to submit their next resolution plans that occurs no earlier than 12 months after the date as of which the covered company became a new group filer. After submitting a full resolution plan, the covered company shall submit, on or before the next date that the other new group filers are required to submit their next resolution plans, the type of resolution plan the other new group filers are required to submit on or before that date.
(2) Altering submission dates. Notwithstanding anything to the contrary in this part, the Board and Corporation may jointly determine that a covered company shall submit its resolution plan on or before a date other than as provided in paragraphs (a) through (c) or paragraph (d)(1) of this section. The Board and the Corporation shall provide a covered company with written notice of a determination under this paragraph (d)(2) no later than 12 months before the date by which the covered company is required to submit the resolution plan.
(3) Authority to require interim updates. The Board and the Corporation may jointly require that a covered company submit an update to a resolution plan submitted under this part, within a reasonable amount of time, as jointly determined by the Board and Corporation. The Board and the Corporation shall notify the covered company of its requirement to submit an update under this paragraph (d)(3) in writing, and shall specify the portions or aspects of the resolution plan the covered company shall update.
(4) Notice of extraordinary events – (i) In general. Each covered company shall provide the Board and the Corporation with a notice no later than 45 days after any material merger, acquisition of assets, or similar transaction or fundamental change to the covered company’s resolution strategy. Such notice must describe the event and explain how the event affects the resolvability of the covered company. The covered company shall address any event with respect to which it has provided notice pursuant to this paragraph (d)(4)(i) in the following resolution plan submitted by the covered company.
(ii) Exception. A covered company shall not be required to submit a notice under paragraph (d)(4)(i) of this section if the date by which the covered company would be required to submit the notice under paragraph (d)(4)(i) of this section would be within 90 days before the date by which the covered company is required to submit a resolution plan under this section.
(5) Authority to require a full resolution plan submission. Notwithstanding anything to the contrary in this part, the Board and Corporation may jointly require a covered company to submit a full resolution plan instead of a targeted resolution plan or a reduced resolution plan that the covered company is otherwise required to submit under this section. The Board and the Corporation shall provide a covered company with written notice of a determination under this paragraph (d)(5) no later than 12 months before the date by which the covered company is required to submit the full resolution plan. The date on or before which a full resolution plan must be submitted under this paragraph (d)(5) will be the date by which the covered company would otherwise be required to submit its upcoming targeted resolution plan or reduced resolution plan under paragraphs (a) through (c), or (d)(1) or (2) of this section. The requirement to submit a full resolution plan under this paragraph (d)(5) does not alter the type of resolution plan the covered company will subsequently be required to submit under this section.
(6) Waivers – (i) Authority to waive requirements. The Board and the Corporation may jointly waive one or more of the resolution plan requirements of § 243.5, § 243.6, or § 243.7 for one or more covered companies for any number of resolution plan submissions. A request pursuant to paragraph (d)(6)(ii) of this section is not required for the Board and Corporation to exercise their authority under this paragraph (d)(6)(i).
(ii) Waiver requests by covered companies. In connection with the submission of a full resolution plan, a triennial full filer or triennial reduced filer that has previously submitted a resolution plan under this part may request a waiver of one or more of the informational content requirements of § 243.5 in accordance with this paragraph (d)(6)(ii).
(A) A requirement to include any of the following information is not eligible for a waiver at the request of a triennial full filer or triennial reduced filer:
(1) Information specified in section 165(d)(1)(A) through (C) of the Dodd-Frank Act (12 U.S.C. 5365(d)(1)(A) through (C));
(2) Any core element;
(3) Information required to be included in the public section of a full resolution plan under § 243.11(c)(2);
(4) Information about the remediation of any previously identified deficiency or shortcoming unless the Board and the Corporation have jointly determined that the triennial full filer or triennial reduced filer has satisfactorily remedied the deficiency or addressed the shortcoming before its submission of the waiver request; or
(5) Information about changes to the triennial full filer or triennial reduced filer’s last submitted resolution plan resulting from any:
(i) Change in law or regulation;
(ii) Guidance or feedback from the Board and the Corporation; or
(iii) Any material change experienced by the triennial full filer or triennial reduced filer since it submitted that resolution plan.
(B) Each waiver request shall be divided into a public section and a confidential section. A triennial full filer or triennial reduced filer shall segregate and separately identify the public section from the confidential section.
(1) The triennial full filer or triennial reduced filer shall include in the confidential section of a waiver request a clear and complete explanation of why:
(i) Each requirement sought to be waived is not a requirement described in paragraph (d)(6)(ii)(A) of this section;
(ii) The information sought to be waived would not be relevant to the Board’s and Corporation’s review of the triennial full filer or triennial reduced filer’s next full resolution plan; and
(iii) A waiver of each requirement would be appropriate.
(2) The triennial full filer or triennial reduced filer shall include in the public section of a waiver request a list of the requirements that it is requesting be waived.
(C) A triennial full filer or triennial reduced filer may not make more than one waiver request for any full resolution plan submission and any waiver request must be made in writing no later than 18 months before the date by which the triennial full filer or triennial reduced filer is required to submit the full resolution plan.
(D) The Board and Corporation may jointly approve or deny a waiver request, in whole or in part, in their discretion. Unless the Board and the Corporation have jointly approved a waiver request, the waiver request will be deemed denied on the date that is 12 months before the date by which the triennial full filer or triennial reduced filer is required to submit the full resolution plan to which the waiver request relates.
(E) An approved waiver request under this paragraph (d)(6)(ii) is effective for only the full resolution plan that immediately follows submission of the waiver request.
(e) Access to information. In order to allow evaluation of a resolution plan, each covered company must provide the Board and the Corporation such information and access to personnel of the covered company as the Board and the Corporation jointly determine during the period for reviewing the resolution plan is necessary to assess the credibility of the resolution plan and the ability of the covered company to implement the resolution plan. In order to facilitate review of any waiver request by a covered company under § 243.3(a)(2) or paragraph (d)(6)(ii) of this section, or any joint identification of a critical operation of a covered company under § 243.3(b), each covered company must provide such information and access to personnel of the covered company as the Board and the Corporation jointly determine is necessary to evaluate the waiver request or whether the operation is a critical operation. The Board and the Corporation will rely to the fullest extent possible on examinations conducted by or on behalf of the appropriate Federal banking agency for the relevant company.
(f) Board of directors approval of resolution plan. Before submission of a resolution plan under paragraphs (a) through (c) of this section, the resolution plan of a covered company shall be approved by:
(1) The board of directors of the covered company and noted in the minutes; or
(2) In the case of a foreign-based covered company only, a delegee acting under the express authority of the board of directors of the covered company to approve the resolution plan.
(g) Resolution plans provided to the Council. The Board shall make the resolution plans and updates submitted by the covered company pursuant to this section available to the Council upon request.
(h) Required and prohibited assumptions. In preparing its resolution plan, a covered company shall:
(1) Take into account that the material financial distress or failure of the covered company may occur under the severely adverse economic conditions provided to the covered company by the Board pursuant to 12 U.S.C. 5365(i)(1)(B);
(2) Not rely on the provision of extraordinary support by the United States or any other government to the covered company or its subsidiaries to prevent the failure of the covered company, including any resolution actions taken outside the United States that would eliminate the need for any of a covered company’s U.S. subsidiaries to enter into resolution proceedings; and
(3) With respect to foreign banking organizations, not assume that the covered company takes resolution actions outside of the United States that would eliminate the need for any U.S. subsidiaries to enter into resolution proceedings.
(i) Point of contact. Each covered company shall identify a senior management official at the covered company responsible for serving as a point of contact regarding the resolution plan of the covered company.
(j) Incorporation of previously submitted resolution plan information by reference. Any resolution plan submitted by a covered company may incorporate by reference information from a resolution plan previously submitted by the covered company to the Board and the Corporation, provided that:
(1) The resolution plan seeking to incorporate information by reference clearly indicates:
(i) The information the covered company is incorporating by reference; and
(ii) Which of the covered company’s previously submitted resolution plan(s) originally contained the information the covered company is incorporating by reference and the specific location of the information in the covered company’s previously submitted resolution plan; and
(2) The covered company certifies that the information the covered company is incorporating by reference remains accurate in all respects that are material to the covered company’s resolution plan.
(k) Initial resolution plans after effective date. (1) Notwithstanding anything to the contrary in paragraphs (a) through (c) or (d)(1) of this section, each company that is a covered company as of December 31, 2019 is required to submit its initial resolution plan after December 31, 2019, as provided in this paragraph (k). The submission date and resolution plan type for each subsequent resolution plan will be determined pursuant to paragraphs (a) through (d) of this section.
(i) Biennial filers. Each covered company that is a biennial filer on October 1, 2020 and remains a biennial filer as of July 1, 2021, is required to submit a targeted resolution plan pursuant to paragraph (a)(4) of this section on or before July 1, 2021.
(ii) Triennial full filers. Each covered company that is a triennial full filer on October 1, 2020 and remains a triennial full filer as of July 1, 2021 is required to submit a targeted resolution plan pursuant to paragraph (b)(3) of this section on or before July 1, 2021.
(iii) Triennial reduced filers. Each covered company that is a triennial reduced filer on October 1, 2020 and remains a triennial reduced filer as of July 1, 2022 is required to submit a reduced resolution plan pursuant to paragraph (c)(3) of this section on or before July 1, 2022.
(2) With respect to any company that is a covered company as of December 31, 2019, and changes filings groups specified in paragraphs (a) through (c) of this section after October 1, 2020 and before the date by which it would be required to submit a resolution plan under paragraph (k)(1) of this section, the requirements for its initial resolution plan after it changes filing groups will be determined pursuant to paragraph (d)(1) of this section.
(3) Notwithstanding anything to the contrary in this paragraph (k), a covered company that has been jointly directed by the Board and the Corporation before December 31, 2019, to submit a resolution plan on or before July 1, 2020 describing changes it has made to its most recent resolution plan submission to address each shortcoming the agencies identified in that resolution plan shall submit a responsive resolution plan on or before July 1, 2020 in addition to any resolution plan that such covered company is otherwise required to submit under this section. The requirement to submit such a resolution plan on or before July 1, 2020 does not alter the timing or type of resolution plan any such covered company is required to submit under this section after July 1, 2020.
§ 243.5 Informational content of a full resolution plan.
(a) In general – (1) Domestic covered companies. A full resolution plan of a covered company that is organized or incorporated in the United States shall include the information specified in paragraphs (b) through (h) of this section with respect to the subsidiaries and operations that are domiciled in the United States as well as the foreign subsidiaries, offices, and operations of the covered company.
(2) Foreign-based covered companies. A full resolution plan of a covered company that is organized or incorporated in a jurisdiction other than the United States (other than a bank holding company) or that is a foreign banking organization shall include:
(i) The information specified in paragraphs (b) through (h) of this section with respect to the subsidiaries, branches and agencies, and identified critical operations and core business lines, as applicable, that are domiciled in the United States or conducted in whole or material part in the United States. With respect to the information specified in paragraph (g) of this section, the resolution plan of a foreign-based covered company shall also identify, describe in detail, and map to legal entity the interconnections and interdependencies among the U.S. subsidiaries, branches, and agencies, and between those entities and:
(A) The identified critical operations and core business lines of the foreign-based covered company; and
(B) Any foreign-based affiliate; and
(ii) A detailed explanation of how resolution planning for the subsidiaries, branches and agencies, and identified critical operations and core business lines of the foreign-based covered company that are domiciled in the United States or conducted in whole or material part in the United States is integrated into the foreign-based covered company’s overall resolution or other contingency planning process.
(b) Executive summary. Each full resolution plan of a covered company shall include an executive summary describing:
(1) The key elements of the covered company’s strategic plan for rapid and orderly resolution in the event of material financial distress at or failure of the covered company;
(2) A description of each material change experienced by the covered company since the filing of the covered company’s previously submitted resolution plan (or affirmation that no such material change has occurred);
(3) Changes to the covered company’s previously submitted resolution plan resulting from any:
(i) Change in law or regulation;
(ii) Guidance or feedback from the Board and the Corporation; or
(iii) Material change described pursuant to paragraph (b)(2) of this section; and
(4) Any actions taken by the covered company since filing of the previous resolution plan to improve the effectiveness of the covered company’s resolution plan or remediate or otherwise mitigate any material weaknesses or impediments to effective and timely execution of the resolution plan.
(c) Strategic analysis. Each full resolution plan shall include a strategic analysis describing the covered company’s plan for rapid and orderly resolution in the event of material financial distress or failure of the covered company. Such analysis shall:
(1) Include detailed descriptions of the:
(i) Key assumptions and supporting analysis underlying the covered company’s resolution plan, including any assumptions made concerning the economic or financial conditions that would be present at the time the covered company sought to implement such plan;
(ii) Range of specific actions to be taken by the covered company to facilitate a rapid and orderly resolution of the covered company, its material entities, and its identified critical operations and core business lines in the event of material financial distress or failure of the covered company;
(iii) Funding, liquidity and capital needs of, and resources available to, the covered company and its material entities, which shall be mapped to its identified critical operations and core business lines, in the ordinary course of business and in the event of material financial distress at or failure of the covered company;
(iv) Covered company’s strategy for maintaining operations of, and funding for, the covered company and its material entities, which shall be mapped to its identified critical operations and core business lines;
(v) Covered company’s strategy in the event of a failure or discontinuation of a material entity, core business line or identified critical operation, and the actions that will be taken by the covered company to prevent or mitigate any adverse effects of such failure or discontinuation on the financial stability of the United States; provided, however, if any such material entity is subject to an insolvency regime other than the Bankruptcy Code, a covered company may exclude that entity from its strategic analysis unless that entity either has $50 billion or more in total assets or conducts an identified critical operation; and
(vi) Covered company’s strategy for ensuring that any insured depository institution subsidiary of the covered company will be adequately protected from risks arising from the activities of any nonbank subsidiaries of the covered company (other than those that are subsidiaries of an insured depository institution);
(2) Identify the time period(s) the covered company expects would be needed for the covered company to successfully execute each material aspect and step of the covered company’s plan;
(3) Identify and describe any potential material weaknesses or impediments to effective and timely execution of the covered company’s plan;
(4) Discuss the actions and steps the covered company has taken or proposes to take to remediate or otherwise mitigate the weaknesses or impediments identified by the covered company, including a timeline for the remedial or other mitigatory action; and
(5) Provide a detailed description of the processes the covered company employs for:
(i) Determining the current market values and marketability of the core business lines, identified critical operations, and material asset holdings of the covered company;
(ii) Assessing the feasibility of the covered company’s plans (including timeframes) for executing any sales, divestitures, restructurings, recapitalizations, or other similar actions contemplated in the covered company’s resolution plan; and
(iii) Assessing the impact of any sales, divestitures, restructurings, recapitalizations, or other similar actions on the value, funding, and operations of the covered company, its material entities, identified critical operations and core business lines.
(d) Corporate governance relating to resolution planning. Each full resolution plan shall:
(1) Include a detailed description of:
(i) How resolution planning is integrated into the corporate governance structure and processes of the covered company;
(ii) The covered company’s policies, procedures, and internal controls governing preparation and approval of the covered company’s resolution plan;
(iii) The identity and position of the senior management official(s) of the covered company that is primarily responsible for overseeing the development, maintenance, implementation, and filing of the covered company’s resolution plan and for the covered company’s compliance with this part; and
(iv) The nature, extent, and frequency of reporting to senior executive officers and the board of directors of the covered company regarding the development, maintenance, and implementation of the covered company’s resolution plan;
(2) Describe the nature, extent, and results of any contingency planning or similar exercise conducted by the covered company since the date of the covered company’s most recently filed resolution plan to assess the viability of or improve the resolution plan of the covered company; and
(3) Identify and describe the relevant risk measures used by the covered company to report credit risk exposures both internally to its senior management and board of directors, as well as any relevant risk measures reported externally to investors or to the covered company’s appropriate Federal regulator.
(e) Organizational structure and related information. Each full resolution plan shall:
(1) Provide a detailed description of the covered company’s organizational structure, including:
(i) A hierarchical list of all material entities within the covered company’s organization (including legal entities that directly or indirectly hold such material entities) that:
(A) Identifies the direct holder and the percentage of voting and nonvoting equity of each legal entity and foreign office listed; and
(B) The location, jurisdiction of incorporation, licensing, and key management associated with each material legal entity and foreign office identified;
(ii) A mapping of the covered company’s identified critical operations and core business lines, including material asset holdings and liabilities related to such identified critical operations and core business lines, to material entities;
(2) Provide an unconsolidated balance sheet for the covered company and a consolidating schedule for all material entities that are subject to consolidation by the covered company;
(3) Include a description of the material components of the liabilities of the covered company, its material entities, identified critical operations and core business lines that, at a minimum, separately identifies types and amounts of the short-term and long-term liabilities, the secured and unsecured liabilities, and subordinated liabilities;
(4) Identify and describe the processes used by the covered company to:
(i) Determine to whom the covered company has pledged collateral;
(ii) Identify the person or entity that holds such collateral; and
(iii) Identify the jurisdiction in which the collateral is located, and, if different, the jurisdiction in which the security interest in the collateral is enforceable against the covered company;
(5) Describe any material off-balance sheet exposures (including guarantees and contractual obligations) of the covered company and its material entities, including a mapping to its identified critical operations and core business lines;
(6) Describe the practices of the covered company, its material entities and its core business lines related to the booking of trading and derivatives activities;
(7) Identify material hedges of the covered company, its material entities, and its core business lines related to trading and derivative activities, including a mapping to legal entity;
(8) Describe the hedging strategies of the covered company;
(9) Describe the process undertaken by the covered company to establish exposure limits;
(10) Identify the major counterparties of the covered company and describe the interconnections, interdependencies and relationships with such major counterparties;
(11) Analyze whether the failure of each major counterparty would likely have an adverse impact on or result in the material financial distress or failure of the covered company; and
(12) Identify each trading, payment, clearing, or settlement system of which the covered company, directly or indirectly, is a member and on which the covered company conducts a material number or value amount of trades or transactions. Map membership in each such system to the covered company’s material entities, identified critical operations and core business lines.
(f) Management information systems. (1) Each full resolution plan shall include:
(i) A detailed inventory and description of the key management information systems and applications, including systems and applications for risk management, accounting, and financial and regulatory reporting, used by the covered company and its material entities. The description of each system or application provided shall identify the legal owner or licensor, the use or function of the system or application, service level agreements related thereto, any software and system licenses, and any intellectual property associated therewith;
(ii) A mapping of the key management information systems and applications to the material entities, identified critical operations and core business lines of the covered company that use or rely on such systems and applications;
(iii) An identification of the scope, content, and frequency of the key internal reports that senior management of the covered company, its material entities, identified critical operations and core business lines use to monitor the financial health, risks, and operation of the covered company, its material entities, identified critical operations and core business lines;
(iv) A description of the process for the appropriate supervisory or regulatory agencies to access the management information systems and applications identified in paragraph (f) of this section; and
(v) A description and analysis of:
(A) The capabilities of the covered company’s management information systems to collect, maintain, and report, in a timely manner to management of the covered company, and to the Board, the information and data underlying the resolution plan; and
(B) Any gaps or weaknesses in such capabilities, and a description of the actions the covered company intends to take to promptly address such gaps, or weaknesses, and the time frame for implementing such actions.
(2) The Board will use its examination authority to review the demonstrated capabilities of each covered company to satisfy the requirements of paragraph (f)(1)(v) of this section. The Board will share with the Corporation information regarding the capabilities of the covered company to collect, maintain, and report in a timely manner information and data underlying the resolution plan.
(g) Interconnections and interdependencies. To the extent not provided elsewhere in this part, each full resolution plan shall identify and map to the material entities the interconnections and interdependencies among the covered company and its material entities, and among the identified critical operations and core business lines of the covered company that, if disrupted, would materially affect the funding or operations of the covered company, its material entities, or its identified critical operations or core business lines. Such interconnections and interdependencies may include:
(1) Common or shared personnel, facilities, or systems (including information technology platforms, management information systems, risk management systems, and accounting and recordkeeping systems);
(2) Capital, funding, or liquidity arrangements;
(3) Existing or contingent credit exposures;
(4) Cross-guarantee arrangements, cross-collateral arrangements, cross-default provisions, and cross-affiliate netting agreements;
(5) Risk transfers; and
(6) Service level agreements.
(h) Supervisory and regulatory information. Each full resolution plan shall:
(1) Identify any:
(i) Federal, state, or foreign agency or authority (other than a Federal banking agency) with supervisory authority or responsibility for ensuring the safety and soundness of the covered company, its material entities, identified critical operations and core business lines; and
(ii) Other Federal, state, or foreign agency or authority (other than a Federal banking agency) with significant supervisory or regulatory authority over the covered company, and its material entities and identified critical operations and core business lines.
(2) Identify any foreign agency or authority responsible for resolving a foreign-based material entity and identified critical operations or core business lines of the covered company; and
(3) Include contact information for each agency identified in paragraphs (h)(1) and (2) of this section.
§ 243.6 Informational content of a targeted resolution plan.
(a) In general. A targeted resolution plan is a subset of a full resolution plan and shall include core elements of a full resolution plan and information concerning key areas of focus as set forth in this section.
(b) Targeted resolution plan content. Each targeted resolution plan of a covered company shall include:
(1) The core elements;
(2) Such targeted information as the Board and Corporation may jointly identify pursuant to paragraph (c) of this section;
(3) A description of each material change experienced by the covered company since the filing of the covered company’s previously submitted resolution plan (or affirmation that no such material change has occurred); and
(4) A description of changes to the covered company’s previously submitted resolution plan resulting from any;
(i) Change in law or regulation;
(ii) Guidance or feedback from the Board and the Corporation; or
(iii) Material change described pursuant to paragraph (b)(3) of this section.
(c) Targeted information requests. No less than 12 months before the date by which a covered company is required to submit a targeted resolution plan, the Board and Corporation may jointly identify in writing resolution-related key areas of focus, questions, and issues that must also be addressed in the covered company’s targeted resolution plan.
(d) Deemed incorporation by reference. If a covered company does not include in its targeted resolution plan a description of changes to any information set forth in section 165(d)(1)(A), (B), or (C) of the Dodd-Frank Act (12 U.S.C. 5365(d)(1)(A), (B), or (C)) since its previously submitted resolution plan, such information from its previously submitted resolution plan are incorporated by reference into its targeted resolution plan.
§ 243.7 Informational content of a reduced resolution plan.
(a) Reduced resolution plan content. Each reduced resolution plan of a covered company shall include:
(1) A description of each material change experienced by the covered company since the filing of the covered company’s previously submitted resolution plan (or affirmation that no such material change has occurred); and
(2) A description of changes to the strategic analysis that was presented in the covered company’s previously submitted resolution plan resulting from any:
(i) Change in law or regulation;
(ii) Guidance or feedback from the Board and the Corporation; or
(iii) Material change described pursuant to paragraph (a)(1) of this section.
(b) Deemed incorporation by reference. If a covered company does not include in its reduced resolution plan a description of changes to any information set forth in section 165(d)(1)(A), (B), or (C) of the Dodd-Frank Act (12 U.S.C. 5365(d)(1)(A), (B), or (C)) since its previously submitted resolution plan, such information from its previously submitted resolution plan are incorporated by reference into its reduced resolution plan.
§ 243.8 Review of resolution plans; resubmission of deficient resolution plans.
(a) Review of resolution plans. The Board and Corporation will seek to coordinate their activities concerning the review of resolution plans, including planning for, reviewing, and assessing the resolution plans, as well as such activities that occur during the periods between resolution plan submissions.
(b) Joint determination regarding deficient resolution plans. If the Board and Corporation jointly determine that the resolution plan of a covered company submitted under § 243.4 is not credible or would not facilitate an orderly resolution of the covered company under the Bankruptcy Code, the Board and Corporation shall jointly notify the covered company in writing of such determination. Any joint notice provided under this paragraph (b) shall be provided pursuant to paragraph (f) of this section and shall identify the deficiencies identified by the Board and Corporation in the resolution plan. A deficiency is an aspect of a covered company’s resolution plan that the Board and Corporation jointly determine presents a weakness that individually or in conjunction with other aspects could undermine the feasibility of the covered company’s resolution plan.
(c) Resubmission of a resolution plan. Within 90 days of receiving a notice of deficiencies issued pursuant to paragraph (b) of this section, or such shorter or longer period as the Board and Corporation may jointly determine, a covered company shall submit a revised resolution plan to the Board and Corporation that addresses the deficiencies jointly identified by the Board and Corporation, and that discusses in detail:
(1) The revisions made by the covered company to address the deficiencies jointly identified by the Board and the Corporation;
(2) Any changes to the covered company’s business operations and corporate structure that the covered company proposes to undertake to facilitate implementation of the revised resolution plan (including a timeline for the execution of such planned changes); and
(3) Why the covered company believes that the revised resolution plan is credible and would result in an orderly resolution of the covered company under the Bankruptcy Code.
(d) Extensions of time. Upon their own initiative or a written request by a covered company, the Board and Corporation may jointly extend any time period under this section. Each extension request shall be supported by a written statement of the covered company describing the basis and justification for the request.
(e) Joint determination regarding shortcomings in resolution plans. The Board and Corporation may also jointly identify one or more shortcomings in a covered company’s resolution plan. A shortcoming is a weakness or gap that raises questions about the feasibility of a covered company’s resolution plan, but does not rise to the level of a deficiency for both the Board and Corporation. If a shortcoming is not satisfactorily explained or addressed before or in the submission of the covered company’s next resolution plan, it may be found to be a deficiency in the covered company’s next resolution plan. The Board and the Corporation may identify an aspect of a covered company’s resolution plan as a deficiency even if such aspect was not identified as a shortcoming in an earlier resolution plan submission.
(f) Feedback. Following their review of a resolution plan, the Board and the Corporation will jointly send a notification to each covered company that identifies any deficiencies or shortcomings in the covered company’s resolution plan (or confirms that no deficiencies or shortcomings were identified) and provides any feedback on the resolution plan. The Board and the Corporation will jointly send the notification no later than 12 months after the later of the date on which the covered company submitted the resolution plan and the date by which the covered company was required to submit the resolution plan, unless the Board and the Corporation jointly determine in their discretion that extenuating circumstances exist that require delay.
§ 243.9 Failure to cure deficiencies on resubmission of a resolution plan.
(a) In general. The Board and Corporation may jointly determine that a covered company or any subsidiary of a covered company shall be subject to more stringent capital, leverage, or liquidity requirements, or restrictions on the growth, activities, or operations of the covered company or the subsidiary if:
(1) The covered company fails to submit a revised resolution plan under § 243.8(c) within the required time period; or
(2) The Board and the Corporation jointly determine that a revised resolution plan submitted under § 243.8(c) does not adequately remedy the deficiencies jointly identified by the Board and the Corporation under § 243.8(b).
(b) Duration of requirements or restrictions. Any requirements or restrictions imposed on a covered company or a subsidiary thereof pursuant to paragraph (a) of this section shall cease to apply to the covered company or subsidiary, respectively, on the date that the Board and the Corporation jointly determine the covered company has submitted a revised resolution plan that adequately remedies the deficiencies jointly identified by the Board and the Corporation under § 243.8(b).
(c) Divestiture. The Board and Corporation, in consultation with the Council, may jointly, by order, direct the covered company to divest such assets or operations as are jointly identified by the Board and Corporation if:
(1) The Board and Corporation have jointly determined that the covered company or a subsidiary thereof shall be subject to requirements or restrictions pursuant to paragraph (a) of this section; and
(2) The covered company has failed, within the 2-year period beginning on the date on which the determination to impose such requirements or restrictions under paragraph (a) of this section was made, to submit a revised resolution plan that adequately remedies the deficiencies jointly identified by the Board and the Corporation under § 243.8(b); and
(3) The Board and Corporation jointly determine that the divestiture of such assets or operations is necessary to facilitate an orderly resolution of the covered company under the Bankruptcy Code in the event the company was to fail.
§ 243.10 Consultation.
Before issuing any notice of deficiencies under § 243.8(b), determining to impose requirements or restrictions under § 243.9(a), or issuing a divestiture order pursuant to § 243.9(c) with respect to a covered company that is likely to have a significant impact on a functionally regulated subsidiary or a depository institution subsidiary of the covered company, the Board –
(a) Shall consult with each Council member that primarily supervises any such subsidiary; and
(b) May consult with any other Federal, state, or foreign supervisor as the Board considers appropriate.
§ 243.11 No limiting effect or private right of action; confidentiality of resolution plans.
(a) No limiting effect on bankruptcy or other resolution proceedings. A resolution plan submitted pursuant to this part shall not have any binding effect on:
(1) A court or trustee in a proceeding commenced under the Bankruptcy Code;
(2) A receiver appointed under title II of the Dodd-Frank Act (12 U.S.C. 5381 et seq.);
(3) A bridge financial company chartered pursuant to 12 U.S.C. 5390(h); or
(4) Any other authority that is authorized or required to resolve a covered company (including any subsidiary or affiliate thereof) under any other provision of Federal, state, or foreign law.
(b) No private right of action. Nothing in this part creates or is intended to create a private right of action based on a resolution plan prepared or submitted under this part or based on any action taken by the Board or the Corporation with respect to any resolution plan submitted under this part.
(c) Form of resolution plans – (1) Generally. Each full, targeted, and reduced resolution plan of a covered company shall be divided into a public section and a confidential section. Each covered company shall segregate and separately identify the public section from the confidential section.
(2) Public section of full and targeted resolution plans. The public section of a full or targeted resolution plan shall consist of an executive summary of the resolution plan that describes the business of the covered company and includes, to the extent material to an understanding of the covered company:
(i) The names of material entities;
(ii) A description of core business lines;
(iii) Consolidated or segment financial information regarding assets, liabilities, capital and major funding sources;
(iv) A description of derivative activities and hedging activities;
(v) A list of memberships in material payment, clearing and settlement systems;
(vi) A description of foreign operations;
(vii) The identities of material supervisory authorities;
(viii) The identities of the principal officers;
(ix) A description of the corporate governance structure and processes related to resolution planning;
(x) A description of material management information systems; and
(xi) A description, at a high level, of the covered company’s resolution strategy, covering such items as the range of potential purchasers of the covered company, its material entities, and its core business lines.
(3) Public section of reduced resolution plans. The public section of a reduced resolution plan shall consist of an executive summary of the resolution plan that describes the business of the covered company and includes, to the extent material to an understanding of the covered company:
(i) The names of material entities;
(ii) A description of core business lines;
(iii) The identities of the principal officers; and
(iv) A description, at a high level, of the covered company’s resolution strategy, referencing the applicable resolution regimes for its material entities.
(d) Confidential treatment of resolution plans. (1) The confidentiality of resolution plans and related materials shall be determined in accordance with applicable exemptions under the Freedom of Information Act (5 U.S.C. 552(b)), 12 CFR part 261 (the Board’s Rules Regarding Availability of Information), and 12 CFR part 309 (the Corporation’s Disclosure of Information rules).
(2) Any covered company submitting a resolution plan or related materials pursuant to this part that desires confidential treatment of the information under 5 U.S.C. 552(b)(4), 12 CFR part 261 (the Board’s Rules Regarding Availability of Information), and 12 CFR part 309 (the Corporation’s Disclosure of Information rules) may file a request for confidential treatment in accordance with those rules.
(3) To the extent permitted by law, information comprising the Confidential Section of a resolution plan will be treated as confidential.
(4) To the extent permitted by law, the submission of any nonpublic data or information under this part shall not constitute a waiver of, or otherwise affect, any privilege arising under Federal or state law (including the rules of any Federal or state court) to which the data or information is otherwise subject. Privileges that apply to resolution plans and related materials are protected pursuant to section 18(x) of the Federal Deposit Insurance Act (12 U.S.C. 1828(x)).
§ 243.12 Enforcement.
The Board and Corporation may jointly enforce an order jointly issued by the Board and Corporation under § 243.9(a) or (c). The Board, in consultation with the Corporation, may take any action to address any violation of this part by a covered company under section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818).
§ 243.13 Additional covered companies.
An additional covered company is any bank holding company or any foreign bank or company that is a bank holding company or is treated as a bank holding company under section 8(a) of the International Banking Act of 1978 (12 U.S.C. 3106(a)) that is:
(a) Identified as a category II banking organization pursuant to § 252.5 of this title;
(b) Identified as a category III banking organization pursuant to § 252.5 of this title; or
(c) Made subject to this part by order of the Board.
PART 244 – CREDIT RISK RETENTION (REGULATION RR)
Subpart A – Authority, Purpose, Scope and Definitions
§ 244.1 Authority, purpose, and scope.
(a) Authority – (1) In general. This part (Regulation RR) is issued by the Board of Governors of the Federal Reserve System under section 15G of the Securities Exchange Act of 1934, as amended (Exchange Act) (15 U.S.C. 78o-11), as well as under the Federal Reserve Act, as amended (12 U.S.C. 221 et seq.); section 8 of the Federal Deposit Insurance Act (FDI Act), as amended (12 U.S.C. 1818); the Bank Holding Company Act of 1956, as amended (BHC Act) (12 U.S.C. 1841 et seq.); the Home Owners’ Loan Act of 1933 (HOLA) (12 U.S.C. 1461 et seq.); section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) (12 U.S.C. 5365); and the International Banking Act of 1978, as amended (12 U.S.C. 3101 et seq.).
(2) Nothing in this part shall be read to limit the authority of the Board to take action under provisions of law other than 15 U.S.C. 78o-11, including action to address unsafe or unsound practices or conditions, or violations of law or regulation, under section 8 of the FDI Act.
(b) Purpose. This part requires any securitizer to retain an economic interest in a portion of the credit risk for any asset that the securitizer, through the issuance of an asset-backed security, transfers, sells, or conveys to a third party in a transaction within the scope of section 15G of the Exchange Act. This part specifies the permissible types, forms, and amounts of credit risk retention, and establishes certain exemptions for securitizations collateralized by assets that meet specified underwriting standards or that otherwise qualify for an exemption.
(c) Scope. (1) This part applies to any securitizer that is:
(i) A state member bank (as defined in 12 CFR 208.2(g)); or
(ii) Any subsidiary of a state member bank.
(2) Section 15G of the Exchange Act and the rules issued thereunder apply to any securitizer that is:
(i) A bank holding company (as defined in 12 U.S.C. 1842);
(ii) A foreign banking organization (as defined in 12 CFR 211.21(o));
(iii) An Edge or agreement corporation (as defined in 12 CFR 211.1(c)(2) and (3));
(iv) A nonbank financial company that the Financial Stability Oversight Council has determined under section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) (12 U.S.C. 5323) shall be supervised by the Board and for which such determination is still in effect; or
(v) A savings and loan holding company (as defined in 12 U.S.C. 1467a); and
(vi) Any subsidiary of the foregoing.
(3) Compliance with this part is required:
(i) With respect to any securitization transaction collateralized by residential mortgages on December 24, 2015; and
(ii) With respect to any other securitization transaction on December 24, 2016.
§ 244.2 Definitions.
For purposes of this part, the following definitions apply:
ABS interest means:
(1) Any type of interest or obligation issued by an issuing entity, whether or not in certificated form, including a security, obligation, beneficial interest or residual interest (other than an uncertificated regular interest in a REMIC that is held by another REMIC, where both REMICs are part of the same structure and a single REMIC in that structure issues ABS interests to investors, or a non-economic residual interest issued by a REMIC), payments on which are primarily dependent on the cash flows of the collateral owned or held by the issuing entity; and
(2) Does not include common or preferred stock, limited liability interests, partnership interests, trust certificates, or similar interests that:
(i) Are issued primarily to evidence ownership of the issuing entity; and
(ii) The payments, if any, on which are not primarily dependent on the cash flows of the collateral held by the issuing entity; and
(3) Does not include the right to receive payments for services provided by the holder of such right, including servicing, trustee services and custodial services.
Affiliate of, or a person affiliated with, a specified person means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.
Appropriate Federal banking agency has the same meaning as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
Asset means a self-liquidating financial asset (including but not limited to a loan, lease, mortgage, or receivable).
Asset-backed security has the same meaning as in section 3(a)(79) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(79)).
Collateral means, with respect to any issuance of ABS interests, the assets that provide the cash flow and the servicing assets that support such cash flow for the ABS interests irrespective of the legal structure of issuance, including security interests in assets or other property of the issuing entity, fractional undivided property interests in the assets or other property of the issuing entity, or any other property interest in or rights to cash flow from such assets and related servicing assets. Assets or other property collateralize an issuance of ABS interests if the assets or property serve as collateral for such issuance.
Commercial real estate loan has the same meaning as in § 244.14.
Commission means the Securities and Exchange Commission.
Control including the terms “controlling,” “controlled by” and “under common control with”:
(1) Means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.
(2) Without limiting the foregoing, a person shall be considered to control another person if the first person:
(i) Owns, controls or holds with power to vote 25 percent or more of any class of voting securities of the other person; or
(ii) Controls in any manner the election of a majority of the directors, trustees or persons performing similar functions of the other person.
Credit risk means:
(1) The risk of loss that could result from the failure of the borrower in the case of a securitized asset, or the issuing entity in the case of an ABS interest in the issuing entity, to make required payments of principal or interest on the asset or ABS interest on a timely basis;
(2) The risk of loss that could result from bankruptcy, insolvency, or a similar proceeding with respect to the borrower or issuing entity, as appropriate; or
(3) The effect that significant changes in the underlying credit quality of the asset or ABS interest may have on the market value of the asset or ABS interest.
Creditor has the same meaning as in 15 U.S.C. 1602(g).
Depositor means:
(1) The person that receives or purchases and transfers or sells the securitized assets to the issuing entity;
(2) The sponsor, in the case of a securitization transaction where there is not an intermediate transfer of the assets from the sponsor to the issuing entity; or
(3) The person that receives or purchases and transfers or sells the securitized assets to the issuing entity in the case of a securitization transaction where the person transferring or selling the securitized assets directly to the issuing entity is itself a trust.
Eligible horizontal residual interest means, with respect to any securitization transaction, an ABS interest in the issuing entity:
(1) That is an interest in a single class or multiple classes in the issuing entity, provided that each interest meets, individually or in the aggregate, all of the requirements of this definition;
(2) With respect to which, on any payment date or allocation date on which the issuing entity has insufficient funds to satisfy its obligation to pay all contractual interest or principal due, any resulting shortfall will reduce amounts payable to the eligible horizontal residual interest prior to any reduction in the amounts payable to any other ABS interest, whether through loss allocation, operation of the priority of payments, or any other governing contractual provision (until the amount of such ABS interest is reduced to zero); and
(3) That, with the exception of any non-economic REMIC residual interest, has the most subordinated claim to payments of both principal and interest by the issuing entity.
Eligible horizontal cash reserve account means an account meeting the requirements of § 244.4(b).
Eligible vertical interest means, with respect to any securitization transaction, a single vertical security or an interest in each class of ABS interests in the issuing entity issued as part of the securitization transaction that constitutes the same proportion of each such class.
Federal banking agencies means the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation.
GAAP means generally accepted accounting principles as used in the United States.
Issuing entity means, with respect to a securitization transaction, the trust or other entity:
(1) That owns or holds the pool of assets to be securitized; and
(2) In whose name the asset-backed securities are issued.
Majority-owned affiliate of a person means an entity (other than the issuing entity) that, directly or indirectly, majority controls, is majority controlled by or is under common majority control with, such person. For purposes of this definition, majority control means ownership of more than 50 percent of the equity of an entity, or ownership of any other controlling financial interest in the entity, as determined under GAAP.
Originator means a person who:
(1) Through an extension of credit or otherwise, creates an asset that collateralizes an asset-backed security; and
(2) Sells the asset directly or indirectly to a securitizer or issuing entity.
REMIC has the same meaning as in 26 U.S.C. 860D.
Residential mortgage means:
(1) A transaction that is a covered transaction as defined in § 1026.43(b) of Regulation Z (12 CFR 1026.43(b)(1));
(2) Any transaction that is exempt from the definition of “covered transaction” under § 1026.43(a) of Regulation Z (12 CFR 1026.43(a)); and
(3) Any other loan secured by a residential structure that contains one to four units, whether or not that structure is attached to real property, including an individual condominium or cooperative unit and, if used as a residence, a mobile home or trailer.
Retaining sponsor means, with respect to a securitization transaction, the sponsor that has retained or caused to be retained an economic interest in the credit risk of the securitized assets pursuant to subpart B of this part.
Securitization transaction means a transaction involving the offer and sale of asset-backed securities by an issuing entity.
Securitized asset means an asset that:
(1) Is transferred, sold, or conveyed to an issuing entity; and
(2) Collateralizes the ABS interests issued by the issuing entity.
Securitizer means, with respect to a securitization transaction, either:
(1) The depositor of the asset-backed securities (if the depositor is not the sponsor); or
(2) The sponsor of the asset-backed securities.
Servicer means any person responsible for the management or collection of the securitized assets or making allocations or distributions to holders of the ABS interests, but does not include a trustee for the issuing entity or the asset-backed securities that makes allocations or distributions to holders of the ABS interests if the trustee receives such allocations or distributions from a servicer and the trustee does not otherwise perform the functions of a servicer.
Servicing assets means rights or other assets designed to assure the servicing or timely distribution of proceeds to ABS interest holders and rights or other assets that are related or incidental to purchasing or otherwise acquiring and holding the issuing entity’s securitized assets. Servicing assets include amounts received by the issuing entity as proceeds of securitized assets, including proceeds of rights or other assets, whether as remittances by obligors or as other recoveries.
Single vertical security means, with respect to any securitization transaction, an ABS interest entitling the sponsor to a specified percentage of the amounts paid on each class of ABS interests in the issuing entity (other than such single vertical security).
Sponsor means a person who organizes and initiates a securitization transaction by selling or transferring assets, either directly or indirectly, including through an affiliate, to the issuing entity.
State has the same meaning as in Section 3(a)(16) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(16)).
United States or U.S. means the United States of America, including its territories and possessions, any State of the United States, and the District of Columbia.
Wholly-owned affiliate means a person (other than an issuing entity) that, directly or indirectly, wholly controls, is wholly controlled by, or is wholly under common control with, another person. For purposes of this definition, “wholly controls” means ownership of 100 percent of the equity of an entity.
Subpart B – Credit Risk Retention
§ 244.3 Base risk retention requirement.
(a) Base risk retention requirement. Except as otherwise provided in this part, the sponsor of a securitization transaction (or majority-owned affiliate of the sponsor) shall retain an economic interest in the credit risk of the securitized assets in accordance with any one of §§ 244.4 through 244.10. Credit risk in securitized assets required to be retained and held by any person for purposes of compliance with this part, whether a sponsor, an originator, an originator-seller, or a third-party purchaser, except as otherwise provided in this part, may be acquired and held by any of such person’s majority-owned affiliates (other than an issuing entity).
(b) Multiple sponsors. If there is more than one sponsor of a securitization transaction, it shall be the responsibility of each sponsor to ensure that at least one of the sponsors of the securitization transaction (or at least one of their majority-owned or wholly-owned affiliates, as applicable) retains an economic interest in the credit risk of the securitized assets in accordance with any one of § 244.4, § 244.5, § 244.8, § 244.9, or § 244.10.
§ 244.4 Standard risk retention.
(a) General requirement. Except as provided in §§ 244.5 through 244.10, the sponsor of a securitization transaction must retain an eligible vertical interest or eligible horizontal residual interest, or any combination thereof, in accordance with the requirements of this section.
(1) If the sponsor retains only an eligible vertical interest as its required risk retention, the sponsor must retain an eligible vertical interest in a percentage of not less than 5 percent.
(2) If the sponsor retains only an eligible horizontal residual interest as its required risk retention, the amount of the interest must equal at least 5 percent of the fair value of all ABS interests in the issuing entity issued as a part of the securitization transaction, determined using a fair value measurement framework under GAAP.
(3) If the sponsor retains both an eligible vertical interest and an eligible horizontal residual interest as its required risk retention, the percentage of the fair value of the eligible horizontal residual interest and the percentage of the eligible vertical interest must equal at least five.
(4) The percentage of the eligible vertical interest, eligible horizontal residual interest, or combination thereof retained by the sponsor must be determined as of the closing date of the securitization transaction.
(b) Option to hold base amount in eligible horizontal cash reserve account. In lieu of retaining all or any part of an eligible horizontal residual interest under paragraph (a) of this section, the sponsor may, at closing of the securitization transaction, cause to be established and funded, in cash, an eligible horizontal cash reserve account in the amount equal to the fair value of such eligible horizontal residual interest or part thereof, provided that the account meets all of the following conditions:
(1) The account is held by the trustee (or person performing similar functions) in the name and for the benefit of the issuing entity;
(2) Amounts in the account are invested only in cash and cash equivalents; and
(3) Until all ABS interests in the issuing entity are paid in full, or the issuing entity is dissolved:
(i) Amounts in the account shall be released only to:
(A) Satisfy payments on ABS interests in the issuing entity on any payment date on which the issuing entity has insufficient funds from any source to satisfy an amount due on any ABS interest; or
(B) Pay critical expenses of the trust unrelated to credit risk on any payment date on which the issuing entity has insufficient funds from any source to pay such expenses and:
(1) Such expenses, in the absence of available funds in the eligible horizontal cash reserve account, would be paid prior to any payments to holders of ABS interests; and
(2) Such payments are made to parties that are not affiliated with the sponsor; and
(ii) Interest (or other earnings) on investments made in accordance with paragraph (b)(2) of this section may be released once received by the account.
(c) Disclosures. A sponsor relying on this section shall provide, or cause to be provided, to potential investors, under the caption “Credit Risk Retention”, a reasonable period of time prior to the sale of the asset-backed securities in the securitization transaction the following disclosures in written form and within the time frames set forth in this paragraph (c):
(1) Horizontal interest. With respect to any eligible horizontal residual interest held under paragraph (a) of this section, a sponsor must disclose:
(i) A reasonable period of time prior to the sale of an asset-backed security issued in the same offering of ABS interests,
(A) The fair value (expressed as a percentage of the fair value of all of the ABS interests issued in the securitization transaction and dollar amount (or corresponding amount in the foreign currency in which the ABS interests are issued, as applicable)) of the eligible horizontal residual interest that the sponsor expects to retain at the closing of the securitization transaction. If the specific prices, sizes, or rates of interest of each tranche of the securitization are not available, the sponsor must disclose a range of fair values (expressed as a percentage of the fair value of all of the ABS interests issued in the securitization transaction and dollar amount (or corresponding amount in the foreign currency in which the ABS interests are issued, as applicable)) of the eligible horizontal residual interest that the sponsor expects to retain at the close of the securitization transaction based on a range of bona fide estimates or specified prices, sizes, or rates of interest of each tranche of the securitization. A sponsor disclosing a range of fair values based on a range of bona fide estimates or specified prices, sizes or rates of interest of each tranche of the securitization must also disclose the method by which it determined any range of prices, tranche sizes, or rates of interest.
(B) A description of the material terms of the eligible horizontal residual interest to be retained by the sponsor;
(C) A description of the valuation methodology used to calculate the fair values or range of fair values of all classes of ABS interests, including any portion of the eligible horizontal residual interest retained by the sponsor;
(D) All key inputs and assumptions or a comprehensive description of such key inputs and assumptions that were used in measuring the estimated total fair value or range of fair values of all classes of ABS interests, including the eligible horizontal residual interest to be retained by the sponsor.
(E) To the extent applicable to the valuation methodology used, the disclosure required in paragraph (c)(1)(i)(D) of this section shall include, but should not be limited to, quantitative information about each of the following:
(1) Discount rates;
(2) Loss given default (recovery);
(3) Prepayment rates;
(4) Default rates;
(5) Lag time between default and recovery; and
(6) The basis of forward interest rates used.
(F) The disclosure required in paragraphs (c)(1)(i)(C) and (D) of this section shall include, at a minimum, descriptions of all inputs and assumptions that either could have a material impact on the fair value calculation or would be material to a prospective investor’s ability to evaluate the sponsor’s fair value calculations. To the extent the disclosure required in this paragraph (c)(1) includes a description of a curve or curves, the description shall include a description of the methodology that was used to derive each curve and a description of any aspects or features of each curve that could materially impact the fair value calculation or the ability of a prospective investor to evaluate the sponsor’s fair value calculation. To the extent a sponsor uses information about the securitized assets in its calculation of fair value, such information shall not be as of a date more than 60 days prior to the date of first use with investors; provided that for a subsequent issuance of ABS interests by the same issuing entity with the same sponsor for which the securitization transaction distributes amounts to investors on a quarterly or less frequent basis, such information shall not be as of a date more than 135 days prior to the date of first use with investors; provided further, that the balance or value (in accordance with the transaction documents) of the securitized assets may be increased or decreased to reflect anticipated additions or removals of assets the sponsor makes or expects to make between the cut-off date or similar date for establishing the composition of the asset pool collateralizing such asset-backed security and the closing date of the securitization.
(G) A summary description of the reference data set or other historical information used to develop the key inputs and assumptions referenced in paragraph (c)(1)(i)(D) of this section, including loss given default and default rates;
(ii) A reasonable time after the closing of the securitization transaction:
(A) The fair value (expressed as a percentage of the fair value of all of the ABS interests issued in the securitization transaction and dollar amount (or corresponding amount in the foreign currency in which the ABS are issued, as applicable)) of the eligible horizontal residual interest the sponsor retained at the closing of the securitization transaction, based on actual sale prices and finalized tranche sizes;
(B) The fair value (expressed as a percentage of the fair value of all of the ABS interests issued in the securitization transaction and dollar amount (or corresponding amount in the foreign currency in which the ABS are issued, as applicable)) of the eligible horizontal residual interest that the sponsor is required to retain under this section; and
(C) To the extent the valuation methodology or any of the key inputs and assumptions that were used in calculating the fair value or range of fair values disclosed prior to sale and required under paragraph (c)(1)(i) of this section materially differs from the methodology or key inputs and assumptions used to calculate the fair value at the time of closing, descriptions of those material differences.
(iii) If the sponsor retains risk through the funding of an eligible horizontal cash reserve account:
(A) The amount to be placed (or that is placed) by the sponsor in the eligible horizontal cash reserve account at closing, and the fair value (expressed as a percentage of the fair value of all of the ABS interests issued in the securitization transaction and dollar amount (or corresponding amount in the foreign currency in which the ABS interests are issued, as applicable)) of the eligible horizontal residual interest that the sponsor is required to fund through the eligible horizontal cash reserve account in order for such account, together with other retained interests, to satisfy the sponsor’s risk retention requirement;
(B) A description of the material terms of the eligible horizontal cash reserve account; and
(C) The disclosures required in paragraphs (c)(1)(i) and (ii) of this section.
(2) Vertical interest. With respect to any eligible vertical interest retained under paragraph (a) of this section, the sponsor must disclose:
(i) A reasonable period of time prior to the sale of an asset-backed security issued in the same offering of ABS interests,
(A) The form of the eligible vertical interest;
(B) The percentage that the sponsor is required to retain as a vertical interest under this section; and
(C) A description of the material terms of the vertical interest and the amount that the sponsor expects to retain at the closing of the securitization transaction.
(ii) A reasonable time after the closing of the securitization transaction, the amount of the vertical interest the sponsor retained at closing, if that amount is materially different from the amount disclosed under paragraph (c)(2)(i) of this section.
(d) Record maintenance. A sponsor must retain the certifications and disclosures required in paragraphs (a) and (c) of this section in its records and must provide the disclosure upon request to the Commission and its appropriate Federal banking agency, if any, until three years after all ABS interests are no longer outstanding.
§ 244.5 Revolving pool securitizations.
(a) Definitions. For purposes of this section, the following definitions apply:
Revolving pool securitization means an issuing entity that is established to issue on multiple issuance dates more than one series, class, subclass, or tranche of asset-backed securities that are collateralized by a common pool of securitized assets that will change in composition over time, and that does not monetize excess interest and fees from its securitized assets.
Seller’s interest means an ABS interest or ABS interests:
(1) Collateralized by the securitized assets and servicing assets owned or held by the issuing entity, other than the following that are not considered a component of seller’s interest:
(i) Servicing assets that have been allocated as collateral only for a specific series in connection with administering the revolving pool securitization, such as a principal accumulation or interest reserve account; and
(ii) Assets that are not eligible under the terms of the securitization transaction to be included when determining whether the revolving pool securitization holds aggregate securitized assets in specified proportions to aggregate outstanding investor ABS interests issued; and
(2) That is pari passu with each series of investor ABS interests issued, or partially or fully subordinated to one or more series in identical or varying amounts, with respect to the allocation of all distributions and losses with respect to the securitized assets prior to early amortization of the revolving securitization (as specified in the securitization transaction documents); and
(3) That adjusts for fluctuations in the outstanding principal balance of the securitized assets in the pool.
(b) General requirement. A sponsor satisfies the risk retention requirements of § 244.3 with respect to a securitization transaction for which the issuing entity is a revolving pool securitization if the sponsor maintains a seller’s interest of not less than 5 percent of the aggregate unpaid principal balance of all outstanding investor ABS interests in the issuing entity.
(c) Measuring the seller’s interest. In measuring the seller’s interest for purposes of meeting the requirements of paragraph (b) of this section:
(1) The unpaid principal balance of the securitized assets for the numerator of the 5 percent ratio shall not include assets of the types excluded from the definition of seller’s interest in paragraph (a) of this section;
(2) The aggregate unpaid principal balance of outstanding investor ABS interests in the denominator of the 5 percent ratio may be reduced by the amount of funds held in a segregated principal accumulation account for the repayment of outstanding investor ABS interests, if:
(i) The terms of the securitization transaction documents prevent funds in the principal accumulation account from being applied for any purpose other than the repayment of the unpaid principal of outstanding investor ABS interests; and
(ii) Funds in that account are invested only in the types of assets in which funds held in an eligible horizontal cash reserve account pursuant to § 244.4 are permitted to be invested;
(3) If the terms of the securitization transaction documents set minimum required seller’s interest as a proportion of the unpaid principal balance of outstanding investor ABS interests for one or more series issued, rather than as a proportion of the aggregate outstanding investor ABS interests in all outstanding series combined, the percentage of the seller’s interest for each such series must, when combined with the percentage of any minimum seller’s interest set by reference to the aggregate outstanding investor ABS interests, equal at least 5 percent;
(4) The 5 percent test must be determined and satisfied at the closing of each issuance of ABS interests to investors by the issuing entity, and
(i) At least monthly at a seller’s interest measurement date specified under the securitization transaction documents, until no ABS interest in the issuing entity is held by any person not a wholly-owned affiliate of the sponsor; or
(ii) If the revolving pool securitization fails to meet the 5 percent test as of any date described in paragraph (c)(4)(i) of this section, and the securitization transaction documents specify a cure period, the 5 percent test must be determined and satisfied within the earlier of the cure period, or one month after the date described in paragraph (c)(4)(i).
(d) Measuring outstanding investor ABS interests. In measuring the amount of outstanding investor ABS interests for purposes of this section, ABS interests held for the life of such ABS interests by the sponsor or its wholly-owned affiliates may be excluded.
(e) Holding and retention of the seller’s interest; legacy trusts. (1) Notwithstanding § 244.12(a), the seller’s interest, and any offsetting horizontal retention interest retained pursuant to paragraph (g) of this section, must be retained by the sponsor or by one or more wholly-owned affiliates of the sponsor, including one or more depositors of the revolving pool securitization.
(2) If one revolving pool securitization issues collateral certificates representing a beneficial interest in all or a portion of the securitized assets held by that securitization to another revolving pool securitization, which in turn issues ABS interests for which the collateral certificates are all or a portion of the securitized assets, a sponsor may satisfy the requirements of paragraphs (b) and (c) of this section by retaining the seller’s interest for the assets represented by the collateral certificates through either of the revolving pool securitizations, so long as both revolving pool securitizations are retained at the direction of the same sponsor or its wholly-owned affiliates.
(3) If the sponsor retains the seller’s interest associated with the collateral certificates at the level of the revolving pool securitization that issues those collateral certificates, the proportion of the seller’s interest required by paragraph (b) of this section retained at that level must equal the proportion that the principal balance of the securitized assets represented by the collateral certificates bears to the principal balance of the securitized assets in the revolving pool securitization that issues the ABS interests, as of each measurement date required by paragraph (c) of this section.
(f) Offset for pool-level excess funding account. The 5 percent seller’s interest required on each measurement date by paragraph (c) of this section may be reduced on a dollar-for-dollar basis by the balance, as of such date, of an excess funding account in the form of a segregated account that:
(1) Is funded in the event of a failure to meet the minimum seller’s interest requirements or other requirement to maintain a minimum balance of securitized assets under the securitization transaction documents by distributions otherwise payable to the holder of the seller’s interest;
(2) Is invested only in the types of assets in which funds held in a horizontal cash reserve account pursuant to § 244.4 are permitted to be invested; and
(3) In the event of an early amortization, makes payments of amounts held in the account to holders of investor ABS interests in the same manner as payments to holders of investor ABS interests of amounts received on securitized assets.
(g) Combined seller’s interests and horizontal interest retention. The 5 percent seller’s interest required on each measurement date by paragraph (c) of this section may be reduced to a percentage lower than 5 percent to the extent that, for all series of investor ABS interests issued after the applicable effective date of this § 244.5, the sponsor, or notwithstanding § 244.12(a) a wholly-owned affiliate of the sponsor, retains, at a minimum, a corresponding percentage of the fair value of ABS interests issued in each series, in the form of one or more of the horizontal residual interests meeting the requirements of paragraphs (h) or (i).
(h) Residual ABS interests in excess interest and fees. The sponsor may take the offset described in paragraph (g) of this section for a residual ABS interest in excess interest and fees, whether certificated or uncertificated, in a single or multiple classes, subclasses, or tranches, that meets, individually or in the aggregate, the requirements of this paragraph (h);
(1) Each series of the revolving pool securitization distinguishes between the series’ share of the interest and fee cash flows and the series’ share of the principal repayment cash flows from the securitized assets collateralizing the revolving pool securitization, which may according to the terms of the securitization transaction documents, include not only the series’ ratable share of such cash flows but also excess cash flows available from other series;
(2) The residual ABS interest’s claim to any part of the series’ share of the interest and fee cash flows for any interest payment period is subordinated to all accrued and payable interest due on the payment date to more senior ABS interests in the series for that period, and further reduced by the series’ share of losses, including defaults on principal of the securitized assets collateralizing the revolving pool securitization (whether incurred in that period or carried over from prior periods) to the extent that such payments would have been included in amounts payable to more senior interests in the series;
(3) The revolving pool securitization continues to revolve, with one or more series, classes, subclasses, or tranches of asset-backed securities that are collateralized by a common pool of assets that change in composition over time; and
(4) For purposes of taking the offset described in paragraph (g) of this section, the sponsor determines the fair value of the residual ABS interest in excess interest and fees, and the fair value of the series of outstanding investor ABS interests to which it is subordinated and supports using the fair value measurement framework under GAAP, as of:
(i) The closing of the securitization transaction issuing the supported ABS interests; and
(ii) The seller’s interest measurement dates described in paragraph (c)(4) of this section, except that for these periodic determinations the sponsor must update the fair value of the residual ABS interest in excess interest and fees for the numerator of the percentage ratio, but may at the sponsor’s option continue to use the fair values determined in (h)(4)(i) for the outstanding investor ABS interests in the denominator.
(i) Offsetting eligible horizontal residual interest. The sponsor may take the offset described in paragraph (g) of this section for ABS interests that would meet the definition of eligible horizontal residual interests in § 244.2 but for the sponsor’s simultaneous holding of subordinated seller’s interests, residual ABS interests in excess interests and fees, or a combination of the two, if:
(1) The sponsor complies with all requirements of paragraphs (b) through (e) of this section for its holdings of subordinated seller’s interest, and paragraph (h) for its holdings of residual ABS interests in excess interests and fees, as applicable;
(2) For purposes of taking the offset described in paragraph (g) of this section, the sponsor determines the fair value of the eligible horizontal residual interest as a percentage of the fair value of the outstanding investor ABS interests in the series supported by the eligible horizontal residual interest, determined using the fair value measurement framework under GAAP:
(i) As of the closing of the securitization transaction issuing the supported ABS interests; and
(ii) Without including in the numerator of the percentage ratio any fair value based on:
(A) The subordinated seller’s interest or residual ABS interest in excess interest and fees;
(B) the interest payable to the sponsor on the eligible horizontal residual interest, if the sponsor is including the value of residual ABS interest in excess interest and fees pursuant to paragraph (h) of this section in taking the offset in paragraph (g) of this section; and,
(C) the principal payable to the sponsor on the eligible horizontal residual interest, if the sponsor is including the value of the seller’s interest pursuant to paragraphs (b) through (f) of this section and distributions on that seller’s interest are available to reduce charge-offs that would otherwise be allocated to reduce principal payable to the offset eligible horizontal residual interest.
(j) Specified dates. A sponsor using data about the revolving pool securitization’s collateral, or ABS interests previously issued, to determine the closing-date percentage of a seller’s interest, residual ABS interest in excess interest and fees, or eligible horizontal residual interest pursuant to this § 244.5 may use such data prepared as of specified dates if:
(1) The sponsor describes the specified dates in the disclosures required by paragraph (k) of this section; and
(2) The dates are no more than 60 days prior to the date of first use with investors of disclosures required for the interest by paragraph (k) of this section, or for revolving pool securitizations that make distributions to investors on a quarterly or less frequent basis, no more than 135 days prior to the date of first use with investors of such disclosures.
(k) Disclosure and record maintenance – (1) Disclosure. A sponsor relying on this section shall provide, or cause to be provided, to potential investors, under the caption “Credit Risk Retention” the following disclosure in written form and within the time frames set forth in this paragraph (k):
(i) A reasonable period of time prior to the sale of an asset-backed security, a description of the material terms of the seller’s interest, and the percentage of the seller’s interest that the sponsor expects to retain at the closing of the securitization transaction, measured in accordance with the requirements of this § 244.5, as a percentage of the aggregate unpaid principal balance of all outstanding investor ABS interests issued, or as a percentage of the aggregate unpaid principal balance of outstanding investor ABS interests for one or more series issued, as required by the terms of the securitization transaction;
(ii) A reasonable time after the closing of the securitization transaction, the amount of seller’s interest the sponsor retained at closing, if that amount is materially different from the amount disclosed under paragraph (k)(1)(i) of this section; and
(iii) A description of the material terms of any horizontal residual interests offsetting the seller’s interest in accordance with paragraphs (g), (h), and (i) of this section; and
(iv) Disclosure of the fair value of those horizontal residual interests retained by the sponsor for the series being offered to investors and described in the disclosures, as a percentage of the fair value of the outstanding investor ABS interests issued, described in the same manner and within the same timeframes required for disclosure of the fair values of eligible horizontal residual interests specified in § 244.4(c).
(2) Adjusted data. Disclosures required by this paragraph (k) to be made a reasonable period of time prior to the sale of an asset-backed security of the amount of seller’s interest, residual ABS interest in excess interest and fees, or eligible horizontal residual interest may include adjustments to the amount of securitized assets for additions or removals the sponsor expects to make before the closing date and adjustments to the amount of outstanding investor ABS interests for expected increases and decreases of those interests under the control of the sponsor.
(3) Record maintenance. A sponsor must retain the disclosures required in paragraph (k)(1) of this section in its records and must provide the disclosure upon request to the Commission and its appropriate Federal banking agency, if any, until three years after all ABS interests are no longer outstanding.
(l) Early amortization of all outstanding series. A sponsor that organizes a revolving pool securitization that relies on this § 244.5 to satisfy the risk retention requirements of § 244.3, does not violate the requirements of this part if its seller’s interest falls below the level required by § 244. 5 after the revolving pool securitization commences early amortization, pursuant to the terms of the securitization transaction documents, of all series of outstanding investor ABS interests, if:
(1) The sponsor was in full compliance with the requirements of this section on all measurement dates specified in paragraph (c) of this section prior to the commencement of early amortization;
(2) The terms of the seller’s interest continue to make it pari passu with or subordinate in identical or varying amounts to each series of outstanding investor ABS interests issued with respect to the allocation of all distributions and losses with respect to the securitized assets;
(3) The terms of any horizontal interest relied upon by the sponsor pursuant to paragraph (g) to offset the minimum seller’s interest amount continue to require the interests to absorb losses in accordance with the terms of paragraph (h) or (i) of this section, as applicable; and
(4) The revolving pool securitization issues no additional ABS interests after early amortization is initiated to any person not a wholly-owned affiliate of the sponsor, either at the time of issuance or during the amortization period.
§ 244.6 Eligible ABCP conduits.
(a) Definitions. For purposes of this section, the following additional definitions apply:
100 percent liquidity coverage means an amount equal to the outstanding balance of all ABCP issued by the conduit plus any accrued and unpaid interest without regard to the performance of the ABS interests held by the ABCP conduit and without regard to any credit enhancement.
ABCP means asset-backed commercial paper that has a maturity at the time of issuance not exceeding 397 days, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.
ABCP conduit means an issuing entity with respect to ABCP.
Eligible ABCP conduit means an ABCP conduit, provided that:
(1) The ABCP conduit is bankruptcy remote or otherwise isolated for insolvency purposes from the sponsor of the ABCP conduit and from any intermediate SPV;
(2) The ABS interests acquired by the ABCP conduit are:
(i) ABS interests collateralized solely by assets originated by an originator-seller and by servicing assets;
(ii) Special units of beneficial interest (or similar ABS interests) in a trust or special purpose vehicle that retains legal title to leased property underlying leases originated by an originator-seller that were transferred to an intermediate SPV in connection with a securitization collateralized solely by such leases and by servicing assets;
(iii) ABS interests in a revolving pool securitization collateralized solely by assets originated by an originator-seller and by servicing assets; or
(iv) ABS interests described in paragraph (2)(i), (ii), or (iii) of this definition that are collateralized, in whole or in part, by assets acquired by an originator-seller in a business combination that qualifies for business combination accounting under GAAP, and, if collateralized in part, the remainder of such assets are assets described in paragraph (2)(i), (ii), or (iii) of this definition; and
(v) Acquired by the ABCP conduit in an initial issuance by or on behalf of an intermediate SPV:
(A) Directly from the intermediate SPV,
(B) From an underwriter of the ABS interests issued by the intermediate SPV, or
(C) From another person who acquired the ABS interests directly from the intermediate SPV;
(3) The ABCP conduit is collateralized solely by ABS interests acquired from intermediate SPVs as described in paragraph (2) of this definition and servicing assets; and
(4) A regulated liquidity provider has entered into a legally binding commitment to provide 100 percent liquidity coverage (in the form of a lending facility, an asset purchase agreement, a repurchase agreement, or other similar arrangement) to all the ABCP issued by the ABCP conduit by lending to, purchasing ABCP issued by, or purchasing assets from, the ABCP conduit in the event that funds are required to repay maturing ABCP issued by the ABCP conduit. With respect to the 100 percent liquidity coverage, in the event that the ABCP conduit is unable for any reason to repay maturing ABCP issued by the issuing entity, the liquidity provider shall be obligated to pay an amount equal to any shortfall, and the total amount that may be due pursuant to the 100 percent liquidity coverage shall be equal to 100 percent of the amount of the ABCP outstanding at any time plus accrued and unpaid interest (amounts due pursuant to the required liquidity coverage may not be subject to credit performance of the ABS interests held by the ABCP conduit or reduced by the amount of credit support provided to the ABCP conduit and liquidity support that only funds performing loans or receivables or performing ABS interests does not meet the requirements of this section).
Intermediate SPV means a special purpose vehicle that:
(1)(i) Is a direct or indirect wholly-owned affiliate of the originator-seller; or
(ii) Has nominal equity owned by a trust or corporate service provider that specializes in providing independent ownership of special purpose vehicles, and such trust or corporate service provider is not affiliated with any other transaction parties;
(2) Is bankruptcy remote or otherwise isolated for insolvency purposes from the eligible ABCP conduit and from each originator-seller and each majority-owned affiliate in each case that, directly or indirectly, sells or transfers assets to such intermediate SPV;
(3) Acquires assets from the originator-seller that are originated by the originator-seller or acquired by the originator-seller in the acquisition of a business that qualifies for business combination accounting under GAAP or acquires ABS interests issued by another intermediate SPV of the originator-seller that are collateralized solely by such assets; and
(4) Issues ABS interests collateralized solely by such assets, as applicable.
Originator-seller means an entity that originates assets and sells or transfers those assets, directly or through a majority-owned affiliate, to an intermediate SPV, and includes (except for the purposes of identifying the sponsorship and affiliation of an intermediate SPV pursuant to this § 244.6) any affiliate of the originator-seller that, directly or indirectly, majority controls, is majority controlled by or is under common majority control with, the originator-seller. For purposes of this definition, majority control means ownership of more than 50 percent of the equity of an entity, or ownership of any other controlling financial interest in the entity, as determined under GAAP.
Regulated liquidity provider means:
(1) A depository institution (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813));
(2) A bank holding company (as defined in 12 U.S.C. 1841), or a subsidiary thereof;
(3) A savings and loan holding company (as defined in 12 U.S.C. 1467a), provided all or substantially all of the holding company’s activities are permissible for a financial holding company under 12 U.S.C. 1843(k), or a subsidiary thereof; or
(4) A foreign bank whose home country supervisor (as defined in § 211.21 of the Federal Reserve Board’s Regulation K (12 CFR 211.21)) has adopted capital standards consistent with the Capital Accord of the Basel Committee on Banking Supervision, as amended, and that is subject to such standards, or a subsidiary thereof.
(b) In general. An ABCP conduit sponsor satisfies the risk retention requirement of § 244.3 with respect to the issuance of ABCP by an eligible ABCP conduit in a securitization transaction if, for each ABS interest the ABCP conduit acquires from an intermediate SPV:
(1) An originator-seller of the intermediate SPV retains an economic interest in the credit risk of the assets collateralizing the ABS interest acquired by the eligible ABCP conduit in the amount and manner required under § 244.4 or § 244.5; and
(2) The ABCP conduit sponsor:
(i) Approves each originator-seller permitted to sell or transfer assets, directly or indirectly, to an intermediate SPV from which an eligible ABCP conduit acquires ABS interests;
(ii) Approves each intermediate SPV from which an eligible ABCP conduit is permitted to acquire ABS interests;
(iii) Establishes criteria governing the ABS interests, and the securitized assets underlying the ABS interests, acquired by the ABCP conduit;
(iv) Administers the ABCP conduit by monitoring the ABS interests acquired by the ABCP conduit and the assets supporting those ABS interests, arranging for debt placement, compiling monthly reports, and ensuring compliance with the ABCP conduit documents and with the ABCP conduit’s credit and investment policy; and
(v) Maintains and adheres to policies and procedures for ensuring that the requirements in this paragraph (b) of this section have been met.
(c) Originator-seller compliance with risk retention. The use of the risk retention option provided in this section by an ABCP conduit sponsor does not relieve the originator-seller that sponsors ABS interests acquired by an eligible ABCP conduit from such originator-seller’s obligation to comply with its own risk retention obligations under this part.
(d) Disclosures – (1) Periodic disclosures to investors. An ABCP conduit sponsor relying upon this section shall provide, or cause to be provided, to each purchaser of ABCP, before or contemporaneously with the first sale of ABCP to such purchaser and at least monthly thereafter, to each holder of commercial paper issued by the ABCP conduit, in writing, each of the following items of information, which shall be as of a date not more than 60 days prior to date of first use with investors:
(i) The name and form of organization of the regulated liquidity provider that provides liquidity coverage to the eligible ABCP conduit, including a description of the material terms of such liquidity coverage, and notice of any failure to fund.
(ii) With respect to each ABS interest held by the ABCP conduit:
(A) The asset class or brief description of the underlying securitized assets;
(B) The standard industrial category code (SIC Code) for the originator-seller that will retain (or has retained) pursuant to this section an interest in the securitization transaction; and
(C) A description of the percentage amount of risk retention pursuant to the rule by the originator-seller, and whether it is in the form of an eligible horizontal residual interest, vertical interest, or revolving pool securitization seller’s interest, as applicable.
(2) Disclosures to regulators regarding originator-sellers. An ABCP conduit sponsor relying upon this section shall provide, or cause to be provided, upon request, to the Commission and its appropriate Federal banking agency, if any, in writing, all of the information required to be provided to investors in paragraph (d)(1) of this section, and the name and form of organization of each originator-seller that will retain (or has retained) pursuant to this section an interest in the securitization transaction.
(e) Sale or transfer of ABS interests between eligible ABCP conduits. At any time, an eligible ABCP conduit that acquired an ABS interest in accordance with the requirements set forth in this section may transfer, and another eligible ABCP conduit may acquire, such ABS interest, if the following conditions are satisfied:
(1) The sponsors of both eligible ABCP conduits are in compliance with this section; and
(2) The same regulated liquidity provider has entered into one or more legally binding commitments to provide 100 percent liquidity coverage to all the ABCP issued by both eligible ABCP conduits.
(f) Duty to comply. (1) The ABCP conduit sponsor shall be responsible for compliance with this section.
(2) An ABCP conduit sponsor relying on this section:
(i) Shall maintain and adhere to policies and procedures that are reasonably designed to monitor compliance by each originator-seller which is satisfying a risk retention obligation in respect of ABS interests acquired by an eligible ABCP conduit with the requirements of paragraph (b)(1) of this section; and
(ii) In the event that the ABCP conduit sponsor determines that an originator-seller no longer complies with the requirements of paragraph (b)(1) of this section, shall:
(A) Promptly notify the holders of the ABCP, and upon request, the Commission and its appropriate Federal banking agency, if any, in writing of:
(1) The name and form of organization of any originator-seller that fails to retain risk in accordance with paragraph (b)(1) of this section and the amount of ABS interests issued by an intermediate SPV of such originator-seller and held by the ABCP conduit;
(2) The name and form of organization of any originator-seller that hedges, directly or indirectly through an intermediate SPV, its risk retention in violation of paragraph (b)(1) of this section and the amount of ABS interests issued by an intermediate SPV of such originator-seller and held by the ABCP conduit; and
(3) Any remedial actions taken by the ABCP conduit sponsor or other party with respect to such ABS interests; and
(B) Take other appropriate steps pursuant to the requirements of paragraphs (b)(2)(iv) and (v) of this section which may include, as appropriate, curing any breach of the requirements in this section, or removing from the eligible ABCP conduit any ABS interest that does not comply with the requirements in this section.
§ 244.7 Commercial mortgage-backed securities.
(a) Definitions. For purposes of this section, the following definition shall apply:
Special servicer means, with respect to any securitization of commercial real estate loans, any servicer that, upon the occurrence of one or more specified conditions in the servicing agreement, has the right to service one or more assets in the transaction.
(b) Third-party purchaser. A sponsor may satisfy some or all of its risk retention requirements under § 244.3 with respect to a securitization transaction if a third party (or any majority-owned affiliate thereof) purchases and holds for its own account an eligible horizontal residual interest in the issuing entity in the same form, amount, and manner as would be held by the sponsor under § 244.4 and all of the following conditions are met:
(1) Number of third-party purchasers. At any time, there are no more than two third-party purchasers of an eligible horizontal residual interest. If there are two third-party purchasers, each third-party purchaser’s interest must be pari passu with the other third-party purchaser’s interest.
(2) Composition of collateral. The securitization transaction is collateralized solely by commercial real estate loans and servicing assets.
(3) Source of funds. (i) Each third-party purchaser pays for the eligible horizontal residual interest in cash at the closing of the securitization transaction.
(ii) No third-party purchaser obtains financing, directly or indirectly, for the purchase of such interest from any other person that is a party to, or an affiliate of a party to, the securitization transaction (including, but not limited to, the sponsor, depositor, or servicer other than a special servicer affiliated with the third-party purchaser), other than a person that is a party to the transaction solely by reason of being an investor.
(4) Third-party review. Each third-party purchaser conducts an independent review of the credit risk of each securitized asset prior to the sale of the asset-backed securities in the securitization transaction that includes, at a minimum, a review of the underwriting standards, collateral, and expected cash flows of each commercial real estate loan that is collateral for the asset-backed securities.
(5) Affiliation and control rights. (i) Except as provided in paragraph (b)(5)(ii) of this section, no third-party purchaser is affiliated with any party to the securitization transaction (including, but not limited to, the sponsor, depositor, or servicer) other than investors in the securitization transaction.
(ii) Notwithstanding paragraph (b)(5)(i) of this section, a third-party purchaser may be affiliated with:
(A) The special servicer for the securitization transaction; or
(B) One or more originators of the securitized assets, as long as the assets originated by the affiliated originator or originators collectively comprise less than 10 percent of the unpaid principal balance of the securitized assets included in the securitization transaction at the cut-off date or similar date for establishing the composition of the securitized assets collateralizing the asset-backed securities issued pursuant to the securitization transaction.
(6) Operating Advisor. The underlying securitization transaction documents shall provide for the following:
(i) The appointment of an operating advisor (the Operating Advisor) that:
(A) Is not affiliated with other parties to the securitization transaction;
(B) Does not directly or indirectly have any financial interest in the securitization transaction other than in fees from its role as Operating Advisor; and
(C) Is required to act in the best interest of, and for the benefit of, investors as a collective whole;
(ii) Standards with respect to the Operating Advisor’s experience, expertise and financial strength to fulfill its duties and responsibilities under the applicable transaction documents over the life of the securitization transaction;
(iii) The terms of the Operating Advisor’s compensation with respect to the securitization transaction;
(iv) When the eligible horizontal residual interest has been reduced by principal payments, realized losses, and appraisal reduction amounts (which reduction amounts are determined in accordance with the applicable transaction documents) to a principal balance of 25 percent or less of its initial principal balance, the special servicer for the securitized assets must consult with the Operating Advisor in connection with, and prior to, any material decision in connection with its servicing of the securitized assets, including, without limitation:
(A) Any material modification of, or waiver with respect to, any provision of a loan agreement (including a mortgage, deed of trust, or other security agreement);
(B) Foreclosure upon or comparable conversion of the ownership of a property; or
(C) Any acquisition of a property.
(v) The Operating Advisor shall have adequate and timely access to information and reports necessary to fulfill its duties under the transaction documents, including all reports made available to holders of ABS interests and third-party purchasers, and shall be responsible for:
(A) Reviewing the actions of the special servicer;
(B) Reviewing all reports provided by the special servicer to the issuing entity or any holder of ABS interests;
(C) Reviewing for accuracy and consistency with the transaction documents calculations made by the special servicer; and
(D) Issuing a report to investors (including any third-party purchasers) and the issuing entity on a periodic basis concerning:
(1) Whether the Operating Advisor believes, in its sole discretion exercised in good faith, that the special servicer is operating in compliance with any standard required of the special servicer in the applicable transaction documents; and
(2) Which, if any, standards the Operating Advisor believes, in its sole discretion exercised in good faith, the special servicer has failed to comply.
(vi)(A) The Operating Advisor shall have the authority to recommend that the special servicer be replaced by a successor special servicer if the Operating Advisor determines, in its sole discretion exercised in good faith, that:
(1) The special servicer has failed to comply with a standard required of the special servicer in the applicable transaction documents; and
(2) Such replacement would be in the best interest of the investors as a collective whole; and
(B) If a recommendation described in paragraph (b)(6)(vi)(A) of this section is made, the special servicer shall be replaced upon the affirmative vote of a majority of the outstanding principal balance of all ABS interests voting on the matter, with a minimum of a quorum of ABS interests voting on the matter. For purposes of such vote, the applicable transaction documents shall specify the quorum and may not specify a quorum of more than the holders of 20 percent of the outstanding principal balance of all ABS interests in the issuing entity, with such quorum including at least three ABS interest holders that are not affiliated with each other.
(7) Disclosures. The sponsor provides, or causes to be provided, to potential investors a reasonable period of time prior to the sale of the asset-backed securities as part of the securitization transaction and, upon request, to the Commission and its appropriate Federal banking agency, if any, the following disclosure in written form under the caption “Credit Risk Retention”:
(i) The name and form of organization of each initial third-party purchaser that acquired an eligible horizontal residual interest at the closing of a securitization transaction;
(ii) A description of each initial third-party purchaser’s experience in investing in commercial mortgage-backed securities;
(iii) Any other information regarding each initial third-party purchaser or each initial third-party purchaser’s retention of the eligible horizontal residual interest that is material to investors in light of the circumstances of the particular securitization transaction;
(iv) The fair value (expressed as a percentage of the fair value of all of the ABS interests issued in the securitization transaction and dollar amount (or corresponding amount in the foreign currency in which the ABS interests are issued, as applicable)) of the eligible horizontal residual interest that will be retained (or was retained) by each initial third-party purchaser, as well as the amount of the purchase price paid by each initial third-party purchaser for such interest;
(v) The fair value (expressed as a percentage of the fair value of all of the ABS interests issued in the securitization transaction and dollar amount (or corresponding amount in the foreign currency in which the ABS interests are issued, as applicable)) of the eligible horizontal residual interest in the securitization transaction that the sponsor would have retained pursuant to § 244.4 if the sponsor had relied on retaining an eligible horizontal residual interest in that section to meet the requirements of § 244.3 with respect to the transaction;
(vi) A description of the material terms of the eligible horizontal residual interest retained by each initial third-party purchaser, including the same information as is required to be disclosed by sponsors retaining horizontal interests pursuant to § 244.4;
(vii) The material terms of the applicable transaction documents with respect to the Operating Advisor, including without limitation:
(A) The name and form of organization of the Operating Advisor;
(B) A description of any material conflict of interest or material potential conflict of interest between the Operating Advisor and any other party to the transaction;
(C) The standards required by paragraph (b)(6)(ii) of this section and a description of how the Operating Advisor satisfies each of the standards; and
(D) The terms of the Operating Advisor’s compensation under paragraph (b)(6)(iii) of this section; and
(viii) The representations and warranties concerning the securitized assets, a schedule of any securitized assets that are determined not to comply with such representations and warranties, and what factors were used to make the determination that such securitized assets should be included in the pool notwithstanding that the securitized assets did not comply with such representations and warranties, such as compensating factors or a determination that the exceptions were not material.
(8) Hedging, transfer and pledging – (i) General rule. Except as set forth in paragraph (b)(8)(ii) of this section, each third-party purchaser and its affiliates must comply with the hedging and other restrictions in § 244.12 as if it were the retaining sponsor with respect to the securitization transaction and had acquired the eligible horizontal residual interest pursuant to § 244.4; provided that, the hedging and other restrictions in § 244.12 shall not apply on or after the date that each CRE loan (as defined in § 244.14) that serves as collateral for outstanding ABS interests has been defeased. For purposes of this section, a loan is deemed to be defeased if:
(A) cash or cash equivalents of the types permitted for an eligible horizontal cash reserve account pursuant to § 244.4 whose maturity corresponds to the remaining debt service obligations, have been pledged to the issuing entity as collateral for the loan and are in such amounts and payable at such times as necessary to timely generate cash sufficient to make all remaining debt service payments due on such loan; and
(B) the issuing entity has an obligation to release its lien on the loan.
(ii) Exceptions – (A) Transfer by initial third-party purchaser or sponsor. An initial third-party purchaser that acquired an eligible horizontal residual interest at the closing of a securitization transaction in accordance with this section, or a sponsor that acquired an eligible horizontal residual interest at the closing of a securitization transaction in accordance with this section, may, on or after the date that is five years after the date of the closing of the securitization transaction, transfer that interest to a subsequent third-party purchaser that complies with paragraph (b)(8)(ii)(C) of this section. The initial third-party purchaser shall provide the sponsor with complete identifying information for the subsequent third-party purchaser.
(B) Transfer by subsequent third-party purchaser. At any time, a subsequent third-party purchaser that acquired an eligible horizontal residual interest pursuant to this section may transfer its interest to a different third-party purchaser that complies with paragraph (b)(8)(ii)(C) of this section. The transferring third-party purchaser shall provide the sponsor with complete identifying information for the acquiring third-party purchaser.
(C) Requirements applicable to subsequent third-party purchasers. A subsequent third-party purchaser is subject to all of the requirements of paragraphs (b)(1), (b)(3) through (5), and (b)(8) of this section applicable to third-party purchasers, provided that obligations under paragraphs (b)(1), (b)(3) through (5), and (b)(8) of this section that apply to initial third-party purchasers at or before the time of closing of the securitization transaction shall apply to successor third-party purchasers at or before the time of the transfer of the eligible horizontal residual interest to the successor third-party purchaser.
(c) Duty to comply. (1) The retaining sponsor shall be responsible for compliance with this section by itself and for compliance by each initial or subsequent third-party purchaser that acquired an eligible horizontal residual interest in the securitization transaction.
(2) A sponsor relying on this section:
(i) Shall maintain and adhere to policies and procedures to monitor each third-party purchaser’s compliance with the requirements of paragraphs (b)(1), (b)(3) through (5), and (b)(8) of this section; and
(ii) In the event that the sponsor determines that a third-party purchaser no longer complies with one or more of the requirements of paragraphs (b)(1), (b)(3) through (5), or (b)(8) of this section, shall promptly notify, or cause to be notified, the holders of the ABS interests issued in the securitization transaction of such noncompliance by such third-party purchaser.
§ 244.8 Federal National Mortgage Association and Federal Home Loan Mortgage Corporation ABS.
(a) In general. A sponsor satisfies its risk retention requirement under this part if the sponsor fully guarantees the timely payment of principal and interest on all ABS interests issued by the issuing entity in the securitization transaction and is:
(1) The Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation operating under the conservatorship or receivership of the Federal Housing Finance Agency pursuant to section 1367 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4617) with capital support from the United States; or
(2) Any limited-life regulated entity succeeding to the charter of either the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation pursuant to section 1367(i) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4617(i)), provided that the entity is operating with capital support from the United States.
(b) Certain provisions not applicable. The provisions of § 244.12(b), (c), and (d) shall not apply to a sponsor described in paragraph (a)(1) or (2) of this section, its affiliates, or the issuing entity with respect to a securitization transaction for which the sponsor has retained credit risk in accordance with the requirements of this section.
(c) Disclosure. A sponsor relying on this section shall provide to investors, in written form under the caption “Credit Risk Retention” and, upon request, to the Federal Housing Finance Agency and the Commission, a description of the manner in which it has met the credit risk retention requirements of this part.
§ 244.9 Open market CLOs.
(a) Definitions. For purposes of this section, the following definitions shall apply:
CLO means a special purpose entity that:
(i) Issues debt and equity interests, and
(ii) Whose assets consist primarily of loans that are securitized assets and servicing assets.
CLO-eligible loan tranche means a term loan of a syndicated facility that meets the criteria set forth in paragraph (c) of this section.
CLO manager means an entity that manages a CLO, which entity is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (15 U.S.C. 80b-1 et seq.), or is an affiliate of such a registered investment adviser and itself is managed by such registered investment adviser.
Commercial borrower means an obligor under a corporate credit obligation (including a loan).
Initial loan syndication transaction means a transaction in which a loan is syndicated to a group of lenders.
Lead arranger means, with respect to a CLO-eligible loan tranche, an institution that:
(i) Is active in the origination, structuring and syndication of commercial loan transactions (as defined in § 244.14) and has played a primary role in the structuring, underwriting and distribution on the primary market of the CLO-eligible loan tranche.
(ii) Has taken an allocation of the funded portion of the syndicated credit facility under the terms of the transaction that includes the CLO-eligible loan tranche of at least 20 percent of the aggregate principal balance at origination, and no other member (or members affiliated with each other) of the syndication group that funded at origination has taken a greater allocation; and
(iii) Is identified in the applicable agreement governing the CLO-eligible loan tranche; represents therein to the holders of the CLO-eligible loan tranche and to any holders of participation interests in such CLO-eligible loan tranche that such lead arranger satisfies the requirements of paragraph (i) of this definition and, at the time of initial funding of the CLO-eligible tranche, will satisfy the requirements of paragraph (ii) of this definition; further represents therein (solely for the purpose of assisting such holders to determine the eligibility of such CLO-eligible loan tranche to be held by an open market CLO) that in the reasonable judgment of such lead arranger, the terms of such CLO-eligible loan tranche are consistent with the requirements of paragraphs (c)(2) and (3) of this section; and covenants therein to such holders that such lead arranger will fulfill the requirements of paragraph (c)(1) of this section.
Open market CLO means a CLO:
(i) Whose assets consist of senior, secured syndicated loans acquired by such CLO directly from the sellers thereof in open market transactions and of servicing assets,
(ii) That is managed by a CLO manager, and
(iii) That holds less than 50 percent of its assets, by aggregate outstanding principal amount, in loans syndicated by lead arrangers that are affiliates of the CLO or the CLO manager or originated by originators that are affiliates of the CLO or the CLO manager.
Open market transaction means:
(i) Either an initial loan syndication transaction or a secondary market transaction in which a seller offers senior, secured syndicated loans to prospective purchasers in the loan market on market terms on an arm’s length basis, which prospective purchasers include, but are not limited to, entities that are not affiliated with the seller, or
(ii) A reverse inquiry from a prospective purchaser of a senior, secured syndicated loan through a dealer in the loan market to purchase a senior, secured syndicated loan to be sourced by the dealer in the loan market.
Secondary market transaction means a purchase of a senior, secured syndicated loan not in connection with an initial loan syndication transaction but in the secondary market.
Senior, secured syndicated loan means a loan made to a commercial borrower that:
(i) Is not subordinate in right of payment to any other obligation for borrowed money of the commercial borrower,
(ii) Is secured by a valid first priority security interest or lien in or on specified collateral securing the commercial borrower’s obligations under the loan, and
(iii) The value of the collateral subject to such first priority security interest or lien, together with other attributes of the obligor (including, without limitation, its general financial condition, ability to generate cash flow available for debt service and other demands for that cash flow), is adequate (in the commercially reasonable judgment of the CLO manager exercised at the time of investment) to repay the loan and to repay all other indebtedness of equal seniority secured by such first priority security interest or lien in or on the same collateral, and the CLO manager certifies, on or prior to each date that it acquires a loan constituting part of a new CLO-eligible tranche, that it has policies and procedures to evaluate the likelihood of repayment of loans acquired by the CLO and it has followed such policies and procedures in evaluating each CLO-eligible loan tranche.
(b) In general. A sponsor satisfies the risk retention requirements of § 244.3 with respect to an open market CLO transaction if:
(1) The open market CLO does not acquire or hold any assets other than CLO-eligible loan tranches that meet the requirements of paragraph (c) of this section and servicing assets;
(2) The governing documents of such open market CLO require that, at all times, the assets of the open market CLO consist of senior, secured syndicated loans that are CLO-eligible loan tranches and servicing assets;
(3) The open market CLO does not invest in ABS interests or in credit derivatives other than hedging transactions that are servicing assets to hedge risks of the open market CLO;
(4) All purchases of CLO-eligible loan tranches and other assets by the open market CLO issuing entity or through a warehouse facility used to accumulate the loans prior to the issuance of the CLO’s ABS interests are made in open market transactions on an arms-length basis;
(5) The CLO manager of the open market CLO is not entitled to receive any management fee or gain on sale at the time the open market CLO issues its ABS interests.
(c) CLO-eligible loan tranche. To qualify as a CLO-eligible loan tranche, a term loan of a syndicated credit facility to a commercial borrower must have the following features:
(1) A minimum of 5 percent of the face amount of the CLO-eligible loan tranche is retained by the lead arranger thereof until the earliest of the repayment, maturity, involuntary and unscheduled acceleration, payment default, or bankruptcy default of such CLO-eligible loan tranche, provided that such lead arranger complies with limitations on hedging, transferring and pledging in § 244.12 with respect to the interest retained by the lead arranger.
(2) Lender voting rights within the credit agreement and any intercreditor or other applicable agreements governing such CLO-eligible loan tranche are defined so as to give holders of the CLO-eligible loan tranche consent rights with respect to, at minimum, any material waivers and amendments of such applicable documents, including but not limited to, adverse changes to the calculation or payments of amounts due to the holders of the CLO-eligible tranche, alterations to pro rata provisions, changes to voting provisions, and waivers of conditions precedent; and
(3) The pro rata provisions, voting provisions, and similar provisions applicable to the security associated with such CLO-eligible loan tranches under the CLO credit agreement and any intercreditor or other applicable agreements governing such CLO-eligible loan tranches are not materially less advantageous to the holder(s) of such CLO-eligible tranche than the terms of other tranches of comparable seniority in the broader syndicated credit facility.
(d) Disclosures. A sponsor relying on this section shall provide, or cause to be provided, to potential investors a reasonable period of time prior to the sale of the asset-backed securities in the securitization transaction and at least annually with respect to the information required by paragraph (d)(1) of this section and, upon request, to the Commission and its appropriate Federal banking agency, if any, the following disclosure in written form under the caption “Credit Risk Retention”:
(1) Open market CLOs. A complete list of every asset held by an open market CLO (or before the CLO’s closing, in a warehouse facility in anticipation of transfer into the CLO at closing), including the following information:
(i) The full legal name, Standard Industrial Classification (SIC) category code, and legal entity identifier (LEI) issued by a utility endorsed or otherwise governed by the Global LEI Regulatory Oversight Committee or the Global LEI Foundation (if an LEI has been obtained by the obligor) of the obligor of the loan or asset;
(ii) The full name of the specific loan tranche held by the CLO;
(iii) The face amount of the entire loan tranche held by the CLO, and the face amount of the portion thereof held by the CLO;
(iv) The price at which the loan tranche was acquired by the CLO; and
(v) For each loan tranche, the full legal name of the lead arranger subject to the sales and hedging restrictions of § 244.12; and
(2) CLO manager. The full legal name and form of organization of the CLO manager.
§ 244.10 Qualified tender option bonds.
(a) Definitions. For purposes of this section, the following definitions shall apply:
Municipal security or municipal securities shall have the same meaning as the term “municipal securities” in Section 3(a)(29) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(29)) and any rules promulgated pursuant to such section.
Qualified tender option bond entity means an issuing entity with respect to tender option bonds for which each of the following applies:
(i) Such entity is collateralized solely by servicing assets and by municipal securities that have the same municipal issuer and the same underlying obligor or source of payment (determined without regard to any third-party credit enhancement), and such municipal securities are not subject to substitution.
(ii) Such entity issues no securities other than:
(A) A single class of tender option bonds with a preferred variable return payable out of capital that meets the requirements of paragraph (b) of this section, and
(B) One or more residual equity interests that, in the aggregate, are entitled to all remaining income of the issuing entity.
(C) The types of securities referred to in paragraphs (ii)(A) and (B) of this definition must constitute asset-backed securities.
(iii) The municipal securities held as assets by such entity are issued in compliance with Section 103 of the Internal Revenue Code of 1986, as amended (the “IRS Code”, 26 U.S.C. 103), such that the interest payments made on those securities are excludable from the gross income of the owners under Section 103 of the IRS Code.
(iv) The terms of all of the securities issued by the entity are structured so that all holders of such securities who are eligible to exclude interest received on such securities will be able to exclude that interest from gross income pursuant to Section 103 of the IRS Code or as “exempt-interest dividends” pursuant to Section 852(b)(5) of the IRS Code (26 U.S.C. 852(b)(5)) in the case of regulated investment companies under the Investment Company Act of 1940, as amended.
(v) Such entity has a legally binding commitment from a regulated liquidity provider as defined in § 244.6(a), to provide a 100 percent guarantee or liquidity coverage with respect to all of the issuing entity’s outstanding tender option bonds.
(vi) Such entity qualifies for monthly closing elections pursuant to IRS Revenue Procedure 2003-84, as amended or supplemented from time to time.
Tender option bond means a security which has features which entitle the holders to tender such bonds to the issuing entity for purchase at any time upon no more than 397 days’ notice, for a purchase price equal to the approximate amortized cost of the security, plus accrued interest, if any, at the time of tender.
(b) Risk retention options. Notwithstanding anything in this section, the sponsor with respect to an issuance of tender option bonds may retain an eligible vertical interest or eligible horizontal residual interest, or any combination thereof, in accordance with the requirements of § 244.4. In order to satisfy its risk retention requirements under this section, the sponsor with respect to an issuance of tender option bonds by a qualified tender option bond entity may retain:
(1) An eligible vertical interest or an eligible horizontal residual interest, or any combination thereof, in accordance with the requirements of § 244.4; or
(2) An interest that meets the requirements set forth in paragraph (c) of this section; or
(3) A municipal security that meets the requirements set forth in paragraph (d) of this section; or
(4) Any combination of interests and securities described in paragraphs (b)(1) through (b)(3) of this section such that the sum of the percentages held in each form equals at least five.
(c) Tender option termination event. The sponsor with respect to an issuance of tender option bonds by a qualified tender option bond entity may retain an interest that upon issuance meets the requirements of an eligible horizontal residual interest but that upon the occurrence of a “tender option termination event” as defined in Section 4.01(5) of IRS Revenue Procedure 2003-84, as amended or supplemented from time to time will meet the requirements of an eligible vertical interest.
(d) Retention of a municipal security outside of the qualified tender option bond entity. The sponsor with respect to an issuance of tender option bonds by a qualified tender option bond entity may satisfy its risk retention requirements under this Section by holding municipal securities from the same issuance of municipal securities deposited in the qualified tender option bond entity, the face value of which retained municipal securities is equal to 5 percent of the face value of the municipal securities deposited in the qualified tender option bond entity.
(e) Disclosures. The sponsor shall provide, or cause to be provided, to potential investors a reasonable period of time prior to the sale of the asset-backed securities as part of the securitization transaction and, upon request, to the Commission and its appropriate Federal banking agency, if any, the following disclosure in written form under the caption “Credit Risk Retention”:
(1) The name and form of organization of the qualified tender option bond entity;
(2) A description of the form and subordination features of such retained interest in accordance with the disclosure obligations in § 244.4(c);
(3) To the extent any portion of the retained interest is claimed by the sponsor as an eligible horizontal residual interest (including any interest held in compliance with § 244.10(c)), the fair value of that interest (expressed as a percentage of the fair value of all of the ABS interests issued in the securitization transaction and as a dollar amount);
(4) To the extent any portion of the retained interest is claimed by the sponsor as an eligible vertical interest (including any interest held in compliance with § 244.10(c)), the percentage of ABS interests issued represented by the eligible vertical interest; and
(5) To the extent any portion of the retained interest claimed by the sponsor is a municipal security held outside of the qualified tender option bond entity, the name and form of organization of the qualified tender option bond entity, the identity of the issuer of the municipal securities, the face value of the municipal securities deposited into the qualified tender option bond entity, and the face value of the municipal securities retained by the sponsor or its majority-owned affiliates and subject to the transfer and hedging prohibition.
(f) Prohibitions on Hedging and Transfer. The prohibitions on transfer and hedging set forth in § 244.12, apply to any interests or municipal securities retained by the sponsor with respect to an issuance of tender option bonds by a qualified tender option bond entity pursuant to of this section.
Subpart C – Transfer of Risk Retention
§ 244.11 Allocation of risk retention to an originator.
(a) In general. A sponsor choosing to retain an eligible vertical interest or an eligible horizontal residual interest (including an eligible horizontal cash reserve account), or combination thereof under § 244.4, with respect to a securitization transaction may offset the amount of its risk retention requirements under § 244.4 by the amount of the eligible interests, respectively, acquired by an originator of one or more of the securitized assets if:
(1) At the closing of the securitization transaction:
(i) The originator acquires the eligible interest from the sponsor and retains such interest in the same manner and proportion (as between horizontal and vertical interests) as the sponsor under § 244.4, as such interest was held prior to the acquisition by the originator;
(ii) The ratio of the percentage of eligible interests acquired and retained by the originator to the percentage of eligible interests otherwise required to be retained by the sponsor pursuant to § 244.4, does not exceed the ratio of:
(A) The unpaid principal balance of all the securitized assets originated by the originator; to
(B) The unpaid principal balance of all the securitized assets in the securitization transaction;
(iii) The originator acquires and retains at least 20 percent of the aggregate risk retention amount otherwise required to be retained by the sponsor pursuant to § 244.4; and
(iv) The originator purchases the eligible interests from the sponsor at a price that is equal, on a dollar-for-dollar basis, to the amount by which the sponsor’s required risk retention is reduced in accordance with this section, by payment to the sponsor in the form of:
(A) Cash; or
(B) A reduction in the price received by the originator from the sponsor or depositor for the assets sold by the originator to the sponsor or depositor for inclusion in the pool of securitized assets.
(2) Disclosures. In addition to the disclosures required pursuant to § 244.4(c), the sponsor provides, or causes to be provided, to potential investors a reasonable period of time prior to the sale of the asset-backed securities as part of the securitization transaction and, upon request, to the Commission and its appropriate Federal banking agency, if any, in written form under the caption “Credit Risk Retention”, the name and form of organization of any originator that will acquire and retain (or has acquired and retained) an interest in the transaction pursuant to this section, including a description of the form and amount (expressed as a percentage and dollar amount (or corresponding amount in the foreign currency in which the ABS interests are issued, as applicable)) and nature (e.g., senior or subordinated) of the interest, as well as the method of payment for such interest under paragraph (a)(1)(iv) of this section.
(3) Hedging, transferring and pledging. The originator and each of its affiliates complies with the hedging and other restrictions in § 244.12 with respect to the interests retained by the originator pursuant to this section as if it were the retaining sponsor and was required to retain the interest under subpart B of this part.
(b) Duty to comply. (1) The retaining sponsor shall be responsible for compliance with this section.
(2) A retaining sponsor relying on this section:
(i) Shall maintain and adhere to policies and procedures that are reasonably designed to monitor the compliance by each originator that is allocated a portion of the sponsor’s risk retention obligations with the requirements in paragraphs (a)(1) and (3) of this section; and
(ii) In the event the sponsor determines that any such originator no longer complies with any of the requirements in paragraphs (a)(1) and (3) of this section, shall promptly notify, or cause to be notified, the holders of the ABS interests issued in the securitization transaction of such noncompliance by such originator.
§ 244.12 Hedging, transfer and financing prohibitions.
(a) Transfer. Except as permitted by § 244.7(b)(8), and subject to § 244.5, a retaining sponsor may not sell or otherwise transfer any interest or assets that the sponsor is required to retain pursuant to subpart B of this part to any person other than an entity that is and remains a majority-owned affiliate of the sponsor and each such majority-owned affiliate shall be subject to the same restrictions.
(b) Prohibited hedging by sponsor and affiliates. A retaining sponsor and its affiliates may not purchase or sell a security, or other financial instrument, or enter into an agreement, derivative or other position, with any other person if:
(1) Payments on the security or other financial instrument or under the agreement, derivative, or position are materially related to the credit risk of one or more particular ABS interests that the retaining sponsor (or any of its majority-owned affiliates) is required to retain with respect to a securitization transaction pursuant to subpart B of this part or one or more of the particular securitized assets that collateralize the asset-backed securities issued in the securitization transaction; and
(2) The security, instrument, agreement, derivative, or position in any way reduces or limits the financial exposure of the sponsor (or any of its majority-owned affiliates) to the credit risk of one or more of the particular ABS interests that the retaining sponsor (or any of its majority-owned affiliates) is required to retain with respect to a securitization transaction pursuant to subpart B of this part or one or more of the particular securitized assets that collateralize the asset-backed securities issued in the securitization transaction.
(c) Prohibited hedging by issuing entity. The issuing entity in a securitization transaction may not purchase or sell a security or other financial instrument, or enter into an agreement, derivative or position, with any other person if:
(1) Payments on the security or other financial instrument or under the agreement, derivative or position are materially related to the credit risk of one or more particular ABS interests that the retaining sponsor for the transaction (or any of its majority-owned affiliates) is required to retain with respect to the securitization transaction pursuant to subpart B of this part; and
(2) The security, instrument, agreement, derivative, or position in any way reduces or limits the financial exposure of the retaining sponsor (or any of its majority-owned affiliates) to the credit risk of one or more of the particular ABS interests that the sponsor (or any of its majority-owned affiliates) is required to retain pursuant to subpart B of this part.
(d) Permitted hedging activities. The following activities shall not be considered prohibited hedging activities under paragraph (b) or (c) of this section:
(1) Hedging the interest rate risk (which does not include the specific interest rate risk, known as spread risk, associated with the ABS interest that is otherwise considered part of the credit risk) or foreign exchange risk arising from one or more of the particular ABS interests required to be retained by the sponsor (or any of its majority-owned affiliates) under subpart B of this part or one or more of the particular securitized assets that underlie the asset-backed securities issued in the securitization transaction; or
(2) Purchasing or selling a security or other financial instrument or entering into an agreement, derivative, or other position with any third party where payments on the security or other financial instrument or under the agreement, derivative, or position are based, directly or indirectly, on an index of instruments that includes asset-backed securities if:
(i) Any class of ABS interests in the issuing entity that were issued in connection with the securitization transaction and that are included in the index represents no more than 10 percent of the dollar-weighted average (or corresponding weighted average in the currency in which the ABS interests are issued, as applicable) of all instruments included in the index; and
(ii) All classes of ABS interests in all issuing entities that were issued in connection with any securitization transaction in which the sponsor (or any of its majority-owned affiliates) is required to retain an interest pursuant to subpart B of this part and that are included in the index represent, in the aggregate, no more than 20 percent of the dollar-weighted average (or corresponding weighted average in the currency in which the ABS interests are issued, as applicable) of all instruments included in the index.
(e) Prohibited non-recourse financing. Neither a retaining sponsor nor any of its affiliates may pledge as collateral for any obligation (including a loan, repurchase agreement, or other financing transaction) any ABS interest that the sponsor is required to retain with respect to a securitization transaction pursuant to subpart B of this part unless such obligation is with full recourse to the sponsor or affiliate, respectively.
(f) Duration of the hedging and transfer restrictions – (1) General rule. Except as provided in paragraph (f)(2) of this section, the prohibitions on sale and hedging pursuant to paragraphs (a) and (b) of this section shall expire on or after the date that is the latest of:
(i) The date on which the total unpaid principal balance (if applicable) of the securitized assets that collateralize the securitization transaction has been reduced to 33 percent of the total unpaid principal balance of the securitized assets as of the cut-off date or similar date for establishing the composition of the securitized assets collateralizing the asset-backed securities issued pursuant to the securitization transaction;
(ii) The date on which the total unpaid principal obligations under the ABS interests issued in the securitization transaction has been reduced to 33 percent of the total unpaid principal obligations of the ABS interests at closing of the securitization transaction; or
(iii) Two years after the date of the closing of the securitization transaction.
(2) Securitizations of residential mortgages. (i) If all of the assets that collateralize a securitization transaction subject to risk retention under this part are residential mortgages, the prohibitions on sale and hedging pursuant to paragraphs (a) and (b) of this section shall expire on or after the date that is the later of:
(A) Five years after the date of the closing of the securitization transaction; or
(B) The date on which the total unpaid principal balance of the residential mortgages that collateralize the securitization transaction has been reduced to 25 percent of the total unpaid principal balance of such residential mortgages at the cut-off date or similar date for establishing the composition of the securitized assets collateralizing the asset-backed securities issued pursuant to the securitization transaction.
(ii) Notwithstanding paragraph (f)(2)(i) of this section, the prohibitions on sale and hedging pursuant to paragraphs (a) and (b) of this section shall expire with respect to the sponsor of a securitization transaction described in paragraph (f)(2)(i) of this section on or after the date that is seven years after the date of the closing of the securitization transaction.
(3) Conservatorship or receivership of sponsor. A conservator or receiver of the sponsor (or any other person holding risk retention pursuant to this part) of a securitization transaction is permitted to sell or hedge any economic interest in the securitization transaction if the conservator or receiver has been appointed pursuant to any provision of federal or State law (or regulation promulgated thereunder) that provides for the appointment of the Federal Deposit Insurance Corporation, or an agency or instrumentality of the United States or of a State as conservator or receiver, including without limitation any of the following authorities:
(i) 12 U.S.C. 1811;
(ii) 12 U.S.C. 1787;
(iii) 12 U.S.C. 4617; or
(iv) 12 U.S.C. 5382.
(4) Revolving pool securitizations. The provisions of paragraphs (f)(1) and (2) are not available to sponsors of revolving pool securitizations with respect to the forms of risk retention specified in § 244.5.
Subpart D – Exceptions and Exemptions
§ 244.13 Exemption for qualified residential mortgages.
(a) Definitions. For purposes of this section, the following definitions shall apply:
Currently performing means the borrower in the mortgage transaction is not currently thirty (30) days or more past due, in whole or in part, on the mortgage transaction.
Qualified residential mortgage means a “qualified mortgage” as defined in section 129C of the Truth in Lending Act (15 U.S.C.1639c) and regulations issued thereunder, as amended from time to time.
(b) Exemption. A sponsor shall be exempt from the risk retention requirements in subpart B of this part with respect to any securitization transaction, if:
(1) All of the assets that collateralize the asset-backed securities are qualified residential mortgages or servicing assets;
(2) None of the assets that collateralize the asset-backed securities are asset-backed securities;
(3) As of the cut-off date or similar date for establishing the composition of the securitized assets collateralizing the asset-backed securities issued pursuant to the securitization transaction, each qualified residential mortgage collateralizing the asset-backed securities is currently performing; and
(4)(i) The depositor with respect to the securitization transaction certifies that it has evaluated the effectiveness of its internal supervisory controls with respect to the process for ensuring that all assets that collateralize the asset-backed security are qualified residential mortgages or servicing assets and has concluded that its internal supervisory controls are effective; and
(ii) The evaluation of the effectiveness of the depositor’s internal supervisory controls must be performed, for each issuance of an asset-backed security in reliance on this section, as of a date within 60 days of the cut-off date or similar date for establishing the composition of the asset pool collateralizing such asset-backed security; and
(iii) The sponsor provides, or causes to be provided, a copy of the certification described in paragraph (b)(4)(i) of this section to potential investors a reasonable period of time prior to the sale of asset-backed securities in the issuing entity, and, upon request, to the Commission and its appropriate Federal banking agency, if any.
(c) Repurchase of loans subsequently determined to be non-qualified after closing. A sponsor that has relied on the exemption provided in paragraph (b) of this section with respect to a securitization transaction shall not lose such exemption with respect to such transaction if, after closing of the securitization transaction, it is determined that one or more of the residential mortgage loans collateralizing the asset-backed securities does not meet all of the criteria to be a qualified residential mortgage provided that:
(1) The depositor complied with the certification requirement set forth in paragraph (b)(4) of this section;
(2) The sponsor repurchases the loan(s) from the issuing entity at a price at least equal to the remaining aggregate unpaid principal balance and accrued interest on the loan(s) no later than 90 days after the determination that the loans do not satisfy the requirements to be a qualified residential mortgage; and
(3) The sponsor promptly notifies, or causes to be notified, the holders of the asset-backed securities issued in the securitization transaction of any loan(s) included in such securitization transaction that is (or are) required to be repurchased by the sponsor pursuant to paragraph (c)(2) of this section, including the amount of such repurchased loan(s) and the cause for such repurchase.
§ 244.14 Definitions applicable to qualifying commercial loans, qualifying commercial real estate loans, and qualifying automobile loans.
The following definitions apply for purposes of §§ 244.15 through 244.18:
Appraisal Standards Board means the board of the Appraisal Foundation that develops, interprets, and amends the Uniform Standards of Professional Appraisal Practice (USPAP), establishing generally accepted standards for the appraisal profession.
Automobile loan:
(1) Means any loan to an individual to finance the purchase of, and that is secured by a first lien on, a passenger car or other passenger vehicle, such as a minivan, van, sport-utility vehicle, pickup truck, or similar light truck for personal, family, or household use; and
(2) Does not include any:
(i) Loan to finance fleet sales;
(ii) Personal cash loan secured by a previously purchased automobile;
(iii) Loan to finance the purchase of a commercial vehicle or farm equipment that is not used for personal, family, or household purposes;
(iv) Lease financing;
(v) Loan to finance the purchase of a vehicle with a salvage title; or
(vi) Loan to finance the purchase of a vehicle intended to be used for scrap or parts.
Combined loan-to-value (CLTV) ratio means, at the time of origination, the sum of the principal balance of a first-lien mortgage loan on the property, plus the principal balance of any junior-lien mortgage loan that, to the creditor’s knowledge, would exist at the closing of the transaction and that is secured by the same property, divided by:
(1) For acquisition funding, the lesser of the purchase price or the estimated market value of the real property based on an appraisal that meets the requirements set forth in § 244.17(a)(2)(ii); or
(2) For refinancing, the estimated market value of the real property based on an appraisal that meets the requirements set forth in § 244.17(a)(2)(ii).
Commercial loan means a secured or unsecured loan to a company or an individual for business purposes, other than any:
(1) Loan to purchase or refinance a one-to-four family residential property;
(2) Commercial real estate loan.
Commercial real estate (CRE) loan means:
(1) A loan secured by a property with five or more single family units, or by nonfarm nonresidential real property, the primary source (50 percent or more) of repayment for which is expected to be:
(i) The proceeds of the sale, refinancing, or permanent financing of the property; or
(ii) Rental income associated with the property;
(2) Loans secured by improved land if the obligor owns the fee interest in the land and the land is leased to a third party who owns all improvements on the land, and the improvements are nonresidential or residential with five or more single family units; and
(3) Does not include:
(i) A land development and construction loan (including 1- to 4-family residential or commercial construction loans);
(ii) Any other land loan; or
(iii) An unsecured loan to a developer.
Debt service coverage (DSC) ratio means:
(1) For qualifying leased CRE loans, qualifying multi-family loans, and other CRE loans:
(i) The annual NOI less the annual replacement reserve of the CRE property at the time of origination of the CRE loan(s) divided by
(ii) The sum of the borrower’s annual payments for principal and interest (calculated at the fully-indexed rate) on any debt obligation.
(2) For commercial loans:
(i) The borrower’s EBITDA as of the most recently completed fiscal year divided by
(ii) The sum of the borrower’s annual payments for principal and interest on all debt obligations.
Debt to income (DTI) ratio means the borrower’s total debt, including the monthly amount due on the automobile loan, divided by the borrower’s monthly income.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) means the annual income of a business before expenses for interest, taxes, depreciation and amortization are deducted, as determined in accordance with GAAP.
Environmental risk assessment means a process for determining whether a property is contaminated or exposed to any condition or substance that could result in contamination that has an adverse effect on the market value of the property or the realization of the collateral value.
First lien means a lien or encumbrance on property that has priority over all other liens or encumbrances on the property.
Junior lien means a lien or encumbrance on property that is lower in priority relative to other liens or encumbrances on the property.
Leverage ratio means the borrower’s total debt divided by the borrower’s EBITDA.
Loan-to-value (LTV) ratio means, at the time of origination, the principal balance of a first-lien mortgage loan on the property divided by:
(1) For acquisition funding, the lesser of the purchase price or the estimated market value of the real property based on an appraisal that meets the requirements set forth in § 244.17(a)(2)(ii); or
(2) For refinancing, the estimated market value of the real property based on an appraisal that meets the requirements set forth in § 244.17(a)(2)(ii).
Model year means the year determined by the manufacturer and reflected on the vehicle’s Motor Vehicle Title as part of the vehicle description.
Net operating income (NOI) refers to the income a CRE property generates for the owner after all expenses have been deducted for federal income tax purposes, except for depreciation, debt service expenses, and federal and state income taxes, and excluding any unusual and nonrecurring items of income.
Operating affiliate means an affiliate of a borrower that is a lessor or similar party with respect to the commercial real estate securing the loan.
Payments-in-kind means payments of accrued interest that are not paid in cash when due, and instead are paid by increasing the principal balance of the loan or by providing equity in the borrowing company.
Purchase money security interest means a security interest in property that secures the obligation of the obligor incurred as all or part of the price of the property.
Purchase price means the amount paid by the borrower for the vehicle net of any incentive payments or manufacturer cash rebates.
Qualified tenant means:
(1) A tenant with a lease who has satisfied all obligations with respect to the property in a timely manner; or
(2) A tenant who originally had a lease that subsequently expired and currently is leasing the property on a month-to-month basis, has occupied the property for at least three years prior to the date of origination, and has satisfied all obligations with respect to the property in a timely manner.
Qualifying leased CRE loan means a CRE loan secured by commercial nonfarm real property, other than a multi-family property or a hotel, inn, or similar property:
(1) That is occupied by one or more qualified tenants pursuant to a lease agreement with a term of no less than one (1) month; and
(2) Where no more than 20 percent of the aggregate gross revenue of the property is payable from one or more tenants who:
(i) Are subject to a lease that will terminate within six months following the date of origination; or
(ii) Are not qualified tenants.
Qualifying multi-family loan means a CRE loan secured by any residential property (excluding a hotel, motel, inn, hospital, nursing home, or other similar facility where dwellings are not leased to residents):
(1) That consists of five or more dwelling units (including apartment buildings, condominiums, cooperatives and other similar structures) primarily for residential use; and
(2) Where at least 75 percent of the NOI is derived from residential rents and tenant amenities (including income from parking garages, health or swim clubs, and dry cleaning), and not from other commercial uses.
Rental income means:
(1) Income derived from a lease or other occupancy agreement between the borrower or an operating affiliate of the borrower and a party which is not an affiliate of the borrower for the use of real property or improvements serving as collateral for the applicable loan; and
(2) Other income derived from hotel, motel, dormitory, nursing home, assisted living, mini-storage warehouse or similar properties that are used primarily by parties that are not affiliates or employees of the borrower or its affiliates.
Replacement reserve means the monthly capital replacement or maintenance amount based on the property type, age, construction and condition of the property that is adequate to maintain the physical condition and NOI of the property.
Salvage title means a form of vehicle title branding, which notes that the vehicle has been severely damaged and/or deemed a total loss and uneconomical to repair by an insurance company that paid a claim on the vehicle.
Total debt, with respect to a borrower, means:
(1) In the case of an automobile loan, the sum of:
(i) All monthly housing payments (rent- or mortgage-related, including property taxes, insurance and home owners association fees); and
(ii) Any of the following that is dependent upon the borrower’s income for payment:
(A) Monthly payments on other debt and lease obligations, such as credit card loans or installment loans, including the monthly amount due on the automobile loan;
(B) Estimated monthly amortizing payments for any term debt, debts with other than monthly payments and debts not in repayment (such as deferred student loans, interest-only loans); and
(C) Any required monthly alimony, child support or court-ordered payments; and
(2) In the case of a commercial loan, the outstanding balance of all long-term debt (obligations that have a remaining maturity of more than one year) and the current portion of all debt that matures in one year or less.
Total liabilities ratio means the borrower’s total liabilities divided by the sum of the borrower’s total liabilities and equity, less the borrower’s intangible assets, with each component determined in accordance with GAAP.
Trade-in allowance means the amount a vehicle purchaser is given as a credit at the purchase of a vehicle for the fair exchange of the borrower’s existing vehicle to compensate the dealer for some portion of the vehicle purchase price, not to exceed the highest trade-in value of the existing vehicle, as determined by a nationally recognized automobile pricing agency and based on the manufacturer, year, model, features, mileage, and condition of the vehicle, less the payoff balance of any outstanding debt collateralized by the existing vehicle.
Uniform Standards of Professional Appraisal Practice (USPAP) means generally accepted standards for professional appraisal practice issued by the Appraisal Standards Board of the Appraisal Foundation.
§ 244.15 Qualifying commercial loans, commercial real estate loans, and automobile loans.
(a) General exception for qualifying assets. Commercial loans, commercial real estate loans, and automobile loans that are securitized through a securitization transaction shall be subject to a 0 percent risk retention requirement under subpart B, provided that the following conditions are met:
(1) The assets meet the underwriting standards set forth in § 244.16 (qualifying commercial loans), § 244.17 (qualifying CRE loans), or § 244.18 (qualifying automobile loans) of this part, as applicable;
(2) The securitization transaction is collateralized solely by loans of the same asset class and by servicing assets;
(3) The securitization transaction does not permit reinvestment periods; and
(4) The sponsor provides, or causes to be provided, to potential investors a reasonable period of time prior to the sale of asset-backed securities of the issuing entity, and, upon request, to the Commission, and to its appropriate Federal banking agency, if any, in written form under the caption “Credit Risk Retention”, a description of the manner in which the sponsor determined the aggregate risk retention requirement for the securitization transaction after including qualifying commercial loans, qualifying CRE loans, or qualifying automobile loans with 0 percent risk retention.
(b) Risk retention requirement. For any securitization transaction described in paragraph (a) of this section, the percentage of risk retention required under § 244.3(a) is reduced by the percentage evidenced by the ratio of the unpaid principal balance of the qualifying commercial loans, qualifying CRE loans, or qualifying automobile loans (as applicable) to the total unpaid principal balance of commercial loans, CRE loans, or automobile loans (as applicable) that are included in the pool of assets collateralizing the asset-backed securities issued pursuant to the securitization transaction (the qualifying asset ratio); provided that:
(1) The qualifying asset ratio is measured as of the cut-off date or similar date for establishing the composition of the securitized assets collateralizing the asset-backed securities issued pursuant to the securitization transaction;
(2) If the qualifying asset ratio would exceed 50 percent, the qualifying asset ratio shall be deemed to be 50 percent; and
(3) The disclosure required by paragraph (a)(4) of this section also includes descriptions of the qualifying commercial loans, qualifying CRE loans, and qualifying automobile loans (qualifying assets) and descriptions of the assets that are not qualifying assets, and the material differences between the group of qualifying assets and the group of assets that are not qualifying assets with respect to the composition of each group’s loan balances, loan terms, interest rates, borrower credit information, and characteristics of any loan collateral.
(c) Exception for securitizations of qualifying assets only. Notwithstanding other provisions of this section, the risk retention requirements of subpart B of this part shall not apply to securitization transactions where the transaction is collateralized solely by servicing assets and either qualifying commercial loans, qualifying CRE loans, or qualifying automobile loans.
(d) Record maintenance. A sponsor must retain the disclosures required in paragraphs (a) and (b) of this section and the certifications required in §§ 244.16(a)(8), 244.17(a)(10), and 244.18(a)(8), as applicable, in its records until three years after all ABS interests issued in the securitization are no longer outstanding. The sponsor must provide the disclosures and certifications upon request to the Commission and the sponsor’s appropriate Federal banking agency, if any.
§ 244.16 Underwriting standards for qualifying commercial loans.
(a) Underwriting, product and other standards. (1) Prior to origination of the commercial loan, the originator:
(i) Verified and documented the financial condition of the borrower:
(A) As of the end of the borrower’s two most recently completed fiscal years; and
(B) During the period, if any, since the end of its most recently completed fiscal year;
(ii) Conducted an analysis of the borrower’s ability to service its overall debt obligations during the next two years, based on reasonable projections;
(iii) Determined that, based on the previous two years’ actual performance, the borrower had:
(A) A total liabilities ratio of 50 percent or less;
(B) A leverage ratio of 3.0 or less; and
(C) A DSC ratio of 1.5 or greater;
(iv) Determined that, based on the two years of projections, which include the new debt obligation, following the closing date of the loan, the borrower will have:
(A) A total liabilities ratio of 50 percent or less;
(B) A leverage ratio of 3.0 or less; and
(C) A DSC ratio of 1.5 or greater.
(2) Prior to, upon or promptly following the inception of the loan, the originator:
(i) If the loan is originated on a secured basis, obtains a perfected security interest (by filing, title notation or otherwise) or, in the case of real property, a recorded lien, on all of the property pledged to collateralize the loan; and
(ii) If the loan documents indicate the purpose of the loan is to finance the purchase of tangible or intangible property, or to refinance such a loan, obtains a first lien on the property.
(3) The loan documentation for the commercial loan includes covenants that:
(i) Require the borrower to provide to the servicer of the commercial loan the borrower’s financial statements and supporting schedules on an ongoing basis, but not less frequently than quarterly;
(ii) Prohibit the borrower from retaining or entering into a debt arrangement that permits payments-in-kind;
(iii) Impose limits on:
(A) The creation or existence of any other security interest or lien with respect to any of the borrower’s property that serves as collateral for the loan;
(B) The transfer of any of the borrower’s assets that serve as collateral for the loan; and
(C) Any change to the name, location or organizational structure of the borrower, or any other party that pledges collateral for the loan;
(iv) Require the borrower and any other party that pledges collateral for the loan to:
(A) Maintain insurance that protects against loss on the collateral for the commercial loan at least up to the amount of the loan, and that names the originator or any subsequent holder of the loan as an additional insured or loss payee;
(B) Pay taxes, charges, fees, and claims, where non-payment might give rise to a lien on any collateral;
(C) Take any action required to perfect or protect the security interest and first lien (as applicable) of the originator or any subsequent holder of the loan in any collateral for the commercial loan or the priority thereof, and to defend any collateral against claims adverse to the lender’s interest;
(D) Permit the originator or any subsequent holder of the loan, and the servicer of the loan, to inspect any collateral for the commercial loan and the books and records of the borrower; and
(E) Maintain the physical condition of any collateral for the commercial loan.
(4) Loan payments required under the loan agreement are:
(i) Based on level monthly payments of principal and interest (at the fully indexed rate) that fully amortize the debt over a term that does not exceed five years from the date of origination; and
(ii) To be made no less frequently than quarterly over a term that does not exceed five years.
(5) The primary source of repayment for the loan is revenue from the business operations of the borrower.
(6) The loan was funded within the six (6) months prior to the cut-off date or similar date for establishing the composition of the securitized assets collateralizing the asset-backed securities issued pursuant to the securitization transaction.
(7) At the cut-off date or similar date for establishing the composition of the securitized assets collateralizing the asset-backed securities issued pursuant to the securitization transaction, all payments due on the loan are contractually current.
(8)(i) The depositor of the asset-backed security certifies that it has evaluated the effectiveness of its internal supervisory controls with respect to the process for ensuring that all qualifying commercial loans that collateralize the asset-backed security and that reduce the sponsor’s risk retention requirement under § 244.15 meet all of the requirements set forth in paragraphs (a)(1) through (7) of this section and has concluded that its internal supervisory controls are effective;
(ii) The evaluation of the effectiveness of the depositor’s internal supervisory controls referenced in paragraph (a)(8)(i) of this section shall be performed, for each issuance of an asset-backed security, as of a date within 60 days of the cut-off date or similar date for establishing the composition of the asset pool collateralizing such asset-backed security; and
(iii) The sponsor provides, or causes to be provided, a copy of the certification described in paragraph (a)(8)(i) of this section to potential investors a reasonable period of time prior to the sale of asset-backed securities in the issuing entity, and, upon request, to its appropriate Federal banking agency, if any.
(b) Cure or buy-back requirement. If a sponsor has relied on the exception provided in § 244.15 with respect to a qualifying commercial loan and it is subsequently determined that the loan did not meet all of the requirements set forth in paragraphs (a)(1) through (7) of this section, the sponsor shall not lose the benefit of the exception with respect to the commercial loan if the depositor complied with the certification requirement set forth in paragraph (a)(8) of this section and:
(1) The failure of the loan to meet any of the requirements set forth in paragraphs (a)(1) through (7) of this section is not material; or
(2) No later than 90 days after the determination that the loan does not meet one or more of the requirements of paragraphs (a)(1) through (7) of this section, the sponsor:
(i) Effectuates cure, establishing conformity of the loan to the unmet requirements as of the date of cure; or
(ii) Repurchases the loan(s) from the issuing entity at a price at least equal to the remaining principal balance and accrued interest on the loan(s) as of the date of repurchase.
(3) If the sponsor cures or repurchases pursuant to paragraph (b)(2) of this section, the sponsor must promptly notify, or cause to be notified, the holders of the asset-backed securities issued in the securitization transaction of any loan(s) included in such securitization transaction that is required to be cured or repurchased by the sponsor pursuant to paragraph (b)(2) of this section, including the principal amount of such loan(s) and the cause for such cure or repurchase.
§ 244.17 Underwriting standards for qualifying CRE loans.
(a) Underwriting, product and other standards. (1) The CRE loan must be secured by the following:
(i) An enforceable first lien, documented and recorded appropriately pursuant to applicable law, on the commercial real estate and improvements;
(ii)(A) An assignment of:
(1) Leases and rents and other occupancy agreements related to the commercial real estate or improvements or the operation thereof for which the borrower or an operating affiliate is a lessor or similar party and all payments under such leases and occupancy agreements; and
(2) All franchise, license and concession agreements related to the commercial real estate or improvements or the operation thereof for which the borrower or an operating affiliate is a lessor, licensor, concession granter or similar party and all payments under such other agreements, whether the assignments described in this paragraph (a)(1)(ii)(A)(2) are absolute or are stated to be made to the extent permitted by the agreements governing the applicable franchise, license or concession agreements;
(B) An assignment of all other payments due to the borrower or due to any operating affiliate in connection with the operation of the property described in paragraph (a)(1)(i) of this section; and
(C) The right to enforce the agreements described in paragraph (a)(1)(ii)(A) of this section and the agreements under which payments under paragraph (a)(1)(ii)(B) of this section are due against, and collect amounts due from, each lessee, occupant or other obligor whose payments were assigned pursuant to paragraphs (a)(1)(ii)(A) or (B) of this section upon a breach by the borrower of any of the terms of, or the occurrence of any other event of default (however denominated) under, the loan documents relating to such CRE loan; and
(iii) A security interest:
(A) In all interests of the borrower and any applicable operating affiliate in all tangible and intangible personal property of any kind, in or used in the operation of or in connection with, pertaining to, arising from, or constituting, any of the collateral described in paragraphs (a)(1)(i) or (ii) of this section; and
(B) In the form of a perfected security interest if the security interest in such property can be perfected by the filing of a financing statement, fixture filing, or similar document pursuant to the law governing the perfection of such security interest;
(2) Prior to origination of the CRE loan, the originator:
(i) Verified and documented the current financial condition of the borrower and each operating affiliate;
(ii) Obtained a written appraisal of the real property securing the loan that:
(A) Had an effective date not more than six months prior to the origination date of the loan by a competent and appropriately State-certified or State-licensed appraiser;
(B) Conforms to generally accepted appraisal standards as evidenced by the USPAP and the appraisal requirements
(C) Provides an “as is” opinion of the market value of the real property, which includes an income approach;
(iii) Qualified the borrower for the CRE loan based on a monthly payment amount derived from level monthly payments consisting of both principal and interest (at the fully-indexed rate) over the term of the loan, not exceeding 25 years, or 30 years for a qualifying multi-family property;
(iv) Conducted an environmental risk assessment to gain environmental information about the property securing the loan and took appropriate steps to mitigate any environmental liability determined to exist based on this assessment;
(v) Conducted an analysis of the borrower’s ability to service its overall debt obligations during the next two years, based on reasonable projections (including operating income projections for the property);
(vi)(A) Determined that based on the two years’ actual performance immediately preceding the origination of the loan, the borrower would have had:
(1) A DSC ratio of 1.5 or greater, if the loan is a qualifying leased CRE loan, net of any income derived from a tenant(s) who is not a qualified tenant(s);
(2) A DSC ratio of 1.25 or greater, if the loan is a qualifying multi-family property loan; or
(3) A DSC ratio of 1.7 or greater, if the loan is any other type of CRE loan;
(B) If the borrower did not own the property for any part of the last two years prior to origination, the calculation of the DSC ratio, for purposes of paragraph (a)(2)(vi)(A) of this section, shall include the property’s operating income for any portion of the two-year period during which the borrower did not own the property;
(vii) Determined that, based on two years of projections, which include the new debt obligation, following the origination date of the loan, the borrower will have:
(A) A DSC ratio of 1.5 or greater, if the loan is a qualifying leased CRE loan, net of any income derived from a tenant(s) who is not a qualified tenant(s);
(B) A DSC ratio of 1.25 or greater, if the loan is a qualifying multi-family property loan; or
(C) A DSC ratio of 1.7 or greater, if the loan is any other type of CRE loan.
(3) The loan documentation for the CRE loan includes covenants that:
(i) Require the borrower to provide the borrower’s financial statements and supporting schedules to the servicer on an ongoing basis, but not less frequently than quarterly, including information on existing, maturing and new leasing or rent-roll activity for the property securing the loan, as appropriate; and
(ii) Impose prohibitions on:
(A) The creation or existence of any other security interest with respect to the collateral for the CRE loan described in paragraphs (a)(1)(i) and (a)(1)(ii)(A) of this section, except as provided in paragraph (a)(4) of this section;
(B) The transfer of any collateral for the CRE loan described in paragraph (a)(1)(i) or (a)(1)(ii)(A) of this section or of any other collateral consisting of fixtures, furniture, furnishings, machinery or equipment other than any such fixture, furniture, furnishings, machinery or equipment that is obsolete or surplus; and
(C) Any change to the name, location or organizational structure of any borrower, operating affiliate or other pledgor unless such borrower, operating affiliate or other pledgor shall have given the holder of the loan at least 30 days advance notice and, pursuant to applicable law governing perfection and priority, the holder of the loan is able to take all steps necessary to continue its perfection and priority during such 30-day period.
(iii) Require each borrower and each operating affiliate to:
(A) Maintain insurance that protects against loss on collateral for the CRE loan described in paragraph (a)(1)(i) of this section for an amount no less than the replacement cost of the property improvements, and names the originator or any subsequent holder of the loan as an additional insured or lender loss payee;
(B) Pay taxes, charges, fees, and claims, where non-payment might give rise to a lien on collateral for the CRE loan described in paragraphs (a)(1)(i) and (ii) of this section;
(C) Take any action required to:
(1) Protect the security interest and the enforceability and priority thereof in the collateral described in paragraphs (a)(1)(i) and (a)(1)(ii)(A) of this section and defend such collateral against claims adverse to the originator’s or any subsequent holder’s interest; and
(2) Perfect the security interest of the originator or any subsequent holder of the loan in any other collateral for the CRE loan to the extent that such security interest is required by this section to be perfected;
(D) Permit the originator or any subsequent holder of the loan, and the servicer, to inspect any collateral for the CRE loan and the books and records of the borrower or other party relating to any collateral for the CRE loan;
(E) Maintain the physical condition of collateral for the CRE loan described in paragraph (a)(1)(i) of this section;
(F) Comply with all environmental, zoning, building code, licensing and other laws, regulations, agreements, covenants, use restrictions, and proffers applicable to collateral for the CRE loan described in paragraph (a)(1)(i) of this section;
(G) Comply with leases, franchise agreements, condominium declarations, and other documents and agreements relating to the operation of collateral for the CRE loan described in paragraph (a)(1)(i) of this section, and to not modify any material terms and conditions of such agreements over the term of the loan without the consent of the originator or any subsequent holder of the loan, or the servicer; and
(H) Not materially alter collateral for the CRE loan described in paragraph (a)(1)(i) of this section without the consent of the originator or any subsequent holder of the loan, or the servicer.
(4) The loan documentation for the CRE loan prohibits the borrower and each operating affiliate from obtaining a loan secured by a junior lien on collateral for the CRE loan described in paragraph (a)(1)(i) or (a)(1)(ii)(A) of this section, unless:
(i) The sum of the principal amount of such junior lien loan, plus the principal amount of all other loans secured by collateral described in paragraph (a)(1)(i) or (a)(1)(ii)(A) of this section, does not exceed the applicable CLTV ratio in paragraph (a)(5) of this section, based on the appraisal at origination of such junior lien loan; or
(ii) Such loan is a purchase money obligation that financed the acquisition of machinery or equipment and the borrower or operating affiliate (as applicable) pledges such machinery and equipment as additional collateral for the CRE loan.
(5) At origination, the applicable loan-to-value ratios for the loan are:
(i) LTV less than or equal to 65 percent and CLTV less than or equal to 70 percent; or
(ii) LTV less than or equal to 60 percent and CLTV less than or equal to 65 percent, if an appraisal used to meet the requirements set forth in paragraph (a)(2)(ii) of this section used a direct capitalization rate, and that rate is less than or equal to the sum of:
(A) The 10-year swap rate, as reported in the Federal Reserve’s H.15 Report (or any successor report) as of the date concurrent with the effective date of such appraisal; and
(B) 300 basis points.
(iii) If the appraisal required under paragraph (a)(2)(ii) of this section included a direct capitalization method using an overall capitalization rate, that rate must be disclosed to potential investors in the securitization.
(6) All loan payments required to be made under the loan agreement are:
(i) Based on level monthly payments of principal and interest (at the fully indexed rate) to fully amortize the debt over a term that does not exceed 25 years, or 30 years for a qualifying multifamily loan; and
(ii) To be made no less frequently than monthly over a term of at least ten years.
(7) Under the terms of the loan agreement:
(i) Any maturity of the note occurs no earlier than ten years following the date of origination;
(ii) The borrower is not permitted to defer repayment of principal or payment of interest; and
(iii) The interest rate on the loan is:
(A) A fixed interest rate;
(B) An adjustable interest rate and the borrower, prior to or concurrently with origination of the CRE loan, obtained a derivative that effectively results in a fixed interest rate; or
(C) An adjustable interest rate and the borrower, prior to or concurrently with origination of the CRE loan, obtained a derivative that established a cap on the interest rate for the term of the loan, and the loan meets the underwriting criteria in paragraphs (a)(2)(vi) and (vii) of this section using the maximum interest rate allowable under the interest rate cap.
(8) The originator does not establish an interest reserve at origination to fund all or part of a payment on the loan.
(9) At the cut-off date or similar date for establishing the composition of the securitized assets collateralizing the asset-backed securities issued pursuant to the securitization transaction, all payments due on the loan are contractually current.
(10)(i) The depositor of the asset-backed security certifies that it has evaluated the effectiveness of its internal supervisory controls with respect to the process for ensuring that all qualifying CRE loans that collateralize the asset-backed security and that reduce the sponsor’s risk retention requirement under § 244.15 meet all of the requirements set forth in paragraphs (a)(1) through (9) of this section and has concluded that its internal supervisory controls are effective;
(ii) The evaluation of the effectiveness of the depositor’s internal supervisory controls referenced in paragraph (a)(10)(i) of this section shall be performed, for each issuance of an asset-backed security, as of a date within 60 days of the cut-off date or similar date for establishing the composition of the asset pool collateralizing such asset-backed security;
(iii) The sponsor provides, or causes to be provided, a copy of the certification described in paragraph (a)(10)(i) of this section to potential investors a reasonable period of time prior to the sale of asset-backed securities in the issuing entity, and, upon request, to its appropriate Federal banking agency, if any; and
(11) Within two weeks of the closing of the CRE loan by its originator or, if sooner, prior to the transfer of such CRE loan to the issuing entity, the originator shall have obtained a UCC lien search from the jurisdiction of organization of the borrower and each operating affiliate, that does not report, as of the time that the security interest of the originator in the property described in paragraph (a)(1)(iii) of this section was perfected, other higher priority liens of record on any property described in paragraph (a)(1)(iii) of this section, other than purchase money security interests.
(b) Cure or buy-back requirement. If a sponsor has relied on the exception provided in § 244.15 with respect to a qualifying CRE loan and it is subsequently determined that the CRE loan did not meet all of the requirements set forth in paragraphs (a)(1) through (9) and (a)(11) of this section, the sponsor shall not lose the benefit of the exception with respect to the CRE loan if the depositor complied with the certification requirement set forth in paragraph (a)(10) of this section, and:
(1) The failure of the loan to meet any of the requirements set forth in paragraphs (a)(1) through (9) and (a)(11) of this section is not material; or;
(2) No later than 90 days after the determination that the loan does not meet one or more of the requirements of paragraphs (a)(1) through (9) or (a)(11) of this section, the sponsor:
(i) Effectuates cure, restoring conformity of the loan to the unmet requirements as of the date of cure; or
(ii) Repurchases the loan(s) from the issuing entity at a price at least equal to the remaining principal balance and accrued interest on the loan(s) as of the date of repurchase.
(3) If the sponsor cures or repurchases pursuant to paragraph (b)(2) of this section, the sponsor must promptly notify, or cause to be notified, the holders of the asset-backed securities issued in the securitization transaction of any loan(s) included in such securitization transaction that is required to be cured or repurchased by the sponsor pursuant to paragraph (b)(2) of this section, including the principal amount of such repurchased loan(s) and the cause for such cure or repurchase.
§ 244.18 Underwriting standards for qualifying automobile loans.
(a) Underwriting, product and other standards. (1) Prior to origination of the automobile loan, the originator:
(i) Verified and documented that within 30 days of the date of origination:
(A) The borrower was not currently 30 days or more past due, in whole or in part, on any debt obligation;
(B) Within the previous 24 months, the borrower has not been 60 days or more past due, in whole or in part, on any debt obligation;
(C) Within the previous 36 months, the borrower has not:
(1) Been a debtor in a proceeding commenced under Chapter 7 (Liquidation), Chapter 11 (Reorganization), Chapter 12 (Family Farmer or Family Fisherman plan), or Chapter 13 (Individual Debt Adjustment) of the U.S. Bankruptcy Code; or
(2) Been the subject of any federal or State judicial judgment for the collection of any unpaid debt;
(D) Within the previous 36 months, no one-to-four family property owned by the borrower has been the subject of any foreclosure, deed in lieu of foreclosure, or short sale; or
(E) Within the previous 36 months, the borrower has not had any personal property repossessed;
(ii) Determined and documented that the borrower has at least 24 months of credit history; and
(iii) Determined and documented that, upon the origination of the loan, the borrower’s DTI ratio is less than or equal to 36 percent.
(A) For the purpose of making the determination under paragraph (a)(1)(iii) of this section, the originator must:
(1) Verify and document all income of the borrower that the originator includes in the borrower’s effective monthly income (using payroll stubs, tax returns, profit and loss statements, or other similar documentation); and
(2) On or after the date of the borrower’s written application and prior to origination, obtain a credit report regarding the borrower from a consumer reporting agency that compiles and maintain files on consumers on a nationwide basis (within the meaning of 15 U.S.C. 1681a(p)) and verify that all outstanding debts reported in the borrower’s credit report are incorporated into the calculation of the borrower’s DTI ratio under paragraph (a)(1)(iii) of this section;
(2) An originator will be deemed to have met the requirements of paragraph (a)(1)(i) of this section if:
(i) The originator, no more than 30 days before the closing of the loan, obtains a credit report regarding the borrower from a consumer reporting agency that compiles and maintains files on consumers on a nationwide basis (within the meaning of 15 U.S.C. 1681a(p));
(ii) Based on the information in such credit report, the borrower meets all of the requirements of paragraph (a)(1)(i) of this section, and no information in a credit report subsequently obtained by the originator before the closing of the loan contains contrary information; and
(iii) The originator obtains electronic or hard copies of the credit report.
(3) At closing of the automobile loan, the borrower makes a down payment from the borrower’s personal funds and trade-in allowance, if any, that is at least equal to the sum of:
(i) The full cost of the vehicle title, tax, and registration fees;
(ii) Any dealer-imposed fees;
(iii) The full cost of any additional warranties, insurance or other products purchased in connection with the purchase of the vehicle; and
(iv) 10 percent of the vehicle purchase price.
(4) The originator records a first lien securing the loan on the purchased vehicle in accordance with State law.
(5) The terms of the loan agreement provide a maturity date for the loan that does not exceed the lesser of:
(i) Six years from the date of origination; or
(ii) 10 years minus the difference between the current model year and the vehicle’s model year.
(6) The terms of the loan agreement:
(i) Specify a fixed rate of interest for the life of the loan;
(ii) Provide for a level monthly payment amount that fully amortizes the amount financed over the loan term;
(iii) Do not permit the borrower to defer repayment of principal or payment of interest; and
(iv) Require the borrower to make the first payment on the automobile loan within 45 days of the loan’s contract date.
(7) At the cut-off date or similar date for establishing the composition of the securitized assets collateralizing the asset-backed securities issued pursuant to the securitization transaction, all payments due on the loan are contractually current; and
(8)(i) The depositor of the asset-backed security certifies that it has evaluated the effectiveness of its internal supervisory controls with respect to the process for ensuring that all qualifying automobile loans that collateralize the asset-backed security and that reduce the sponsor’s risk retention requirement under § 244.15 meet all of the requirements set forth in paragraphs (a)(1) through (7) of this section and has concluded that its internal supervisory controls are effective;
(ii) The evaluation of the effectiveness of the depositor’s internal supervisory controls referenced in paragraph (a)(8)(i) of this section shall be performed, for each issuance of an asset-backed security, as of a date within 60 days of the cut-off date or similar date for establishing the composition of the asset pool collateralizing such asset-backed security; and
(iii) The sponsor provides, or causes to be provided, a copy of the certification described in paragraph (a)(8)(i) of this section to potential investors a reasonable period of time prior to the sale of asset-backed securities in the issuing entity, and, upon request, to its appropriate Federal banking agency, if any.
(b) Cure or buy-back requirement. If a sponsor has relied on the exception provided in § 244.15 with respect to a qualifying automobile loan and it is subsequently determined that the loan did not meet all of the requirements set forth in paragraphs (a)(1) through (7) of this section, the sponsor shall not lose the benefit of the exception with respect to the automobile loan if the depositor complied with the certification requirement set forth in paragraph (a)(8) of this section, and:
(1) The failure of the loan to meet any of the requirements set forth in paragraphs (a)(1) through (7) of this section is not material; or
(2) No later than ninety (90) days after the determination that the loan does not meet one or more of the requirements of paragraphs (a)(1) through (7) of this section, the sponsor:
(i) Effectuates cure, establishing conformity of the loan to the unmet requirements as of the date of cure; or
(ii) Repurchases the loan(s) from the issuing entity at a price at least equal to the remaining principal balance and accrued interest on the loan(s) as of the date of repurchase.
(3) If the sponsor cures or repurchases pursuant to paragraph (b)(2) of this section, the sponsor must promptly notify, or cause to be notified, the holders of the asset-backed securities issued in the securitization transaction of any loan(s) included in such securitization transaction that is required to be cured or repurchased by the sponsor pursuant to paragraph (b)(2) of this section, including the principal amount of such loan(s) and the cause for such cure or repurchase.
§ 244.19 General exemptions.
(a) Definitions. For purposes of this section, the following definitions shall apply:
Community-focused residential mortgage means a residential mortgage exempt from the definition of “covered transaction” under § 1026.43(a)(3)(iv) and (v) of the CFPB’s Regulation Z (12 CFR 1026.43(a)).
First pay class means a class of ABS interests for which all interests in the class are entitled to the same priority of payment and that, at the time of closing of the transaction, is entitled to repayments of principal and payments of interest prior to or pro-rata with all other classes of securities collateralized by the same pool of first-lien residential mortgages, until such class has no principal or notional balance remaining.
Inverse floater means an ABS interest issued as part of a securitization transaction for which interest or other income is payable to the holder based on a rate or formula that varies inversely to a reference rate of interest.
Qualifying three-to-four unit residential mortgage loan means a mortgage loan that is:
(i) Secured by a dwelling (as defined in 12 CFR 1026.2(a)(19)) that is owner occupied and contains three-to-four housing units;
(ii) Is deemed to be for business purposes for purposes of Regulation Z under 12 CFR part 1026, supplement I, paragraph 3(a)(5)(i); and
(iii) Otherwise meets all of the requirements to qualify as a qualified mortgage under § 1026.43(e) and (f) of Regulation Z (12 CFR 1026.43(e) and (f)) as if the loan were a covered transaction under that section.
(b) This part shall not apply to:
(1) U.S. Government-backed securitizations. Any securitization transaction that:
(i) Is collateralized solely by residential, multifamily, or health care facility mortgage loan assets that are insured or guaranteed (in whole or in part) as to the payment of principal and interest by the United States or an agency of the United States, and servicing assets; or
(ii) Involves the issuance of asset-backed securities that:
(A) Are insured or guaranteed as to the payment of principal and interest by the United States or an agency of the United States; and
(B) Are collateralized solely by residential, multifamily, or health care facility mortgage loan assets or interests in such assets, and servicing assets.
(2) Certain agricultural loan securitizations. Any securitization transaction that is collateralized solely by loans or other assets made, insured, guaranteed, or purchased by any institution that is subject to the supervision of the Farm Credit Administration, including the Federal Agricultural Mortgage Corporation, and servicing assets;
(3) State and municipal securitizations. Any asset-backed security that is a security issued or guaranteed by any State, or by any political subdivision of a State, or by any public instrumentality of a State that is exempt from the registration requirements of the Securities Act of 1933 by reason of section 3(a)(2) of that Act (15 U.S.C. 77c(a)(2)); and
(4) Qualified scholarship funding bonds. Any asset-backed security that meets the definition of a qualified scholarship funding bond, as set forth in section 150(d)(2) of the Internal Revenue Code of 1986 (26 U.S.C. 150(d)(2)).
(5) Pass-through resecuritizations. Any securitization transaction that:
(i) Is collateralized solely by servicing assets, and by asset-backed securities:
(A) For which credit risk was retained as required under subpart B of this part; or
(B) That were exempted from the credit risk retention requirements of this part pursuant to subpart D of this part;
(ii) Is structured so that it involves the issuance of only a single class of ABS interests; and
(iii) Provides for the pass-through of all principal and interest payments received on the underlying asset-backed securities (net of expenses of the issuing entity) to the holders of such class.
(6) First-pay-class securitizations. Any securitization transaction that:
(i) Is collateralized solely by servicing assets, and by first-pay classes of asset-backed securities collateralized by first-lien residential mortgages on properties located in any state:
(A) For which credit risk was retained as required under subpart B of this part; or
(B) That were exempted from the credit risk retention requirements of this part pursuant to subpart D of this part;
(ii) Does not provide for any ABS interest issued in the securitization transaction to share in realized principal losses other than pro rata with all other ABS interests issued in the securitization transaction based on the current unpaid principal balance of such ABS interests at the time the loss is realized;
(iii) Is structured to reallocate prepayment risk;
(iv) Does not reallocate credit risk (other than as a consequence of reallocation of prepayment risk); and
(v) Does not include any inverse floater or similarly structured ABS interest.
(7) Seasoned loans. (i) Any securitization transaction that is collateralized solely by servicing assets, and by seasoned loans that meet the following requirements:
(A) The loans have not been modified since origination; and
(B) None of the loans have been delinquent for 30 days or more.
(ii) For purposes of this paragraph, a seasoned loan means:
(A) With respect to asset-backed securities collateralized by residential mortgages, a loan that has been outstanding and performing for the longer of:
(1) A period of five years; or
(2) Until the outstanding principal balance of the loan has been reduced to 25 percent of the original principal balance.
(3) Notwithstanding paragraphs (b)(7)(ii)(A)(1) and (2) of this section, any residential mortgage loan that has been outstanding and performing for a period of at least seven years shall be deemed a seasoned loan.
(B) With respect to all other classes of asset-backed securities, a loan that has been outstanding and performing for the longer of:
(1) A period of at least two years; or
(2) Until the outstanding principal balance of the loan has been reduced to 33 percent of the original principal balance.
(8) Certain public utility securitizations. (i) Any securitization transaction where the asset-back securities issued in the transaction are secured by the intangible property right to collect charges for the recovery of specified costs and such other assets, if any, of an issuing entity that is wholly owned, directly or indirectly, by an investor owned utility company that is subject to the regulatory authority of a State public utility commission or other appropriate State agency.
(ii) For purposes of this paragraph:
(A) Specified cost means any cost identified by a State legislature as appropriate for recovery through securitization pursuant to specified cost recovery legislation; and
(B) Specified cost recovery legislation means legislation enacted by a State that:
(1) Authorizes the investor owned utility company to apply for, and authorizes the public utility commission or other appropriate State agency to issue, a financing order determining the amount of specified costs the utility will be allowed to recover;
(2) Provides that pursuant to a financing order, the utility acquires an intangible property right to charge, collect, and receive amounts necessary to provide for the full recovery of the specified costs determined to be recoverable, and assures that the charges are non-bypassable and will be paid by customers within the utility’s historic service territory who receive utility goods or services through the utility’s transmission and distribution system, even if those customers elect to purchase these goods or services from a third party; and
(3) Guarantees that neither the State nor any of its agencies has the authority to rescind or amend the financing order, to revise the amount of specified costs, or in any way to reduce or impair the value of the intangible property right, except as may be contemplated by periodic adjustments authorized by the specified cost recovery legislation.
(c) Exemption for securitizations of assets issued, insured or guaranteed by the United States. This part shall not apply to any securitization transaction if the asset-backed securities issued in the transaction are:
(1) Collateralized solely by obligations issued by the United States or an agency of the United States and servicing assets;
(2) Collateralized solely by assets that are fully insured or guaranteed as to the payment of principal and interest by the United States or an agency of the United States (other than those referred to in paragraph (b)(1)(i) of this section) and servicing assets; or
(3) Fully guaranteed as to the timely payment of principal and interest by the United States or any agency of the United States;
(d) Federal Deposit Insurance Corporation securitizations. This part shall not apply to any securitization transaction that is sponsored by the Federal Deposit Insurance Corporation acting as conservator or receiver under any provision of the Federal Deposit Insurance Act or of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(e) Reduced requirement for certain student loan securitizations. The 5 percent risk retention requirement set forth in § 244.4 shall be modified as follows:
(1) With respect to a securitization transaction that is collateralized solely by student loans made under the Federal Family Education Loan Program (“FFELP loans”) that are guaranteed as to 100 percent of defaulted principal and accrued interest, and servicing assets, the risk retention requirement shall be 0 percent;
(2) With respect to a securitization transaction that is collateralized solely by FFELP loans that are guaranteed as to at least 98 percent but less than 100 percent of defaulted principal and accrued interest, and servicing assets, the risk retention requirement shall be 2 percent; and
(3) With respect to any other securitization transaction that is collateralized solely by FFELP loans, and servicing assets, the risk retention requirement shall be 3 percent.
(f) Community-focused lending securitizations. (1) This part shall not apply to any securitization transaction if the asset-backed securities issued in the transaction are collateralized solely by community-focused residential mortgages and servicing assets.
(2) For any securitization transaction that includes both community-focused residential mortgages and residential mortgages that are not exempt from risk retention under this part, the percent of risk retention required under § 244.4(a) is reduced by the ratio of the unpaid principal balance of the community-focused residential mortgages to the total unpaid principal balance of residential mortgages that are included in the pool of assets collateralizing the asset-backed securities issued pursuant to the securitization transaction (the community-focused residential mortgage asset ratio); provided that:
(i) The community-focused residential mortgage asset ratio is measured as of the cut-off date or similar date for establishing the composition of the pool assets collateralizing the asset-backed securities issued pursuant to the securitization transaction; and
(ii) If the community-focused residential mortgage asset ratio would exceed 50 percent, the community-focused residential mortgage asset ratio shall be deemed to be 50 percent.
(g) Exemptions for securitizations of certain three-to-four unit mortgage loans. A sponsor shall be exempt from the risk retention requirements in subpart B of this part with respect to any securitization transaction if:
(1)(i) The asset-backed securities issued in the transaction are collateralized solely by qualifying three-to-four unit residential mortgage loans and servicing assets; or
(ii) The asset-backed securities issued in the transaction are collateralized solely by qualifying three-to-four unit residential mortgage loans, qualified residential mortgages as defined in § 244.13, and servicing assets.
(2) The depositor with respect to the securitization provides the certifications set forth in § 244.13(b)(4) with respect to the process for ensuring that all assets that collateralize the asset-backed securities issued in the transaction are qualifying three-to-four unit residential mortgage loans, qualified residential mortgages, or servicing assets; and
(3) The sponsor of the securitization complies with the repurchase requirements in § 244.13(c) with respect to a loan if, after closing, it is determined that the loan does not meet all of the criteria to be either a qualified residential mortgage or a qualifying three-to-four unit residential mortgage loan, as appropriate.
(h) Rule of construction. Securitization transactions involving the issuance of asset-backed securities that are either issued, insured, or guaranteed by, or are collateralized by obligations issued by, or loans that are issued, insured, or guaranteed by, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or a Federal home loan bank shall not on that basis qualify for exemption under this part.
(a) Definitions. For purposes of this section, the following definition shall apply:
U.S. person means:
(i) Any of the following:
(A) Any natural person resident in the United States;
(B) Any partnership, corporation, limited liability company, or other organization or entity organized or incorporated under the laws of any State or of the United States;
(C) Any estate of which any executor or administrator is a U.S. person (as defined under any other clause of this definition);
(D) Any trust of which any trustee is a U.S. person (as defined under any other clause of this definition);
(E) Any agency or branch of a foreign entity located in the United States;
(F) Any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a U.S. person (as defined under any other clause of this definition);
(G) Any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States; and
(H) Any partnership, corporation, limited liability company, or other organization or entity if:
(1) Organized or incorporated under the laws of any foreign jurisdiction; and
(2) Formed by a U.S. person (as defined under any other clause of this definition) principally for the purpose of investing in securities not registered under the Act; and
(ii) “U.S. person(s)” does not include:
(A) Any discretionary account or similar account (other than an estate or trust) held for the benefit or account of a person not constituting a U.S. person (as defined in paragraph (i) of this section) by a dealer or other professional fiduciary organized, incorporated, or (if an individual) resident in the United States;
(B) Any estate of which any professional fiduciary acting as executor or administrator is a U.S. person (as defined in paragraph (i) of this section) if:
(1) An executor or administrator of the estate who is not a U.S. person (as defined in paragraph (i) of this section) has sole or shared investment discretion with respect to the assets of the estate; and
(2) The estate is governed by foreign law;
(C) Any trust of which any professional fiduciary acting as trustee is a U.S. person (as defined in paragraph (i) of this section), if a trustee who is not a U.S. person (as defined in paragraph (i) of this section) has sole or shared investment discretion with respect to the trust assets, and no beneficiary of the trust (and no settlor if the trust is revocable) is a U.S. person (as defined in paragraph (i) of this section);
(D) An employee benefit plan established and administered in accordance with the law of a country other than the United States and customary practices and documentation of such country;
(E) Any agency or branch of a U.S. person (as defined in paragraph (i) of this section) located outside the United States if:
(1) The agency or branch operates for valid business reasons; and
(2) The agency or branch is engaged in the business of insurance or banking and is subject to substantive insurance or banking regulation, respectively, in the jurisdiction where located;
(F) The International Monetary Fund, the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the United Nations, and their agencies, affiliates and pension plans, and any other similar international organizations, their agencies, affiliates and pension plans.
(b) In general. This part shall not apply to a securitization transaction if all the following conditions are met:
(1) The securitization transaction is not required to be and is not registered under the Securities Act of 1933 (15 U.S.C. 77a et seq.);
(2) No more than 10 percent of the dollar value (or equivalent amount in the currency in which the ABS interests are issued, as applicable) of all classes of ABS interests in the securitization transaction are sold or transferred to U.S. persons or for the account or benefit of U.S. persons;
(3) Neither the sponsor of the securitization transaction nor the issuing entity is:
(i) Chartered, incorporated, or organized under the laws of the United States or any State;
(ii) An unincorporated branch or office (wherever located) of an entity chartered, incorporated, or organized under the laws of the United States or any State; or
(iii) An unincorporated branch or office located in the United States or any State of an entity that is chartered, incorporated, or organized under the laws of a jurisdiction other than the United States or any State; and
(4) If the sponsor or issuing entity is chartered, incorporated, or organized under the laws of a jurisdiction other than the United States or any State, no more than 25 percent (as determined based on unpaid principal balance) of the assets that collateralize the ABS interests sold in the securitization transaction were acquired by the sponsor or issuing entity, directly or indirectly, from:
(i) A majority-owned affiliate of the sponsor or issuing entity that is chartered, incorporated, or organized under the laws of the United States or any State; or
(ii) An unincorporated branch or office of the sponsor or issuing entity that is located in the United States or any State.
(c) Evasions prohibited. In view of the objective of these rules and the policies underlying Section 15G of the Exchange Act, the safe harbor described in paragraph (b) of this section is not available with respect to any transaction or series of transactions that, although in technical compliance with paragraphs (a) and (b) of this section, is part of a plan or scheme to evade the requirements of section 15G and this part. In such cases, compliance with section 15G and this part is required.
§ 244.21 Additional exemptions.
(a) Securitization transactions. The federal agencies with rulewriting authority under section 15G(b) of the Exchange Act (15 U.S.C. 78o-11(b)) with respect to the type of assets involved may jointly provide a total or partial exemption of any securitization transaction as such agencies determine may be appropriate in the public interest and for the protection of investors.
(b) Exceptions, exemptions, and adjustments. The Federal banking agencies and the Commission, in consultation with the Federal Housing Finance Agency and the Department of Housing and Urban Development, may jointly adopt or issue exemptions, exceptions or adjustments to the requirements of this part, including exemptions, exceptions or adjustments for classes of institutions or assets in accordance with section 15G(e) of the Exchange Act (15 U.S.C. 78o-11(e)).
§ 244.22 Periodic review of the QRM definition, exempted three-to-four unit residential mortgage loans, and community-focused residential mortgage exemption.
(a) The Federal banking agencies and the Commission, in consultation with the Federal Housing Finance Agency and the Department of Housing and Urban Development, shall commence a review of the definition of qualified residential mortgage in § 244.13, a review of the community-focused residential mortgage exemption in § 244.19(f), and a review of the exemption for qualifying three-to-four unit residential mortgage loans in § 244.19(g):
(1) No later than four years after the effective date of the rule (as it relates to securitizers and originators of asset-backed securities collateralized by residential mortgages), five years following the completion of such initial review, and every five years thereafter; and
(2) At any time, upon the request of any Federal banking agency, the Commission, the Federal Housing Finance Agency or the Department of Housing and Urban Development, specifying the reason for such request, including as a result of any amendment to the definition of qualified mortgage or changes in the residential housing market.
(b) The Federal banking agencies, the Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development shall publish in the
PART 246 – SUPERVISION AND REGULATION ASSESSMENTS OF FEES (REGULATION TT)
§ 246.1 Authority, purpose and scope.
(a) Authority. This part (Regulation TT) is issued by the Board of Governors of the Federal Reserve System (Board) under section 318 of Title III of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) (Pub. L. 111-203, 124 Stat. 1376, 1423-32, 12 U.S.C. 5365 and 5366), section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) (Pub. L. 115-174, 132 Stat. 1296), and section 11(s) of the Federal Reserve Act (12 U.S.C. 248(s)).
(b) Scope. This part applies to:
(1) Any bank holding company having total consolidated assets of $100 billion or more, as defined in this section;
(2) Any savings and loan holding company having total consolidated assets of $100 billion or more, as defined below; and
(3) Any nonbank financial company supervised by the Board, as defined § 246.2.
(c) Purpose. This part implements provisions of section 318 of the Dodd-Frank Act and section 401 of EGRRCPA that direct the Board to collect assessments, fees, or other charges from companies identified in subsection (b) that are equal to the total expenses the Board estimates are necessary or appropriate to carry out the supervisory and regulatory responsibilities of the Board with respect to these assessed companies and to adjust the amount charged to assessed companies with total consolidated assets between $100 billion and $250 billion to reflect any changes in supervisory and regulatory responsibilities resulting from EGRRCPA.
(d)(1) Reservation of authority. In exceptional circumstances, for the purpose of avoiding inequitable or inconsistent application of the rule, the Board may require an assessed company to pay a lesser amount of assessments than would otherwise be provided for under this part.
(2) Use of comparable financial information. The Board may use, at its discretion, any comparable financial information that the Board may require from a company in considering whether the company must pay to the Board an assessment and the amount of such assessment, pursuant to section 318 of the Dodd-Frank Act.
§ 246.2 Definitions.
As used in this part:
(a) Assessment period means January 1 through December 31 of each calendar year.
(b) Bank means an insured depository institution as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
(c) Bank holding company is defined as in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), and the Board’s Regulation Y (12 CFR part 225).
(d) Company means a corporation, partnership, limited liability company, depository institution, business trust, special purpose entity, association, or similar organization.
(e) Council means the Financial Stability Oversight Council established by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
(f) Foreign bank holding company means a foreign bank that is a bank holding company and any foreign company that owns such foreign bank.
(g) Foreign savings and loan holding company means a foreign bank or foreign company that is a savings and loan holding company.
(h) GAAP means generally accepted accounting principles, as used in the United States.
(i) Grandfathered unitary savings and loan holding company means a savings and loan holding company described in section 10(c)(9)(C) of the Home Owners’ Loan Act (“HOLA”) (12 U.S.C. 1467a(c)(9)(C)).
(j) Nonbank financial company supervised by the Board means a company that the Council has determined pursuant to section 113 of the Dodd-Frank Act shall be supervised by the Board and for which such determination is in effect.
(k) Notice of assessment means the notice in which the Board informs a company that it is an assessed company and states the assessed company’s total assessable assets and the amount of its assessment.
(l) Savings and loan holding company is defined as in section 10 of HOLA (12 U.S.C. 1467a).
(m) Savings association is defined as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
(n) Category I, II, and III firms are assessed companies subject to Category I, II, or III standards as defined and determined under 12 CFR parts 238 and 252 as of December 31 of the assessment period.
(o) Category IV firms are assessed companies subject to Category IV standards as defined and determined under 12 CFR parts 238 and 252 as of December 31 of the assessment period.
(p) “Other” firms are assessed companies not subject to the Category I, II, III, or IV standards as defined and determined under 12 CFR parts 238 and 252 as of December 31 of the assessment period.
§ 246.3 Assessed companies.
An assessed company is any company that:
(a) Is a top-tier company that, on December 31 of the assessment period:
(1) Is a bank holding company, other than a foreign bank holding company, with $100 billion or more in total consolidated assets, as determined based on the average of the bank holding company’s total consolidated assets reported for the assessment period on the Federal Reserve’s Form FR Y-9C (“FR Y-9C”),
(2)(i) Is a savings and loan holding company, other than a foreign savings and loan holding company, with $100 billion or more in total consolidated assets, as determined, except as provided in paragraph (a)(2)(ii) of this section, based on the average of the savings and loan holding company’s total consolidated assets as reported for the assessment period on the FR Y-9C or on the Quarterly Savings and Loan Holding Company Report (FR 2320), as applicable.
(ii) If a company does not calculate its total consolidated assets under GAAP for any regulatory purpose (including compliance with applicable securities laws), the company may request that the Board permit the company to file a quarterly estimate of its total consolidated assets. The Board may, in its discretion and subject to Board review and adjustment, permit the company to provide estimated total consolidated assets on a quarterly basis. For purposes of this part, the company’s total consolidated assets will be the average of the estimated total consolidated assets provided for the assessment period.
(b) Is a top-tier foreign bank holding company on December 31 of the assessment period, with $100 billion or more in total consolidated assets, as determined based on the average of the foreign bank holding company’s total consolidated assets reported for the assessment period on the Federal Reserve’s Form FR Y-7Q (“FR Y-7Q”), provided, however, that if any such company has filed only one FR Y-7Q during the assessment period, the Board shall use an average of the foreign bank holding company’s total consolidated assets reported on that FR Y-7Q and on the FR Y-7Q for the corresponding period in the year prior to the assessment period.
(c) Is a top-tier foreign savings and loan holding company on December 31 of the assessment period, with $100 billion or more in total consolidated assets, as determined based on the average of the foreign savings and loan holding company’s total consolidated assets reported for the assessment period on the reporting forms applicable during the assessment period, provided, however, that if any such company has filed only one reporting form during the assessment period, the Board shall use an average of the foreign savings and loan holding company’s total consolidated assets reported on that reporting form and on the reporting form for the corresponding period in the year prior to the assessment period, or
(d) Is a nonbank financial company supervised by the Board.
§ 246.4 Assessments.
(a) Assessment. Each assessed company shall pay to the Board an assessment for any assessment period for which the Board determines the company to be an assessed company.
(b)(1) Assessment formula. Except as provided in paragraph (b)(2) of this section, the assessment will be calculated according to the Assessment Formula, as follows:
| Column A | Column B | Column C | Column D | |||
|---|---|---|---|---|---|---|
| Base Amount ($50,000) | + | (Total Assessable Assets | × | Assessment Rate) | = | Assessment |
(2) In any assessment period, if, at the time a company becomes a bank holding company or savings and loan holding company, it also becomes an assessed company, as defined in § 246.3, the Board shall pro-rate that company’s assessment for that assessment period based on the number of quarters in which such company is an assessed company. For a nonbank financial company supervised by the Board, for the assessment period that the company is designated for Board supervision, Board shall pro-rate that company’s assessment for that assessment period based on the number of quarters the company has been a nonbank financial company supervised by the Board.
(c) Assessment rate. Assessment rate means, with regard to a given assessment period, the rate published by the Board on its Web site for the calculation of assessments for that period.
(1)(i) The assessment rate for Category IV and “other” firms will be calculated according to this formula:
(ii) The assessment rate for Category I, II, and III firms will be calculated according to this formula:
(2) For the calculation set forth in paragraph (c)(1) of this section, the number of assessed companies and the total assessable assets of all assessed companies will each be that of the relevant assessment period, provided, however, that for the assessment periods corresponding to 2012, 2013 and 2014, the Board shall use the number of assessed companies and the total assessable assets of the 2012 assessment period to calculate the assessment rate.
(d) Assessment basis. (1) For the 2012, 2013, and 2014 assessment periods, the assessment basis is the amount of total expenses the Board estimates is necessary or appropriate to carry out the supervisory and regulatory responsibilities of the Board with respect to assessed companies for 2012.
(2) For the 2015 assessment period and for each assessment period thereafter, the assessment basis is the average of the amount of total expenses the Board estimates is necessary or appropriate to carry out the supervisory and regulatory responsibilities of the Board with respect to assessed companies for that assessment period and the two prior assessment periods.
(3) Net Assessment Basis is the assessment basis, as defined by paragraph (d)(2), net of the total $50,000 base amount charged to all assessed companies. Net Assessment Basis = assessment basis−(number of assessed companies × $50,000).
(4) The variable S represents the estimated share of total costs attributable to changes in supervisory and regulatory responsibilities resulting from EGRRCPA for Category IV and “other” firms. S = 0.1 (10 percent).
(e) Total assessable assets. Except as provided in paragraph (f) of this section, total assessable assets are calculated as follows:
(1) Bank holding companies. For any bank holding company, other than a foreign bank holding company, total assessable assets will be the average of the bank holding company’s total consolidated assets as reported for the assessment period on the bank holding company’s FR Y-9C or such other reports as determined by the Board as applicable to the bank holding company,
(2) Foreign bank holding companies and foreign savings and loan holding companies – (i) In general. For any foreign bank holding company or any foreign savings and loan holding company, with the exception of the 2012 and 2013 assessment periods, total assessable assets will be the average of the foreign bank holding company’s or foreign savings and loan holding company’s total combined assets of its U.S. operations, net of intercompany balances and transactions between U.S. domiciled affiliates, branches and agencies, as reported for the assessment period on the Part 1 of the FR Y-7Q or such other reports as determined by the Board as applicable to the foreign bank holding company or foreign savings and loan holding company,
(ii) 2012 and 2013 assessment periods. For the 2012 and 2013 assessment periods, for any foreign bank holding company, total assessable assets will be the average of the sum of the line items set forth in this section reported quarterly, plus any line items set forth in this section reported annually for the assessment period on an applicable regulatory reporting form for the assessment period for all of the foreign bank holding company’s majority-owned:
(A) Top-tier, U.S.-domiciled bank holding companies and savings and loan holding companies, calculated as:
(1) Total assets (line item 12) as reported on Schedule HC of the FR Y-9C and, as applicable;
(2) Total assets (line item 1, column B) as reported on FR 2320;
(B) Related branches and agencies of Foreign Banks in the United States, calculated as: total claims on nonrelated parties (line item 1.i from column A on Schedule RAL) plus net due from related institutions in foreign countries (line items 2.a, 2.b(1), 2.b(2), and 2.c from column A, minus line items 2.a, 2.b(1), 2.b(2) and 2.c from column B, part 1 on Schedule M), minus transactions with related nondepository majority-owned subsidiaries in the U.S. (line item 1 from column A, part 3 on Schedule M), as reported on the Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks (FFIEC 002);
(C) U.S.-domiciled nonbank subsidiaries, calculated as:
(1) For FR Y-7N filers: total assets (line item 10) as reported for each nonbank subsidiary reported on Schedule BS – Balance Sheet of the Financial Statements of U.S. Nonbank Subsidiaries Held by Foreign Banking Organizations (FR Y-7N); minus balances due from related institutions located in the United States, gross (line item 4.a), as reported on Schedule BS-M – Memoranda, and, as applicable;
(2) For FR Y-7NS (annual) filers: total assets (line item 2) as reported for each nonbank subsidiary reported on abbreviated financial statements (page 3) of the Abbreviated Financial Statements of U.S. Nonbank Subsidiaries Held by Foreign Banking Organizations (FR Y-7NS);
(D) Edge Act and agreement corporations that are not reflected in the assets of a U.S.-domiciled parent’s regulatory reporting form submission, calculated as claims on nonrelated organizations (line item 9, “consolidated total” column on Schedule RC of the Consolidated Report of Condition and Income for Edge and Agreement Corporations (FR 2886b)), plus claims on related organizations domiciled outside the United States (line items 2.a and 2.b, column A on Schedule RC-M), as reported on FR 2886b;
(E) Banks and savings associations that are not reflected in the assets of a U.S.-domiciled parent’s regulatory reporting form submission, calculated as: total assets (line item 12) as reported on Schedule RC – Balance Sheet of the Consolidated Reports of Condition and Income for a Bank with Domestic and Foreign Offices (FFIEC 031), or total assets (line item 12) as reported on Schedule RC – Balance Sheet of the Consolidated Reports of Condition and Income for a Bank with Domestic Offices Only (FFIEC 041), as applicable; and
(F) Broker-dealers that are not reflected in the assets of a U.S.-domiciled parent’s regulatory reporting form submission, calculated as: total assets as reported on statement of financial condition of the Securities and Exchange Commission’s Form X-17A-5 (FOCUS REPORT), Part II line item 16, Part IIa, line item 12, or Part II CSE, line item 18, as applicable.
(3)(i) Savings and loan holding companies. For any savings and loan holding company, other than a foreign savings and loan holding company, total assessable assets will be, except as provided in paragraph (e)(3)(ii) of this section, the average of the savings and loan holding company’s total consolidated assets as reported for the assessment period on the regulatory reports on the savings and loan holding company’s Form FR Y-9C, column B of the Quarterly Savings and Loan Holding Company Report (FR 2320), or other reports as determined by the Board as applicable to the savings and loan holding company. If the savings and loan holding company is a grandfathered unitary savings and loan holding company, total assessable assets will only include the assets associated with its savings association subsidiary and its other financial activities.
(ii) If a company does not calculate its total consolidated assets under GAAP for any regulatory purpose (including compliance with applicable securities laws), the company may request that the Board permit the company to file a quarterly estimate of its total consolidated assets. The Board may, in its discretion and subject to Board review and adjustment, permit the company to provide estimated total consolidated assets on a quarterly basis. The company’s total assessable assets will be the average of the estimated total consolidated assets provided for the assessment period.
(4) Nonbank financial companies supervised by the Board. For a nonbank financial company supervised by the Board, if the company is a U.S. company, this amount will be the average of the nonbank financial company’s total consolidated assets as reported for the assessment period on such regulatory or other reports as are applicable to the nonbank financial company determined by the Board; if the company is a foreign company, this amount will be the average of the nonbank financial company’s total combined assets of U.S. operations, net of intercompany balances and transactions between U.S. domiciled affiliates, branches and agencies, as reported for the assessment period on such regulatory or other reports as determined by the Board as applicable to the nonbank financial company.
§ 246.5 Notice of assessment and appeal.
(a) Notice of Assessment. The Board shall issue a notice of assessment to each assessed company no later than June 30 of each calendar year following the assessment period, provided, however, that for the 2012 assessment period, the Board shall issue a notice of assessment as soon as reasonably practical after publication of the final rule in the
(b) Appeal period. (1) Each assessed company will have thirty calendar days from June 30, or, for the 2012 assessment period, thirty calendar days from the Board’s issuance of a notice of assessment for that assessment period, to submit a written statement to appeal the Board’s determination:
(i) That the company is an assessed company; or
(ii) Of the company’s total assessable assets.
(2) The Board will respond with the results of its consideration to an assessed company that has submitted a written appeal within 15 calendar days from the end of the appeal period in paragraph (b)(1) of this section.
§ 246.6 Collection of assessments; payment of interest.
(a) Collection date. Each assessed company shall remit to the Federal Reserve the amount of its assessment using the Fedwire Funds Service by September 15 of the calendar year following the assessment period, or, for the 2012 assessment period, by a date specified in the notice of assessment for that assessment period.
(b) Payment of interest. (1) If the Board does not receive the total amount of an assessed company’s assessment by the collection date for any reason not attributable to the Board, the assessment will be delinquent and the assessed company shall pay to the Board interest on any sum owed to the Board according to this rule (delinquent payments).
(2) Interest on delinquent payments will be assessed beginning on the first calendar day after the collection date, and on each calendar day thereafter up to and including the day payment is received. Interest will be simple interest, calculated for each day payment is delinquent by multiplying the daily equivalent of the applicable interest rate by the amount delinquent. The rate of interest will be the United States Treasury Department’s current value of funds rate (the “CVFR percentage”); issued under the Treasury Fiscal Requirements Manual and published quarterly in the
PART 248 – PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND RELATIONSHIPS WITH COVERED FUNDS (REGULATION VV)
Subpart A – Authority and Definitions
(a) Authority. This part (Regulation VV) is issued by the Board under section 13 of the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1851), as well as under the Federal Reserve Act, as amended (12 U.S.C. 221 et seq.); section 8 of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818); the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1841 et seq.); and the International Banking Act of 1978, as amended (12 U.S.C. 3101 et seq.).
(b) Purpose. Section 13 of the Bank Holding Company Act establishes prohibitions and restrictions on proprietary trading and on investments in or relationships with covered funds by certain banking entities, including state member banks, bank holding companies, savings and loan holding companies, other companies that control an insured depository institution, foreign banking organizations, and certain subsidiaries thereof. This part implements section 13 of the Bank Holding Company Act by defining terms used in the statute and related terms, establishing prohibitions and restrictions on proprietary trading and on investments in or relationships with covered funds, and explaining the statute’s requirements.
(c) Scope. This part implements section 13 of the Bank Holding Company Act with respect to banking entities for which the Board is authorized to issue regulations under section 13(b)(2) of the Bank Holding Company Act (12 U.S.C. 1851(b)(2)) and take actions under section 13(e) of that Act (12 U.S.C. 1851(e)). These include any state bank that is a member of the Federal Reserve System, any company that controls an insured depository institution (including a bank holding company and savings and loan holding company), any company that is treated as a bank holding company for purposes of section 8 of the International Banking Act (12 U.S.C. 3106), and any subsidiary of the foregoing other than a subsidiary for which the OCC, FDIC, CFTC, or SEC is the primary financial regulatory agency (as defined in section 2(12) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (12 U.S.C. 5301(12)), but do not include such entities to the extent they are not within the definition of banking entity in § 248.2(c).
(d) Relationship to other authorities. Except as otherwise provided under section 13 of the BHC Act or this part, and notwithstanding any other provision of law, the prohibitions and restrictions under section 13 of BHC Act and this part shall apply to the activities of a banking entity, even if such activities are authorized for the banking entity under other applicable provisions of law.
(e) Preservation of authority. Nothing in this part limits in any way the authority of the Board to impose on a banking entity identified in paragraph (c) of this section additional requirements or restrictions with respect to any activity, investment, or relationship covered under section 13 of the Bank Holding Company Act or this part, or additional penalties for violation of this part provided under any other applicable provision of law.
§ 248.2 Definitions.
Unless otherwise specified, for purposes of this part:
(a) Affiliate has the same meaning as in section 2(k) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(k)).
(b) Bank holding company has the same meaning as in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841).
(c) Banking entity. (1) Except as provided in paragraph (c)(2) of this section, banking entity means:
(i) Any insured depository institution;
(ii) Any company that controls an insured depository institution;
(iii) Any company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978 (12 U.S.C. 3106); and
(iv) Any affiliate or subsidiary of any entity described in paragraphs (c)(1)(i), (ii), or (iii) of this section.
(2) Banking entity does not include:
(i) A covered fund that is not itself a banking entity under paragraph (c)(1)(i), (ii), or (iii) of this section;
(ii) A portfolio company held under the authority contained in section 4(k)(4)(H) or (I) of the BHC Act (12 U.S.C. 1843(k)(4)(H), (I)), or any portfolio concern, as defined under 13 CFR 107.50, that is controlled by a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662), so long as the portfolio company or portfolio concern is not itself a banking entity under paragraph (c)(1)(i), (ii), or (iii) of this section; or
(iii) The FDIC acting in its corporate capacity or as conservator or receiver under the Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(d) Board means the Board of Governors of the Federal Reserve System.
(e) CFTC means the Commodity Futures Trading Commission.
(f) Dealer has the same meaning as in section 3(a)(5) of the Exchange Act (15 U.S.C. 78c(a)(5)).
(g) Depository institution has the same meaning as in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
(h) Derivative. (1) Except as provided in paragraph (h)(2) of this section, derivative means:
(i) Any swap, as that term is defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68));
(ii) Any purchase or sale of a commodity, that is not an excluded commodity, for deferred shipment or delivery that is intended to be physically settled;
(iii) Any foreign exchange forward (as that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or foreign exchange swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25));
(iv) Any agreement, contract, or transaction in foreign currency described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(C)(i));
(v) Any agreement, contract, or transaction in a commodity other than foreign currency described in section 2(c)(2)(D)(i) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
(vi) Any transaction authorized under section 19 of the Commodity Exchange Act (7 U.S.C. 23(a) or (b));
(2) A derivative does not include:
(i) Any consumer, commercial, or other agreement, contract, or transaction that the CFTC and SEC have further defined by joint regulation, interpretation, or other action as not within the definition of swap, as that term is defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)); or
(ii) Any identified banking product, as defined in section 402(b) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)), that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
(i) Employee includes a member of the immediate family of the employee.
(j) Exchange Act means the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).
(k) Excluded commodity has the same meaning as in section 1a(19) of the Commodity Exchange Act (7 U.S.C. 1a(19)).
(l) FDIC means the Federal Deposit Insurance Corporation.
(m) Federal banking agencies means the Board, the Office of the Comptroller of the Currency, and the FDIC.
(n) Foreign banking organization has the same meaning as in § 211.21(o) of the Board’s Regulation K (12 CFR 211.21(o)), but does not include a foreign bank, as defined in section 1(b)(7) of the International Banking Act of 1978 (12 U.S.C. 3101(7)), that is organized under the laws of the Commonwealth of Puerto Rico, Guam, American Samoa, the United States Virgin Islands, or the Commonwealth of the Northern Mariana Islands.
(o) Foreign insurance regulator means the insurance commissioner, or a similar official or agency, of any country other than the United States that is engaged in the supervision of insurance companies under foreign insurance law.
(p) General account means all of the assets of an insurance company except those allocated to one or more separate accounts.
(q) Insurance company means a company that is organized as an insurance company, primarily and predominantly engaged in writing insurance or reinsuring risks underwritten by insurance companies, subject to supervision as such by a state insurance regulator or a foreign insurance regulator, and not operated for the purpose of evading the provisions of section 13 of the BHC Act (12 U.S.C. 1851).
(r) Insured depository institution has the same meaning as in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)), but does not include:
(1) An insured depository institution that is described in section 2(c)(2)(D) of the BHC Act (12 U.S.C. 1841(c)(2)(D)); or
(2) An insured depository institution if it has, and if every company that controls it has, total consolidated assets of $10 billion or less and total trading assets and trading liabilities, on a consolidated basis, that are 5 percent or less of total consolidated assets.
(s) Limited trading assets and liabilities means with respect to a banking entity that:
(1)(i) The banking entity has, together with its affiliates and subsidiaries, trading assets and liabilities (excluding trading assets and liabilities attributable to trading activities permitted pursuant to § 248.6(a)(1) and (2) of subpart B) the average gross sum of which over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, is less than $1 billion; and
(ii) The Board has not determined pursuant to § 248.20(g) or (h) of this part that the banking entity should not be treated as having limited trading assets and liabilities.
(2) With respect to a banking entity other than a banking entity described in paragraph (s)(3) of this section, trading assets and liabilities for purposes of this paragraph (s) means trading assets and liabilities (excluding trading assets and liabilities attributable to trading activities permitted pursuant to § 248.6(a)(1) and (2) of subpart B) on a worldwide consolidated basis.
(3)(i) With respect to a banking entity that is a foreign banking organization or a subsidiary of a foreign banking organization, trading assets and liabilities for purposes of this paragraph (s) means the trading assets and liabilities (excluding trading assets and liabilities attributable to trading activities permitted pursuant to § 248.6(a)(1) and (2) of subpart B) of the combined U.S. operations of the top-tier foreign banking organization (including all subsidiaries, affiliates, branches, and agencies of the foreign banking organization operating, located, or organized in the United States).
(ii) For purposes of paragraph (s)(3)(i) of this section, a U.S. branch, agency, or subsidiary of a banking entity is located in the United States; however, the foreign bank that operates or controls that branch, agency, or subsidiary is not considered to be located in the United States solely by virtue of operating or controlling the U.S. branch, agency, or subsidiary. For purposes of paragraph (s)(3)(i) of this section, all foreign operations of a U.S. agency, branch, or subsidiary of a foreign banking organization are considered to be located in the United States, including branches outside the United States that are managed or controlled by a U.S. branch or agency of the foreign banking organization, for purposes of calculating the banking entity’s U.S. trading assets and liabilities.
(t) Loan means any loan, lease, extension of credit, or secured or unsecured receivable that is not a security or derivative.
(u) Moderate trading assets and liabilities means, with respect to a banking entity, that the banking entity does not have significant trading assets and liabilities or limited trading assets and liabilities.
(v) Primary financial regulatory agency has the same meaning as in section 2(12) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5301(12)).
(w) Purchase includes any contract to buy, purchase, or otherwise acquire. For security futures products, purchase includes any contract, agreement, or transaction for future delivery. With respect to a commodity future, purchase includes any contract, agreement, or transaction for future delivery. With respect to a derivative, purchase includes the execution, termination (prior to its scheduled maturity date), assignment, exchange, or similar transfer or conveyance of, or extinguishing of rights or obligations under, a derivative, as the context may require.
(x) Qualifying foreign banking organization means a foreign banking organization that qualifies as such under § 211.23(a), (c) or (e) of the Board’s Regulation K (12 CFR 211.23(a), (c), or (e)).
(y) SEC means the Securities and Exchange Commission.
(z) Sale and sell each include any contract to sell or otherwise dispose of. For security futures products, such terms include any contract, agreement, or transaction for future delivery. With respect to a commodity future, such terms include any contract, agreement, or transaction for future delivery. With respect to a derivative, such terms include the execution, termination (prior to its scheduled maturity date), assignment, exchange, or similar transfer or conveyance of, or extinguishing of rights or obligations under, a derivative, as the context may require.
(aa) Security has the meaning specified in section 3(a)(10) of the Exchange Act (15 U.S.C. 78c(a)(10)).
(bb) Security-based swap dealer has the same meaning as in section 3(a)(71) of the Exchange Act (15 U.S.C. 78c(a)(71)).
(cc) Security future has the meaning specified in section 3(a)(55) of the Exchange Act (15 U.S.C. 78c(a)(55)).
(dd) Separate account means an account established and maintained by an insurance company in connection with one or more insurance contracts to hold assets that are legally segregated from the insurance company’s other assets, under which income, gains, and losses, whether or not realized, from assets allocated to such account, are, in accordance with the applicable contract, credited to or charged against such account without regard to other income, gains, or losses of the insurance company.
(ee) Significant trading assets and liabilities means with respect to a banking entity that:
(1)(i) The banking entity has, together with its affiliates and subsidiaries, trading assets and liabilities the average gross sum of which over the previous consecutive four quarters, as measured as of the last day of each of the four previous calendar quarters, equals or exceeds $20 billion; or
(ii) The Board has determined pursuant to § 248.20(h) of this part that the banking entity should be treated as having significant trading assets and liabilities.
(2) With respect to a banking entity, other than a banking entity described in paragraph (ee)(3) of this section, trading assets and liabilities for purposes of this paragraph (ee) means trading assets and liabilities (excluding trading assets and liabilities attributable to trading activities permitted pursuant to § 248.6(a)(1) and (2) of subpart B) on a worldwide consolidated basis.
(3)(i) With respect to a banking entity that is a foreign banking organization or a subsidiary of a foreign banking organization, trading assets and liabilities for purposes of this paragraph (ee) means the trading assets and liabilities (excluding trading assets and liabilities attributable to trading activities permitted pursuant to § 248.6(a)(1) and (2) of subpart B) of the combined U.S. operations of the top-tier foreign banking organization (including all subsidiaries, affiliates, branches, and agencies of the foreign banking organization operating, located, or organized in the United States as well as branches outside the United States that are managed or controlled by a branch or agency of the foreign banking entity operating, located or organized in the United States).
(ii) For purposes of paragraph (ee)(3)(i) of this section, a U.S. branch, agency, or subsidiary of a banking entity is located in the United States; however, the foreign bank that operates or controls that branch, agency, or subsidiary is not considered to be located in the United States solely by virtue of operating or controlling the U.S. branch, agency, or subsidiary. For purposes of paragraph (ee)(3)(i) of this section, all foreign operations of a U.S. agency, branch, or subsidiary of a foreign banking organization are considered to be located in the United States for purposes of calculating the banking entity’s U.S. trading assets and liabilities.
(ff) State means any State, the District of Columbia, the Commonwealth of Puerto Rico, Guam, American Samoa, the United States Virgin Islands, and the Commonwealth of the Northern Mariana Islands.
(gg) Subsidiary has the same meaning as in section 2(d) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(d)).
(hh) State insurance regulator means the insurance commissioner, or a similar official or agency, of a State that is engaged in the supervision of insurance companies under State insurance law.
(ii) Swap dealer has the same meaning as in section 1(a)(49) of the Commodity Exchange Act (7 U.S.C. 1a(49)).
Subpart B – Proprietary Trading
§ 248.3 Prohibition on proprietary trading.
(a) Prohibition. Except as otherwise provided in this subpart, a banking entity may not engage in proprietary trading. Proprietary trading means engaging as principal for the trading account of the banking entity in any purchase or sale of one or more financial instruments.
(b) Definition of trading account – (1) Trading account. Trading account means:
(i) Any account that is used by a banking entity to purchase or sell one or more financial instruments principally for the purpose of short-term resale, benefitting from actual or expected short-term price movements, realizing short-term arbitrage profits, or hedging one or more of the positions resulting from the purchases or sales of financial instruments described in this paragraph;
(ii) Any account that is used by a banking entity to purchase or sell one or more financial instruments that are both market risk capital rule covered positions and trading positions (or hedges of other market risk capital rule covered positions), if the banking entity, or any affiliate with which the banking entity is consolidated for regulatory reporting purposes, calculates risk-based capital ratios under the market risk capital rule; or
(iii) Any account that is used by a banking entity to purchase or sell one or more financial instruments, if the banking entity:
(A) Is licensed or registered, or is required to be licensed or registered, to engage in the business of a dealer, swap dealer, or security-based swap dealer, to the extent the instrument is purchased or sold in connection with the activities that require the banking entity to be licensed or registered as such; or
(B) Is engaged in the business of a dealer, swap dealer, or security-based swap dealer outside of the United States, to the extent the instrument is purchased or sold in connection with the activities of such business.
(2) Trading account application for certain banking entities. (i) A banking entity that is subject to paragraph (b)(1)(ii) of this section in determining the scope of its trading account is not subject to paragraph (b)(1)(i) of this section.
(ii) A banking entity that does not calculate risk-based capital ratios under the market risk capital rule and is not a consolidated affiliate for regulatory reporting purposes of a banking entity that calculates risk based capital ratios under the market risk capital rule may elect to apply paragraph (b)(1)(ii) of this section in determining the scope of its trading account as if it were subject to that paragraph. A banking entity that elects under this subsection to apply paragraph (b)(1)(ii) of this section in determining the scope of its trading account as if it were subject to that paragraph is not required to apply paragraph (b)(1)(i) of this section.
(3) Consistency of account election for certain banking entities. (i) Any election or change to an election under paragraph (b)(2)(ii) of this section must apply to the electing banking entity and all of its wholly owned subsidiaries. The primary financial regulatory agency of a banking entity that is affiliated with but is not a wholly owned subsidiary of such electing banking entity may require that the banking entity be subject to this uniform application requirement if the primary financial regulatory agency determines that it is necessary to prevent evasion of the requirements of this part after notice and opportunity for response as provided in subpart D of this part.
(ii) A banking entity that does not elect under paragraph (b)(2)(ii) of this section to be subject to the trading account definition in (b)(1)(ii) may continue to apply the trading account definition in paragraph (b)(1)(i) of this section for one year from the date on which it becomes, or becomes a consolidated affiliate for regulatory reporting purposes with, a banking entity that calculates risk-based capital ratios under the market risk capital rule.
(4) Rebuttable presumption for certain purchases and sales. The purchase (or sale) of a financial instrument by a banking entity shall be presumed not to be for the trading account of the banking entity under paragraph (b)(1)(i) of this section if the banking entity holds the financial instrument for sixty days or longer and does not transfer substantially all of the risk of the financial instrument within sixty days of the purchase (or sale).
(c) Financial instrument. (1) Financial instrument means:
(i) A security, including an option on a security;
(ii) A derivative, including an option on a derivative; or
(iii) A contract of sale of a commodity for future delivery, or option on a contract of sale of a commodity for future delivery.
(2) A financial instrument does not include:
(i) A loan;
(ii) A commodity that is not:
(A) An excluded commodity (other than foreign exchange or currency);
(B) A derivative;
(C) A contract of sale of a commodity for future delivery; or
(D) An option on a contract of sale of a commodity for future delivery; or
(iii) Foreign exchange or currency.
(d) Proprietary trading. Proprietary trading does not include:
(1) Any purchase or sale of one or more financial instruments by a banking entity that arises under a repurchase or reverse repurchase agreement pursuant to which the banking entity has simultaneously agreed, in writing, to both purchase and sell a stated asset, at stated prices, and on stated dates or on demand with the same counterparty;
(2) Any purchase or sale of one or more financial instruments by a banking entity that arises under a transaction in which the banking entity lends or borrows a security temporarily to or from another party pursuant to a written securities lending agreement under which the lender retains the economic interests of an owner of such security, and has the right to terminate the transaction and to recall the loaned security on terms agreed by the parties;
(3) Any purchase or sale of a security, foreign exchange forward (as that term is defined in section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)), foreign exchange swap (as that term is defined in section 1a(25) of the Commodity Exchange Act (7 U.S.C. 1a(25)), or cross-currency swap by a banking entity for the purpose of liquidity management in accordance with a documented liquidity management plan of the banking entity that:
(i) Specifically contemplates and authorizes the particular financial instruments to be used for liquidity management purposes, the amount, types, and risks of these financial instruments that are consistent with liquidity management, and the liquidity circumstances in which the particular financial instruments may or must be used;
(ii) Requires that any purchase or sale of financial instruments contemplated and authorized by the plan be principally for the purpose of managing the liquidity of the banking entity, and not for the purpose of short-term resale, benefitting from actual or expected short-term price movements, realizing short-term arbitrage profits, or hedging a position taken for such short-term purposes;
(iii) Requires that any financial instruments purchased or sold for liquidity management purposes be highly liquid and limited to financial instruments the market, credit, and other risks of which the banking entity does not reasonably expect to give rise to appreciable profits or losses as a result of short-term price movements;
(iv) Limits any financial instruments purchased or sold for liquidity management purposes, together with any other financial instruments purchased or sold for such purposes, to an amount that is consistent with the banking entity’s near-term funding needs, including deviations from normal operations of the banking entity or any affiliate thereof, as estimated and documented pursuant to methods specified in the plan;
(v) Includes written policies and procedures, internal controls, analysis, and independent testing to ensure that the purchase and sale of financial instruments that are not permitted under § 248.6(a) or (b) of this subpart are for the purpose of liquidity management and in accordance with the liquidity management plan described in this paragraph (d)(3); and
(vi) Is consistent with the Board’s supervisory requirements regarding liquidity management;
(4) Any purchase or sale of one or more financial instruments by a banking entity that is a derivatives clearing organization or a clearing agency in connection with clearing financial instruments;
(5) Any excluded clearing activities by a banking entity that is a member of a clearing agency, a member of a derivatives clearing organization, or a member of a designated financial market utility;
(6) Any purchase or sale of one or more financial instruments by a banking entity, so long as:
(i) The purchase (or sale) satisfies an existing delivery obligation of the banking entity or its customers, including to prevent or close out a failure to deliver, in connection with delivery, clearing, or settlement activity; or
(ii) The purchase (or sale) satisfies an obligation of the banking entity in connection with a judicial, administrative, self-regulatory organization, or arbitration proceeding;
(7) Any purchase or sale of one or more financial instruments by a banking entity that is acting solely as agent, broker, or custodian;
(8) Any purchase or sale of one or more financial instruments by a banking entity through a deferred compensation, stock-bonus, profit-sharing, or pension plan of the banking entity that is established and administered in accordance with the law of the United States or a foreign sovereign, if the purchase or sale is made directly or indirectly by the banking entity as trustee for the benefit of persons who are or were employees of the banking entity;
(9) Any purchase or sale of one or more financial instruments by a banking entity in the ordinary course of collecting a debt previously contracted in good faith, provided that the banking entity divests the financial instrument as soon as practicable, and in no event may the banking entity retain such instrument for longer than such period permitted by the Board;
(10) Any purchase or sale of one or more financial instruments that was made in error by a banking entity in the course of conducting a permitted or excluded activity or is a subsequent transaction to correct such an error;
(11) Contemporaneously entering into a customer-driven swap or customer-driven security-based swap and a matched swap or security-based swap if:
(i) The banking entity retains no more than minimal price risk; and
(ii) The banking entity is not a registered dealer, swap dealer, or security-based swap dealer;
(12) Any purchase or sale of one or more financial instruments that the banking entity uses to hedge mortgage servicing rights or mortgage servicing assets in accordance with a documented hedging strategy; or
(13) Any purchase or sale of a financial instrument that does not meet the definition of trading asset or trading liability under the applicable reporting form for a banking entity as of January 1, 2020.
(e) Definition of other terms related to proprietary trading. For purposes of this subpart:
(1) Anonymous means that each party to a purchase or sale is unaware of the identity of the other party(ies) to the purchase or sale.
(2) Clearing agency has the same meaning as in section 3(a)(23) of the Exchange Act (15 U.S.C. 78c(a)(23)).
(3) Commodity has the same meaning as in section 1a(9) of the Commodity Exchange Act (7 U.S.C. 1a(9)), except that a commodity does not include any security;
(4) Contract of sale of a commodity for future delivery means a contract of sale (as that term is defined in section 1a(13) of the Commodity Exchange Act (7 U.S.C. 1a(13)) for future delivery (as that term is defined in section 1a(27) of the Commodity Exchange Act (7 U.S.C. 1a(27))).
(5) Cross-currency swap means a swap in which one party exchanges with another party principal and interest rate payments in one currency for principal and interest rate payments in another currency, and the exchange of principal occurs on the date the swap is entered into, with a reversal of the exchange of principal at a later date that is agreed upon when the swap is entered into.
(6) Derivatives clearing organization means:
(i) A derivatives clearing organization registered under section 5b of the Commodity Exchange Act (7 U.S.C. 7a-1);
(ii) A derivatives clearing organization that, pursuant to CFTC regulation, is exempt from the registration requirements under section 5b of the Commodity Exchange Act (7 U.S.C. 7a-1); or
(iii) A foreign derivatives clearing organization that, pursuant to CFTC regulation, is permitted to clear for a foreign board of trade that is registered with the CFTC.
(7) Exchange, unless the context otherwise requires, means any designated contract market, swap execution facility, or foreign board of trade registered with the CFTC, or, for purposes of securities or security-based swaps, an exchange, as defined under section 3(a)(1) of the Exchange Act (15 U.S.C. 78c(a)(1)), or security-based swap execution facility, as defined under section 3(a)(77) of the Exchange Act (15 U.S.C. 78c(a)(77)).
(8) Excluded clearing activities means:
(i) With respect to customer transactions cleared on a derivatives clearing organization, a clearing agency, or a designated financial market utility, any purchase or sale necessary to correct trading errors made by or on behalf of a customer provided that such purchase or sale is conducted in accordance with, for transactions cleared on a derivatives clearing organization, the Commodity Exchange Act, CFTC regulations, and the rules or procedures of the derivatives clearing organization, or, for transactions cleared on a clearing agency, the rules or procedures of the clearing agency, or, for transactions cleared on a designated financial market utility that is neither a derivatives clearing organization nor a clearing agency, the rules or procedures of the designated financial market utility;
(ii) Any purchase or sale in connection with and related to the management of a default or threatened imminent default of a customer provided that such purchase or sale is conducted in accordance with, for transactions cleared on a derivatives clearing organization, the Commodity Exchange Act, CFTC regulations, and the rules or procedures of the derivatives clearing organization, or, for transactions cleared on a clearing agency, the rules or procedures of the clearing agency, or, for transactions cleared on a designated financial market utility that is neither a derivatives clearing organization nor a clearing agency, the rules or procedures of the designated financial market utility;
(iii) Any purchase or sale in connection with and related to the management of a default or threatened imminent default of a member of a clearing agency, a member of a derivatives clearing organization, or a member of a designated financial market utility;
(iv) Any purchase or sale in connection with and related to the management of the default or threatened default of a clearing agency, a derivatives clearing organization, or a designated financial market utility; and
(v) Any purchase or sale that is required by the rules or procedures of a clearing agency, a derivatives clearing organization, or a designated financial market utility to mitigate the risk to the clearing agency, derivatives clearing organization, or designated financial market utility that would result from the clearing by a member of security-based swaps that reference the member or an affiliate of the member.
(9) Designated financial market utility has the same meaning as in section 803(4) of the Dodd-Frank Act (12 U.S.C. 5462(4)).
(10) Issuer has the same meaning as in section 2(a)(4) of the Securities Act of 1933 (15 U.S.C. 77b(a)(4)).
(11) Market risk capital rule covered position and trading position means a financial instrument that meets the criteria to be a covered position and a trading position, as those terms are respectively defined, without regard to whether the financial instrument is reported as a covered position or trading position on any applicable regulatory reporting forms:
(i) In the case of a banking entity that is a bank holding company, savings and loan holding company, or insured depository institution, under the market risk capital rule that is applicable to the banking entity; and
(ii) In the case of a banking entity that is affiliated with a bank holding company or savings and loan holding company, other than a banking entity to which a market risk capital rule is applicable, under the market risk capital rule that is applicable to the affiliated bank holding company or savings and loan holding company.
(12) Market risk capital rule means the market risk capital rule that is contained in 12 CFR part 3 with respect to a banking entity for which the OCC is the primary financial regulatory agency, 12 CFR part 217 with respect to a banking entity for which the Board is the primary financial regulatory agency, or 12 CFR part 324 with respect to a banking entity for which the FDIC is the primary financial regulatory agency.
(13) Municipal security means a security that is a direct obligation of or issued by, or an obligation guaranteed as to principal or interest by, a State or any political subdivision thereof, or any agency or instrumentality of a State or any political subdivision thereof, or any municipal corporate instrumentality of one or more States or political subdivisions thereof.
(14) Trading desk means a unit of organization of a banking entity that purchases or sells financial instruments for the trading account of the banking entity or an affiliate thereof that is:
(i)(A) Structured by the banking entity to implement a well-defined business strategy;
(B) Organized to ensure appropriate setting, monitoring, and management review of the desk’s trading and hedging limits, current and potential future loss exposures, and strategies; and
(C) Characterized by a clearly defined unit that:
(1) Engages in coordinated trading activity with a unified approach to its key elements;
(2) Operates subject to a common and calibrated set of risk metrics, risk levels, and joint trading limits;
(3) Submits compliance reports and other information as a unit for monitoring by management; and
(4) Books its trades together; or
(ii) For a banking entity that calculates risk-based capital ratios under the market risk capital rule, or a consolidated affiliate for regulatory reporting purposes of a banking entity that calculates risk-based capital ratios under the market risk capital rule, established by the banking entity or its affiliate for purposes of market risk capital calculations under the market risk capital rule.
(a) Underwriting activities – (1) Permitted underwriting activities. The prohibition contained in § 248.3(a) does not apply to a banking entity’s underwriting activities conducted in accordance with this paragraph (a).
(2) Requirements. The underwriting activities of a banking entity are permitted under paragraph (a)(1) of this section only if:
(i) The banking entity is acting as an underwriter for a distribution of securities and the trading desk’s underwriting position is related to such distribution;
(ii)(A) The amount and type of the securities in the trading desk’s underwriting position are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, taking into account the liquidity, maturity, and depth of the market for the relevant types of securities; and
(B) Reasonable efforts are made to sell or otherwise reduce the underwriting position within a reasonable period, taking into account the liquidity, maturity, and depth of the market for the relevant types of securities;
(iii) In the case of a banking entity with significant trading assets and liabilities, the banking entity has established and implements, maintains, and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity’s compliance with the requirements of paragraph (a) of this section, including reasonably designed written policies and procedures, internal controls, analysis and independent testing identifying and addressing:
(A) The products, instruments or exposures each trading desk may purchase, sell, or manage as part of its underwriting activities;
(B) Limits for each trading desk, in accordance with paragraph (a)(2)(ii)(A) of this section;
(C) Written authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk’s limit(s), demonstrable analysis of the basis for any temporary or permanent increase to a trading desk’s limit(s), and independent review of such demonstrable analysis and approval; and
(D) Internal controls and ongoing monitoring and analysis of each trading desk’s compliance with its limits.
(iv) A banking entity with significant trading assets and liabilities may satisfy the requirements in paragraphs (a)(2)(iii)(B) and (C) of this section by complying with the requirements set forth in paragraph (c) of this section;
(v) The compensation arrangements of persons performing the activities described in this paragraph (a) are designed not to reward or incentivize prohibited proprietary trading; and
(vi) The banking entity is licensed or registered to engage in the activity described in this paragraph (a) in accordance with applicable law.
(3) Definition of distribution. For purposes of this paragraph (a), a distribution of securities means:
(i) An offering of securities, whether or not subject to registration under the Securities Act of 1933, that is distinguished from ordinary trading transactions by the presence of special selling efforts and selling methods; or
(ii) An offering of securities made pursuant to an effective registration statement under the Securities Act of 1933.
(4) Definition of underwriter. For purposes of this paragraph (a), underwriter means:
(i) A person who has agreed with an issuer or selling security holder to:
(A) Purchase securities from the issuer or selling security holder for distribution;
(B) Engage in a distribution of securities for or on behalf of the issuer or selling security holder; or
(C) Manage a distribution of securities for or on behalf of the issuer or selling security holder; or
(ii) A person who has agreed to participate or is participating in a distribution of such securities for or on behalf of the issuer or selling security holder.
(5) Definition of selling security holder. For purposes of this paragraph (a), selling security holder means any person, other than an issuer, on whose behalf a distribution is made.
(6) Definition of underwriting position. For purposes of this section, underwriting position means the long or short positions in one or more securities held by a banking entity or its affiliate, and managed by a particular trading desk, in connection with a particular distribution of securities for which such banking entity or affiliate is acting as an underwriter.
(7) Definition of client, customer, and counterparty. For purposes of this paragraph (a), the terms client, customer, and counterparty, on a collective or individual basis, refer to market participants that may transact with the banking entity in connection with a particular distribution for which the banking entity is acting as underwriter.
(b) Market making-related activities – (1) Permitted market making-related activities. The prohibition contained in § 248.3(a) does not apply to a banking entity’s market making-related activities conducted in accordance with this paragraph (b).
(2) Requirements. The market making-related activities of a banking entity are permitted under paragraph (b)(1) of this section only if:
(i) The trading desk that establishes and manages the financial exposure, routinely stands ready to purchase and sell one or more types of financial instruments related to its financial exposure, and is willing and available to quote, purchase and sell, or otherwise enter into long and short positions in those types of financial instruments for its own account, in commercially reasonable amounts and throughout market cycles on a basis appropriate for the liquidity, maturity, and depth of the market for the relevant types of financial instruments;
(ii) The trading desk’s market-making related activities are designed not to exceed, on an ongoing basis, the reasonably expected near term demands of clients, customers, or counterparties, taking into account the liquidity, maturity, and depth of the market for the relevant types of financial instruments;
(iii) In the case of a banking entity with significant trading assets and liabilities, the banking entity has established and implements, maintains, and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity’s compliance with the requirements of this paragraph (b), including reasonably designed written policies and procedures, internal controls, analysis and independent testing identifying and addressing:
(A) The financial instruments each trading desk stands ready to purchase and sell in accordance with paragraph (b)(2)(i) of this section;
(B) The actions the trading desk will take to demonstrably reduce or otherwise significantly mitigate promptly the risks of its financial exposure consistent with the limits required under paragraph (b)(2)(iii)(C) of this section; the products, instruments, and exposures each trading desk may use for risk management purposes; the techniques and strategies each trading desk may use to manage the risks of its market making-related activities and positions; and the process, strategies, and personnel responsible for ensuring that the actions taken by the trading desk to mitigate these risks are and continue to be effective;
(C) Limits for each trading desk, in accordance with paragraph (b)(2)(ii) of this section;
(D) Written authorization procedures, including escalation procedures that require review and approval of any trade that would exceed a trading desk’s limit(s), demonstrable analysis of the basis for any temporary or permanent increase to a trading desk’s limit(s), and independent review of such demonstrable analysis and approval; and
(E) Internal controls and ongoing monitoring and analysis of each trading desk’s compliance with its limits.
(iv) A banking entity with significant trading assets and liabilities may satisfy the requirements in paragraphs (b)(2)(iii)(C) and (D) of this section by complying with the requirements set forth in paragraph (c) of this section.
(v) The compensation arrangements of persons performing the activities described in this paragraph (b) are designed not to reward or incentivize prohibited proprietary trading; and
(vi) The banking entity is licensed or registered to engage in activity described in this paragraph (b) in accordance with applicable law.
(3) Definition of client, customer, and counterparty. For purposes of this paragraph (b), the terms client, customer, and counterparty, on a collective or individual basis refer to market participants that make use of the banking entity’s market making-related services by obtaining such services, responding to quotations, or entering into a continuing relationship with respect to such services, provided that:
(i) A trading desk or other organizational unit of another banking entity is not a client, customer, or counterparty of the trading desk if that other entity has trading assets and liabilities of $50 billion or more as measured in accordance with the methodology described in § 248.2(ee) of this part, unless:
(A) The trading desk documents how and why a particular trading desk or other organizational unit of the entity should be treated as a client, customer, or counterparty of the trading desk for purposes of paragraph (b)(2) of this section; or
(B) The purchase or sale by the trading desk is conducted anonymously on an exchange or similar trading facility that permits trading on behalf of a broad range of market participants.
(ii) [Reserved]
(4) Definition of financial exposure. For purposes of this section, financial exposure means the aggregate risks of one or more financial instruments and any associated loans, commodities, or foreign exchange or currency, held by a banking entity or its affiliate and managed by a particular trading desk as part of the trading desk’s market making-related activities.
(5) Definition of market-maker positions. For the purposes of this section, market-maker positions means all of the positions in the financial instruments for which the trading desk stands ready to make a market in accordance with paragraph (b)(2)(i) of this section, that are managed by the trading desk, including the trading desk’s open positions or exposures arising from open transactions.
(c) Rebuttable presumption of compliance – (1) Internal limits. (i) A banking entity shall be presumed to meet the requirement in paragraph (a)(2)(ii)(A) or (b)(2)(ii) of this section with respect to the purchase or sale of a financial instrument if the banking entity has established and implements, maintains, and enforces the internal limits for the relevant trading desk as described in paragraph (c)(1)(ii) of this section.
(ii)(A) With respect to underwriting activities conducted pursuant to paragraph (a) of this section, the presumption described in paragraph (c)(1)(i) of this section shall be available to each trading desk that establishes, implements, maintains, and enforces internal limits that should take into account the liquidity, maturity, and depth of the market for the relevant types of securities and are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, based on the nature and amount of the trading desk’s underwriting activities, on the:
(1) Amount, types, and risk of its underwriting position;
(2) Level of exposures to relevant risk factors arising from its underwriting position; and
(3) Period of time a security may be held.
(B) With respect to market making-related activities conducted pursuant to paragraph (b) of this section, the presumption described in paragraph (c)(1)(i) of this section shall be available to each trading desk that establishes, implements, maintains, and enforces internal limits that should take into account the liquidity, maturity, and depth of the market for the relevant types of financial instruments and are designed not to exceed the reasonably expected near term demands of clients, customers, or counterparties, based on the nature and amount of the trading desk’s market-making related activities, that address the:
(1) Amount, types, and risks of its market-maker positions;
(2) Amount, types, and risks of the products, instruments, and exposures the trading desk may use for risk management purposes;
(3) Level of exposures to relevant risk factors arising from its financial exposure; and
(4) Period of time a financial instrument may be held.
(2) Supervisory review and oversight. The limits described in paragraph (c)(1) of this section shall be subject to supervisory review and oversight by the Board on an ongoing basis.
(3) Limit breaches and increases. (i) With respect to any limit set pursuant to paragraph (c)(1)(ii)(A) or (B) of this section, a banking entity shall maintain and make available to the Board upon request records regarding:
(A) Any limit that is exceeded; and
(B) Any temporary or permanent increase to any limit(s), in each case in the form and manner as directed by the Board.
(ii) In the event of a breach or increase of any limit set pursuant to paragraph (c)(1)(ii)(A) or (B) of this section, the presumption described in paragraph (c)(1)(i) of this section shall continue to be available only if the banking entity:
(A) Takes action as promptly as possible after a breach to bring the trading desk into compliance; and
(B) Follows established written authorization procedures, including escalation procedures that require review and approval of any trade that exceeds a trading desk’s limit(s), demonstrable analysis of the basis for any temporary or permanent increase to a trading desk’s limit(s), and independent review of such demonstrable analysis and approval.
(4) Rebutting the presumption. The presumption in paragraph (c)(1)(i) of this section may be rebutted by the Board if the Board determines, taking into account the liquidity, maturity, and depth of the market for the relevant types of financial instruments and based on all relevant facts and circumstances, that a trading desk is engaging in activity that is not based on the reasonably expected near term demands of clients, customers, or counterparties. The Board’s rebuttal of the presumption in paragraph (c)(1)(i) must be made in accordance with the notice and response procedures in subpart D of this part.
§ 248.5 Permitted risk-mitigating hedging activities.
(a) Permitted risk-mitigating hedging activities. The prohibition contained in § 248.3(a) does not apply to the risk-mitigating hedging activities of a banking entity in connection with and related to individual or aggregated positions, contracts, or other holdings of the banking entity and designed to reduce the specific risks to the banking entity in connection with and related to such positions, contracts, or other holdings.
(b) Requirements. (1) The risk-mitigating hedging activities of a banking entity that has significant trading assets and liabilities are permitted under paragraph (a) of this section only if:
(i) The banking entity has established and implements, maintains and enforces an internal compliance program required by subpart D of this part that is reasonably designed to ensure the banking entity’s compliance with the requirements of this section, including:
(A) Reasonably designed written policies and procedures regarding the positions, techniques and strategies that may be used for hedging, including documentation indicating what positions, contracts or other holdings a particular trading desk may use in its risk-mitigating hedging activities, as well as position and aging limits with respect to such positions, contracts or other holdings;
(B) Internal controls and ongoing monitoring, management, and authorization procedures, including relevant escalation procedures; and
(C) The conduct of analysis and independent testing designed to ensure that the positions, techniques and strategies that may be used for hedging may reasonably be expected to reduce or otherwise significantly mitigate the specific, identifiable risk(s) being hedged;
(ii) The risk-mitigating hedging activity:
(A) Is conducted in accordance with the written policies, procedures, and internal controls required under this section;
(B) At the inception of the hedging activity, including, without limitation, any adjustments to the hedging activity, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including market risk, counterparty or other credit risk, currency or foreign exchange risk, interest rate risk, commodity price risk, basis risk, or similar risks, arising in connection with and related to identified positions, contracts, or other holdings of the banking entity, based upon the facts and circumstances of the identified underlying and hedging positions, contracts or other holdings and the risks and liquidity thereof;
(C) Does not give rise, at the inception of the hedge, to any significant new or additional risk that is not itself hedged contemporaneously in accordance with this section;
(D) Is subject to continuing review, monitoring and management by the banking entity that:
(1) Is consistent with the written hedging policies and procedures required under paragraph (b)(1)(i) of this section;
(2) Is designed to reduce or otherwise significantly mitigate the specific, identifiable risks that develop over time from the risk-mitigating hedging activities undertaken under this section and the underlying positions, contracts, and other holdings of the banking entity, based upon the facts and circumstances of the underlying and hedging positions, contracts and other holdings of the banking entity and the risks and liquidity thereof; and
(3) Requires ongoing recalibration of the hedging activity by the banking entity to ensure that the hedging activity satisfies the requirements set out in paragraph (b)(1)(ii) of this section and is not prohibited proprietary trading; and
(iii) The compensation arrangements of persons performing risk-mitigating hedging activities are designed not to reward or incentivize prohibited proprietary trading.
(2) The risk-mitigating hedging activities of a banking entity that does not have significant trading assets and liabilities are permitted under paragraph (a) of this section only if the risk-mitigating hedging activity:
(i) At the inception of the hedging activity, including, without limitation, any adjustments to the hedging activity, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks, including market risk, counterparty or other credit risk, currency or foreign exchange risk, interest rate risk, commodity price risk, basis risk, or similar risks, arising in connection with and related to identified positions, contracts, or other holdings of the banking entity, based upon the facts and circumstances of the identified underlying and hedging positions, contracts or other holdings and the risks and liquidity thereof; and
(ii) Is subject, as appropriate, to ongoing recalibration by the banking entity to ensure that the hedging activity satisfies the requirements set out in paragraph (b)(2) of this section and is not prohibited proprietary trading.
(c) Documentation requirement. (1) A banking entity that has significant trading assets and liabilities must comply with the requirements of paragraphs (c)(2) and (3) of this section, unless the requirements of paragraph (c)(4) of this section are met, with respect to any purchase or sale of financial instruments made in reliance on this section for risk-mitigating hedging purposes that is:
(i) Not established by the specific trading desk establishing or responsible for the underlying positions, contracts, or other holdings the risks of which the hedging activity is designed to reduce;
(ii) Established by the specific trading desk establishing or responsible for the underlying positions, contracts, or other holdings the risks of which the purchases or sales are designed to reduce, but that is effected through a financial instrument, exposure, technique, or strategy that is not specifically identified in the trading desk’s written policies and procedures established under paragraph (b)(1) of this section or under § 248.4(b)(2)(iii)(B) of this subpart as a product, instrument, exposure, technique, or strategy such trading desk may use for hedging; or
(iii) Established to hedge aggregated positions across two or more trading desks.
(2) In connection with any purchase or sale identified in paragraph (c)(1) of this section, a banking entity must, at a minimum, and contemporaneously with the purchase or sale, document:
(i) The specific, identifiable risk(s) of the identified positions, contracts, or other holdings of the banking entity that the purchase or sale is designed to reduce;
(ii) The specific risk-mitigating strategy that the purchase or sale is designed to fulfill; and
(iii) The trading desk or other business unit that is establishing and responsible for the hedge.
(3) A banking entity must create and retain records sufficient to demonstrate compliance with the requirements of this paragraph (c) for a period that is no less than five years in a form that allows the banking entity to promptly produce such records to the Board on request, or such longer period as required under other law or this part.
(4) The requirements of paragraphs (c)(2) and (3) of this section do not apply to the purchase or sale of a financial instrument described in paragraph (c)(1) of this section if:
(i) The financial instrument purchased or sold is identified on a written list of pre-approved financial instruments that are commonly used by the trading desk for the specific type of hedging activity for which the financial instrument is being purchased or sold; and
(ii) At the time the financial instrument is purchased or sold, the hedging activity (including the purchase or sale of the financial instrument) complies with written, pre-approved limits for the trading desk purchasing or selling the financial instrument for hedging activities undertaken for one or more other trading desks. The limits shall be appropriate for the:
(A) Size, types, and risks of the hedging activities commonly undertaken by the trading desk;
(B) Financial instruments purchased and sold for hedging activities by the trading desk; and
(C) Levels and duration of the risk exposures being hedged.
§ 248.6 Other permitted proprietary trading activities.
(a) Permitted trading in domestic government obligations. The prohibition contained in § 248.3(a) does not apply to the purchase or sale by a banking entity of a financial instrument that is:
(1) An obligation of, or issued or guaranteed by, the United States;
(2) An obligation, participation, or other instrument of, or issued or guaranteed by, an agency of the United States, the Government National Mortgage Association, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, a Federal Home Loan Bank, the Federal Agricultural Mortgage Corporation or a Farm Credit System institution chartered under and subject to the provisions of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.);
(3) An obligation of any State or any political subdivision thereof, including any municipal security; or
(4) An obligation of the FDIC, or any entity formed by or on behalf of the FDIC for purpose of facilitating the disposal of assets acquired or held by the FDIC in its corporate capacity or as conservator or receiver under the Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(b) Permitted trading in foreign government obligations – (1) Affiliates of foreign banking entities in the United States. The prohibition contained in § 248.3(a) does not apply to the purchase or sale of a financial instrument that is an obligation of, or issued or guaranteed by, a foreign sovereign (including any multinational central bank of which the foreign sovereign is a member), or any agency or political subdivision of such foreign sovereign, by a banking entity, so long as:
(i) The banking entity is organized under or is directly or indirectly controlled by a banking entity that is organized under the laws of a foreign sovereign and is not directly or indirectly controlled by a top-tier banking entity that is organized under the laws of the United States;
(ii) The financial instrument is an obligation of, or issued or guaranteed by, the foreign sovereign under the laws of which the foreign banking entity referred to in paragraph (b)(1)(i) of this section is organized (including any multinational central bank of which the foreign sovereign is a member), or any agency or political subdivision of that foreign sovereign; and
(iii) The purchase or sale as principal is not made by an insured depository institution.
(2) Foreign affiliates of a U.S. banking entity. The prohibition contained in § 248.3(a) does not apply to the purchase or sale of a financial instrument that is an obligation of, or issued or guaranteed by, a foreign sovereign (including any multinational central bank of which the foreign sovereign is a member), or any agency or political subdivision of that foreign sovereign, by a foreign entity that is owned or controlled by a banking entity organized or established under the laws of the United States or any State, so long as:
(i) The foreign entity is a foreign bank, as defined in section 211.2(j) of the Board’s Regulation K (12 CFR 211.2(j)), or is regulated by the foreign sovereign as a securities dealer;
(ii) The financial instrument is an obligation of, or issued or guaranteed by, the foreign sovereign under the laws of which the foreign entity is organized (including any multinational central bank of which the foreign sovereign is a member), or any agency or political subdivision of that foreign sovereign; and
(iii) The financial instrument is owned by the foreign entity and is not financed by an affiliate that is located in the United States or organized under the laws of the United States or of any State.
(c) Permitted trading on behalf of customers – (1) Fiduciary transactions. The prohibition contained in § 248.3(a) does not apply to the purchase or sale of financial instruments by a banking entity acting as trustee or in a similar fiduciary capacity, so long as:
(i) The transaction is conducted for the account of, or on behalf of, a customer; and
(ii) The banking entity does not have or retain beneficial ownership of the financial instruments.
(2) Riskless principal transactions. The prohibition contained in § 248.3(a) does not apply to the purchase or sale of financial instruments by a banking entity acting as riskless principal in a transaction in which the banking entity, after receiving an order to purchase (or sell) a financial instrument from a customer, purchases (or sells) the financial instrument for its own account to offset a contemporaneous sale to (or purchase from) the customer.
(d) Permitted trading by a regulated insurance company. The prohibition contained in § 248.3(a) does not apply to the purchase or sale of financial instruments by a banking entity that is an insurance company or an affiliate of an insurance company if:
(1) The insurance company or its affiliate purchases or sells the financial instruments solely for:
(i) The general account of the insurance company; or
(ii) A separate account established by the insurance company;
(2) The purchase or sale is conducted in compliance with, and subject to, the insurance company investment laws, regulations, and written guidance of the State or jurisdiction in which such insurance company is domiciled; and
(3) The appropriate Federal banking agencies, after consultation with the Financial Stability Oversight Council and the relevant insurance commissioners of the States and foreign jurisdictions, as appropriate, have not jointly determined, after notice and comment, that a particular law, regulation, or written guidance described in paragraph (d)(2) of this section is insufficient to protect the safety and soundness of the covered banking entity, or the financial stability of the United States.
(e) Permitted trading activities of foreign banking entities. (1) The prohibition contained in § 248.3(a) does not apply to the purchase or sale of financial instruments by a banking entity if:
(i) The banking entity is not organized or directly or indirectly controlled by a banking entity that is organized under the laws of the United States or of any State;
(ii) The purchase or sale by the banking entity is made pursuant to paragraph (9) or (13) of section 4(c) of the BHC Act; and
(iii) The purchase or sale meets the requirements of paragraph (e)(3) of this section.
(2) A purchase or sale of financial instruments by a banking entity is made pursuant to paragraph (9) or (13) of section 4(c) of the BHC Act for purposes of paragraph (e)(1)(ii) of this section only if:
(i) The purchase or sale is conducted in accordance with the requirements of paragraph (e) of this section; and
(ii)(A) With respect to a banking entity that is a foreign banking organization, the banking entity meets the qualifying foreign banking organization requirements of section 211.23(a), (c) or (e) of the Board’s Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable; or
(B) With respect to a banking entity that is not a foreign banking organization, the banking entity is not organized under the laws of the United States or of any State and the banking entity, on a fully-consolidated basis, meets at least two of the following requirements:
(1) Total assets of the banking entity held outside of the United States exceed total assets of the banking entity held in the United States;
(2) Total revenues derived from the business of the banking entity outside of the United States exceed total revenues derived from the business of the banking entity in the United States; or
(3) Total net income derived from the business of the banking entity outside of the United States exceeds total net income derived from the business of the banking entity in the United States.
(3) A purchase or sale by a banking entity is permitted for purposes of this paragraph (e) if:
(i) The banking entity engaging as principal in the purchase or sale (including relevant personnel) is not located in the United States or organized under the laws of the United States or of any State;
(ii) The banking entity (including relevant personnel) that makes the decision to purchase or sell as principal is not located in the United States or organized under the laws of the United States or of any State; and
(iii) The purchase or sale, including any transaction arising from risk-mitigating hedging related to the instruments purchased or sold, is not accounted for as principal directly or on a consolidated basis by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State.
(4) For purposes of this paragraph (e), a U.S. branch, agency, or subsidiary of a foreign banking entity is considered to be located in the United States; however, the foreign bank that operates or controls that branch, agency, or subsidiary is not considered to be located in the United States solely by virtue of operating or controlling the U.S. branch, agency, or subsidiary.
(f) Permitted trading activities of qualifying foreign excluded funds. The prohibition contained in § 248.3(a) does not apply to the purchase or sale of a financial instrument by a qualifying foreign excluded fund. For purposes of this paragraph (f), a qualifying foreign excluded fund means a banking entity that:
(1) Is organized or established outside the United States, and the ownership interests of which are offered and sold solely outside the United States;
(2)(i) Would be a covered fund if the entity were organized or established in the United States, or
(ii) Is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in financial instruments for resale or other disposition or otherwise trading in financial instruments;
(3) Would not otherwise be a banking entity except by virtue of the acquisition or retention of an ownership interest in, sponsorship of, or relationship with the entity, by another banking entity that meets the following:
(i) The banking entity is not organized, or directly or indirectly controlled by a banking entity that is organized, under the laws of the United States or of any State; and
(ii) The banking entity’s acquisition or retention of an ownership interest in or sponsorship of the fund meets the requirements for permitted covered fund activities and investments solely outside the United States, as provided in § 248.13(b);
(4) Is established and operated as part of a bona fide asset management business; and
(5) Is not operated in a manner that enables the banking entity that sponsors or controls the qualifying foreign excluded fund, or any of its affiliates, to evade the requirements of section 13 of the BHC Act or this part.
§ 248.7 Limitations on permitted proprietary trading activities.
(a) No transaction, class of transactions, or activity may be deemed permissible under §§ 248.4 through 248.6 if the transaction, class of transactions, or activity would:
(1) Involve or result in a material conflict of interest between the banking entity and its clients, customers, or counterparties;
(2) Result, directly or indirectly, in a material exposure by the banking entity to a high-risk asset or a high-risk trading strategy; or
(3) Pose a threat to the safety and soundness of the banking entity or to the financial stability of the United States.
(b) Definition of material conflict of interest. (1) For purposes of this section, a material conflict of interest between a banking entity and its clients, customers, or counterparties exists if the banking entity engages in any transaction, class of transactions, or activity that would involve or result in the banking entity’s interests being materially adverse to the interests of its client, customer, or counterparty with respect to such transaction, class of transactions, or activity, and the banking entity has not taken at least one of the actions in paragraph (b)(2) of this section.
(2) Prior to effecting the specific transaction or class or type of transactions, or engaging in the specific activity, the banking entity:
(i) Timely and effective disclosure. (A) Has made clear, timely, and effective disclosure of the conflict of interest, together with other necessary information, in reasonable detail and in a manner sufficient to permit a reasonable client, customer, or counterparty to meaningfully understand the conflict of interest; and
(B) Such disclosure is made in a manner that provides the client, customer, or counterparty the opportunity to negate, or substantially mitigate, any materially adverse effect on the client, customer, or counterparty created by the conflict of interest; or
(ii) Information barriers. Has established, maintained, and enforced information barriers that are memorialized in written policies and procedures, such as physical separation of personnel, or functions, or limitations on types of activity, that are reasonably designed, taking into consideration the nature of the banking entity’s business, to prevent the conflict of interest from involving or resulting in a materially adverse effect on a client, customer, or counterparty. A banking entity may not rely on such information barriers if, in the case of any specific transaction, class or type of transactions or activity, the banking entity knows or should reasonably know that, notwithstanding the banking entity’s establishment of information barriers, the conflict of interest may involve or result in a materially adverse effect on a client, customer, or counterparty.
(c) Definition of high-risk asset and high-risk trading strategy. For purposes of this section:
(1) High-risk asset means an asset or group of related assets that would, if held by a banking entity, significantly increase the likelihood that the banking entity would incur a substantial financial loss or would pose a threat to the financial stability of the United States.
(2) High-risk trading strategy means a trading strategy that would, if engaged in by a banking entity, significantly increase the likelihood that the banking entity would incur a substantial financial loss or would pose a threat to the financial stability of the United States.
§§ 248.8-248.9 [Reserved]
Subpart C – Covered Funds Activities and Investments
§ 248.10 Prohibition on acquiring or retaining an ownership interest in and having certain relationships with a covered fund.
(a) Prohibition. (1) Except as otherwise provided in this subpart, a banking entity may not, as principal, directly or indirectly, acquire or retain any ownership interest in or sponsor a covered fund.
(2) Paragraph (a)(1) of this section does not include acquiring or retaining an ownership interest in a covered fund by a banking entity:
(i) Acting solely as agent, broker, or custodian, so long as;
(A) The activity is conducted for the account of, or on behalf of, a customer; and
(B) The banking entity and its affiliates do not have or retain beneficial ownership of such ownership interest;
(ii) Through a deferred compensation, stock-bonus, profit-sharing, or pension plan of the banking entity (or an affiliate thereof) that is established and administered in accordance with the law of the United States or a foreign sovereign, if the ownership interest is held or controlled directly or indirectly by the banking entity as trustee for the benefit of persons who are or were employees of the banking entity (or an affiliate thereof);
(iii) In the ordinary course of collecting a debt previously contracted in good faith, provided that the banking entity divests the ownership interest as soon as practicable, and in no event may the banking entity retain such ownership interest for longer than such period permitted by the Board; or
(iv) On behalf of customers as trustee or in a similar fiduciary capacity for a customer that is not a covered fund, so long as:
(A) The activity is conducted for the account of, or on behalf of, the customer; and
(B) The banking entity and its affiliates do not have or retain beneficial ownership of such ownership interest.
(b) Definition of covered fund. (1) Except as provided in paragraph (c) of this section, covered fund means:
(i) An issuer that would be an investment company, as defined in the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), but for section 3(c)(1) or 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(1) or (7));
(ii) Any commodity pool under section 1a(10) of the Commodity Exchange Act (7 U.S.C. 1a(10)) for which:
(A) The commodity pool operator has claimed an exemption under 17 CFR 4.7; or
(B)(1) A commodity pool operator is registered with the CFTC as a commodity pool operator in connection with the operation of the commodity pool;
(2) Substantially all participation units of the commodity pool are owned by qualified eligible persons under 17 CFR 4.7(a)(2) and (3); and
(3) Participation units of the commodity pool have not been publicly offered to persons who are not qualified eligible persons under 17 CFR 4.7(a)(2) and (3); or
(iii) For any banking entity that is, or is controlled directly or indirectly by a banking entity that is, located in or organized under the laws of the United States or of any State, an entity that:
(A) Is organized or established outside the United States and the ownership interests of which are offered and sold solely outside the United States;
(B) Is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in securities; and
(C)(1) Has as its sponsor that banking entity (or an affiliate thereof); or
(2) Has issued an ownership interest that is owned directly or indirectly by that banking entity (or an affiliate thereof).
(2) An issuer shall not be deemed to be a covered fund under paragraph (b)(1)(iii) of this section if, were the issuer subject to U.S. securities laws, the issuer could rely on an exclusion or exemption from the definition of “investment company” under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) other than the exclusions contained in section 3(c)(1) and 3(c)(7) of that Act.
(3) For purposes of paragraph (b)(1)(iii) of this section, a U.S. branch, agency, or subsidiary of a foreign banking entity is located in the United States; however, the foreign bank that operates or controls that branch, agency, or subsidiary is not considered to be located in the United States solely by virtue of operating or controlling the U.S. branch, agency, or subsidiary.
(c) Notwithstanding paragraph (b) of this section, unless the appropriate Federal banking agencies, the SEC, and the CFTC jointly determine otherwise, a covered fund does not include:
(1) Foreign public funds. (i) Subject to paragraphs (c)(1)(ii) and (iii) of this section, an issuer that:
(A) Is organized or established outside of the United States; and
(B) Is authorized to offer and sell ownership interests, and such interests are offered and sold, through one or more public offerings.
(ii) With respect to a banking entity that is, or is controlled directly or indirectly by a banking entity that is, located in or organized under the laws of the United States or of any State and any issuer for which such banking entity acts as sponsor, the sponsoring banking entity may not rely on the exemption in paragraph (c)(1)(i) of this section for such issuer unless more than 75 percent of the ownership interests in the issuer are sold to persons other than:
(A) Such sponsoring banking entity;
(B) Such issuer;
(C) Affiliates of such sponsoring banking entity or such issuer; and
(D) Directors and senior executive officers as defined in § 225.71(c) of the Board’s Regulation Y (12 CFR 225.71(c)) of such entities.
(iii) For purposes of paragraph (c)(1)(i)(B) of this section, the term “public offering” means a distribution (as defined in § 248.4(a)(3)) of securities in any jurisdiction outside the United States to investors, including retail investors, provided that:
(A) The distribution is subject to substantive disclosure and retail investor protection laws or regulations;
(B) With respect to an issuer for which the banking entity serves as the investment manager, investment adviser, commodity trading advisor, commodity pool operator, or sponsor, the distribution complies with all applicable requirements in the jurisdiction in which such distribution is being made;
(C) The distribution does not restrict availability to investors having a minimum level of net worth or net investment assets; and
(D) The issuer has filed or submitted, with the appropriate regulatory authority in such jurisdiction, offering disclosure documents that are publicly available.
(2) Wholly-owned subsidiaries. An entity, all of the outstanding ownership interests of which are owned directly or indirectly by the banking entity (or an affiliate thereof), except that:
(i) Up to five percent of the entity’s outstanding ownership interests, less any amounts outstanding under paragraph (c)(2)(ii) of this section, may be held by employees or directors of the banking entity or such affiliate (including former employees or directors if their ownership interest was acquired while employed by or in the service of the banking entity); and
(ii) Up to 0.5 percent of the entity’s outstanding ownership interests may be held by a third party if the ownership interest is acquired or retained by the third party for the purpose of establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns.
(3) Joint ventures. A joint venture between a banking entity or any of its affiliates and one or more unaffiliated persons, provided that the joint venture:
(i) Is composed of no more than 10 unaffiliated co-venturers;
(ii) Is in the business of engaging in activities that are permissible for the banking entity or affiliate, other than investing in securities for resale or other disposition; and
(iii) Is not, and does not hold itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in securities.
(4) Acquisition vehicles. An issuer:
(i) Formed solely for the purpose of engaging in a bona fide merger or acquisition transaction; and
(ii) That exists only for such period as necessary to effectuate the transaction.
(5) Foreign pension or retirement funds. A plan, fund, or program providing pension, retirement, or similar benefits that is:
(i) Organized and administered outside the United States;
(ii) A broad-based plan for employees or citizens that is subject to regulation as a pension, retirement, or similar plan under the laws of the jurisdiction in which the plan, fund, or program is organized and administered; and
(iii) Established for the benefit of citizens or residents of one or more foreign sovereigns or any political subdivision thereof.
(6) Insurance company separate accounts. A separate account, provided that no banking entity other than the insurance company participates in the account’s profits and losses.
(7) Bank owned life insurance. A separate account that is used solely for the purpose of allowing one or more banking entities to purchase a life insurance policy for which the banking entity or entities is beneficiary, provided that no banking entity that purchases the policy:
(i) Controls the investment decisions regarding the underlying assets or holdings of the separate account; or
(ii) Participates in the profits and losses of the separate account other than in compliance with applicable requirements regarding bank owned life insurance.
(8) Loan securitizations – (i) Scope. An issuing entity for asset-backed securities that satisfies all the conditions of this paragraph (c)(8) and the assets or holdings of which are composed solely of:
(A) Loans as defined in § 248.2(t);
(B) Rights or other assets designed to assure the servicing or timely distribution of proceeds to holders of such securities and rights or other assets that are related or incidental to purchasing or otherwise acquiring and holding the loans, provided that each asset that is a security (other than special units of beneficial interest and collateral certificates meeting the requirements of paragraph (c)(8)(v) of this section) meets the requirements of paragraph (c)(8)(iii) of this section;
(C) Interest rate or foreign exchange derivatives that meet the requirements of paragraph (c)(8)(iv) of this section;
(D) Special units of beneficial interest and collateral certificates that meet the requirements of paragraph (c)(8)(v) of this section; and
(E) Debt securities, other than asset-backed securities and convertible securities, provided that:
(1) The aggregate value of such debt securities does not exceed five percent of the aggregate value of loans held under paragraph (c)(8)(i)(A) of this section, cash and cash equivalents held under paragraph (c)(8)(iii)(A) of this section, and debt securities held under this paragraph (c)(8)(i)(E); and
(2) The aggregate value of the loans, cash and cash equivalents, and debt securities for purposes of this paragraph is calculated at par value at the most recent time any such debt security is acquired, except that the issuing entity may instead determine the value of any such loan, cash equivalent, or debt security based on its fair market value if:
(i) The issuing entity is required to use the fair market value of such assets for purposes of calculating compliance with concentration limitations or other similar calculations under its transaction agreements, and
(ii) The issuing entity’s valuation methodology values similarly situated assets consistently.
(ii) Impermissible assets. For purposes of this paragraph (c)(8), except as permitted under paragraph (c)(8)(i)(E) of this section, the assets or holdings of the issuing entity shall not include any of the following:
(A) A security, including an asset-backed security, or an interest in an equity or debt security other than as permitted in paragraphs (c)(8)(iii), (iv), or (v) of this section;
(B) A derivative, other than a derivative that meets the requirements of paragraph (c)(8)(iv) of this section; or
(C) A commodity forward contract.
(iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A) of this section, the issuing entity may hold securities, other than debt securities permitted under paragraph (c)(8)(i)(E) of this section, if those securities are:
(A) Cash equivalents – which, for the purposes of this paragraph, means high quality, highly liquid investments whose maturity corresponds to the securitization’s expected or potential need for funds and whose currency corresponds to either the underlying loans or the asset-backed securities – for purposes of the rights and assets in paragraph (c)(8)(i)(B) of this section; or
(B) Securities received in lieu of debts previously contracted with respect to the loans supporting the asset-backed securities.
(iv) Derivatives. The holdings of derivatives by the issuing entity shall be limited to interest rate or foreign exchange derivatives that satisfy all of the following conditions:
(A) The written terms of the derivatives directly relate to the loans, the asset-backed securities, the contractual rights or other assets described in paragraph (c)(8)(i)(B) of this section, or the debt securities described in paragraph (c)(8)(i)(E) of this section; and
(B) The derivatives reduce the interest rate and/or foreign exchange risks related to the loans, the asset-backed securities, the contractual rights or other assets described in paragraph (c)(8)(i)(B) of this section, or the debt securities described in paragraph (c)(8)(i)(E) of this section.
(v) Special units of beneficial interest and collateral certificates. The assets or holdings of the issuing entity may include collateral certificates and special units of beneficial interest issued by a special purpose vehicle, provided that:
(A) The special purpose vehicle that issues the special unit of beneficial interest or collateral certificate meets the requirements in this paragraph (c)(8);
(B) The special unit of beneficial interest or collateral certificate is used for the sole purpose of transferring to the issuing entity for the loan securitization the economic risks and benefits of the assets that are permissible for loan securitizations under this paragraph (c)(8) and does not directly or indirectly transfer any interest in any other economic or financial exposure;
(C) The special unit of beneficial interest or collateral certificate is created solely to satisfy legal requirements or otherwise facilitate the structuring of the loan securitization; and
(D) The special purpose vehicle that issues the special unit of beneficial interest or collateral certificate and the issuing entity are established under the direction of the same entity that initiated the loan securitization.
(9) Qualifying asset-backed commercial paper conduits. (i) An issuing entity for asset-backed commercial paper that satisfies all of the following requirements:
(A) The asset-backed commercial paper conduit holds only:
(1) Loans and other assets permissible for a loan securitization under paragraph (c)(8)(i) of this section; and
(2) Asset-backed securities supported solely by assets that are permissible for loan securitizations under paragraph (c)(8)(i) of this section and acquired by the asset-backed commercial paper conduit as part of an initial issuance either directly from the issuing entity of the asset-backed securities or directly from an underwriter in the distribution of the asset-backed securities;
(B) The asset-backed commercial paper conduit issues only asset-backed securities, comprised of a residual interest and securities with a legal maturity of 397 days or less; and
(C) A regulated liquidity provider has entered into a legally binding commitment to provide full and unconditional liquidity coverage with respect to all of the outstanding asset-backed securities issued by the asset-backed commercial paper conduit (other than any residual interest) in the event that funds are required to redeem maturing asset-backed securities.
(ii) For purposes of this paragraph (c)(9), a regulated liquidity provider means:
(A) A depository institution, as defined in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c));
(B) A bank holding company, as defined in section 2(a) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(a)), or a subsidiary thereof;
(C) A savings and loan holding company, as defined in section 10a of the Home Owners’ Loan Act (12 U.S.C. 1467a), provided all or substantially all of the holding company’s activities are permissible for a financial holding company under section 4(k) of the Bank Holding Company Act of 1956 (12 U.S.C. 1843(k)), or a subsidiary thereof;
(D) A foreign bank whose home country supervisor, as defined in § 211.21(q) of the Board’s Regulation K (12 CFR 211.21(q)), has adopted capital standards consistent with the Capital Accord for the Basel Committee on banking Supervision, as amended, and that is subject to such standards, or a subsidiary thereof; or
(E) The United States or a foreign sovereign.
(10) Qualifying covered bonds – (i) Scope. An entity owning or holding a dynamic or fixed pool of loans or other assets as provided in paragraph (c)(8) of this section for the benefit of the holders of covered bonds, provided that the assets in the pool are composed solely of assets that meet the conditions in paragraph (c)(8)(i) of this section.
(ii) Covered bond. For purposes of this paragraph (c)(10), a covered bond means:
(A) A debt obligation issued by an entity that meets the definition of foreign banking organization, the payment obligations of which are fully and unconditionally guaranteed by an entity that meets the conditions set forth in paragraph (c)(10)(i) of this section; or
(B) A debt obligation of an entity that meets the conditions set forth in paragraph (c)(10)(i) of this section, provided that the payment obligations are fully and unconditionally guaranteed by an entity that meets the definition of foreign banking organization and the entity is a wholly-owned subsidiary, as defined in paragraph (c)(2) of this section, of such foreign banking organization.
(11) SBICs and public welfare investment funds. An issuer:
(i) That is a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662), or that has received from the Small Business Administration notice to proceed to qualify for a license as a small business investment company, which notice or license has not been revoked, or that has voluntarily surrendered its license to operate as a small business investment company in accordance with 13 CFR 107.1900 and does not make any new investments (other than investments in cash equivalents, which, for the purposes of this paragraph, means high quality, highly liquid investments whose maturity corresponds to the issuer’s expected or potential need for funds and whose currency corresponds to the issuer’s assets) after such voluntary surrender;
(ii) The business of which is to make investments that are:
(A) Designed primarily to promote the public welfare, of the type permitted under paragraph (11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the welfare of low- and moderate-income communities or families (such as providing housing, services, or jobs) and including investments that qualify for consideration under the regulations implementing the Community Reinvestment Act (12 U.S.C. 2901 et seq.); or
(B) Qualified rehabilitation expenditures with respect to a qualified rehabilitated building or certified historic structure, as such terms are defined in section 47 of the Internal Revenue Code of 1986 or a similar State historic tax credit program;
(iii) That has elected to be regulated or is regulated as a rural business investment company, as described in 15 U.S.C. 80b-3(b)(8)(A) or (B), or that has terminated its participation as a rural business investment company in accordance with 7 CFR 4290.1900 and does not make any new investments (other than investments in cash equivalents, which, for the purposes of this paragraph, means high quality, highly liquid investments whose maturity corresponds to the issuer’s expected or potential need for funds and whose currency corresponds to the issuer’s assets) after such termination; or
(iv) That is a qualified opportunity fund, as defined in 26 U.S.C. 1400Z-2(d)
(12) Registered investment companies and excluded entities. An issuer:
(i) That is registered as an investment company under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), or that is formed and operated pursuant to a written plan to become a registered investment company as described in § 248.20(e)(3) of subpart D and that complies with the requirements of section 18 of the Investment Company Act of 1940 (15 U.S.C. 80a-18);
(ii) That may rely on an exclusion or exemption from the definition of “investment company” under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) other than the exclusions contained in section 3(c)(1) and 3(c)(7) of that Act; or
(iii) That has elected to be regulated as a business development company pursuant to section 54(a) of that Act (15 U.S.C. 80a-53) and has not withdrawn its election, or that is formed and operated pursuant to a written plan to become a business development company as described in § 248.20(e)(3) of subpart D and that complies with the requirements of section 61 of the Investment Company Act of 1940 (15 U.S.C. 80a-60).
(13) Issuers in conjunction with the FDIC’s receivership or conservatorship operations. An issuer that is an entity formed by or on behalf of the FDIC for the purpose of facilitating the disposal of assets acquired in the FDIC’s capacity as conservator or receiver under the Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
(14) Other excluded issuers. (i) Any issuer that the appropriate Federal banking agencies, the SEC, and the CFTC jointly determine the exclusion of which is consistent with the purposes of section 13 of the BHC Act.
(ii) A determination made under paragraph (c)(14)(i) of this section will be promptly made public.
(15) Credit funds. Subject to paragraphs (c)(15)(iii), (iv), and (v) of this section, an issuer that satisfies the asset and activity requirements of paragraphs (c)(15)(i) and (ii) of this section.
(i) Asset requirements. The issuer’s assets must be composed solely of:
(A) Loans as defined in § 248.2(t);
(B) Debt instruments, subject to paragraph (c)(15)(iv) of this section;
(C) Rights and other assets that are related or incidental to acquiring, holding, servicing, or selling such loans or debt instruments, provided that:
(1) Each right or asset held under this paragraph (c)(15)(i)(C) that is a security is either:
(i) A cash equivalent (which, for the purposes of this paragraph, means high quality, highly liquid investments whose maturity corresponds to the issuer’s expected or potential need for funds and whose currency corresponds to either the underlying loans or the debt instruments);
(ii) A security received in lieu of debts previously contracted with respect to such loans or debt instruments; or
(iii) An equity security (or right to acquire an equity security) received on customary terms in connection with such loans or debt instruments; and
(2) Rights or other assets held under this paragraph (c)(15)(i)(C) of this section may not include commodity forward contracts or any derivative; and
(D) Interest rate or foreign exchange derivatives, if:
(1) The written terms of the derivative directly relate to the loans, debt instruments, or other rights or assets described in paragraph (c)(15)(i)(C) of this section; and
(2) The derivative reduces the interest rate and/or foreign exchange risks related to the loans, debt instruments, or other rights or assets described in paragraph (c)(15)(i)(C) of this section.
(ii) Activity requirements. To be eligible for the exclusion of paragraph (c)(15) of this section, an issuer must:
(A) Not engage in any activity that would constitute proprietary trading under § 248.3(b)(l)(i), as if the issuer were a banking entity; and
(B) Not issue asset-backed securities.
(iii) Requirements for a sponsor, investment adviser, or commodity trading advisor. A banking entity that acts as a sponsor, investment adviser, or commodity trading advisor to an issuer that meets the conditions in paragraphs (c)(15)(i) and (ii) of this section may not rely on this exclusion unless the banking entity:
(A) Provides in writing to any prospective and actual investor in the issuer the disclosures required under § 248.11(a)(8) of this subpart, as if the issuer were a covered fund;
(B) Ensures that the activities of the issuer are consistent with safety and soundness standards that are substantially similar to those that would apply if the banking entity engaged in the activities directly; and
(C) Complies with the limitations imposed in § 248.14, as if the issuer were a covered fund, except the banking entity may acquire and retain any ownership interest in the issuer.
(iv) Additional Banking Entity Requirements. A banking entity may not rely on this exclusion with respect to an issuer that meets the conditions in paragraphs (c)(15)(i) and (ii) of this section unless:
(A) The banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the issuer or of any entity to which such issuer extends credit or in which such issuer invests; and
(B) Any assets the issuer holds pursuant to paragraphs (c)(15)(i)(B) or (i)(C)(1)(iii) of this section would be permissible for the banking entity to acquire and hold directly under applicable federal banking laws and regulations.
(v) Investment and Relationship Limits. A banking entity’s investment in, and relationship with, the issuer must:
(A) Comply with the limitations imposed in § 248.15, as if the issuer were a covered fund; and
(B) Be conducted in compliance with, and subject to, applicable banking laws and regulations, including applicable safety and soundness standards.
(16) Qualifying venture capital funds. (i) Subject to paragraphs (c)(16)(ii) through (iv) of this section, an issuer that:
(A) Is a venture capital fund as defined in 17 CFR 275.203(l)-1; and
(B) Does not engage in any activity that would constitute proprietary trading under § 248.3(b)(1)(i), as if the issuer were a banking entity.
(ii) A banking entity that acts as a sponsor, investment adviser, or commodity trading advisor to an issuer that meets the conditions in paragraph (c)(16)(i) of this section may not rely on this exclusion unless the banking entity:
(A) Provides in writing to any prospective and actual investor in the issuer the disclosures required under § 248.11(a)(8), as if the issuer were a covered fund;
(B) Ensures that the activities of the issuer are consistent with safety and soundness standards that are substantially similar to those that would apply if the banking entity engaged in the activities directly; and
(C) Complies with the restrictions in § 248.14 as if the issuer were a covered fund (except the banking entity may acquire and retain any ownership interest in the issuer).
(iii) The banking entity must not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the issuer.
(iv) A banking entity’s ownership interest in or relationship with the issuer must:
(A) Comply with the limitations imposed in § 248.15, as if the issuer were a covered fund; and
(B) Be conducted in compliance with, and subject to, applicable banking laws and regulations, including applicable safety and soundness standards.
(17) Family wealth management vehicles. (i) Subject to paragraph (c)(17)(ii) of this section, any entity that is not, and does not hold itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in securities, and:
(A) If the entity is a trust, the grantor(s) of the entity are all family customers; and
(B) If the entity is not a trust:
(1) A majority of the voting interests in the entity are owned (directly or indirectly) by family customers;
(2) A majority of the interests in the entity are owned (directly or indirectly) by family customers;
(3) The entity is owned only by family customers and up to 5 closely related persons of the family customers; and
(C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this section, up to an aggregate 0.5 percent of the entity’s outstanding ownership interests may be acquired or retained by one or more entities that are not family customers or closely related persons if the ownership interest is acquired or retained by such parties for the purpose of and to the extent necessary for establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns.
(ii) A banking entity may rely on the exclusion in paragraph (c)(17)(i) of this section with respect to an entity provided that the banking entity (or an affiliate):
(A) Provides bona fide trust, fiduciary, investment advisory, or commodity trading advisory services to the entity;
(B) Does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of such entity;
(C) Complies with the disclosure obligations under § 248.11(a)(8), as if such entity were a covered fund, provided that the content may be modified to prevent the disclosure from being misleading and the manner of disclosure may be modified to accommodate the specific circumstances of the entity;
(D) Does not acquire or retain, as principal, an ownership interest in the entity, other than as described in paragraph (c)(17)(i)(C) of this section;
(E) Complies with the requirements of §§ 248.14(b) and 248.15, as if such entity were a covered fund; and
(F) Except for riskless principal transactions as defined in paragraph (d)(11) of this section, complies with the requirements of 12 CFR 223.15(a), as if such banking entity and its affiliates were a member bank and the entity were an affiliate thereof.
(iii) For purposes of paragraph (c)(17) of this section, the following definitions apply:
(A) Closely related person means a natural person (including the estate and estate planning vehicles of such person) who has longstanding business or personal relationships with any family customer.
(B) Family customer means:
(1) A family client, as defined in Rule 202(a)(11)(G)-1(d)(4) of the Investment Advisers Act of 1940 (17 CFR 275.202(a)(11)(G)-1(d)(4)); or
(2) Any natural person who is a father-in-law, mother-in-law, brother-in-law, sister-in-law, son-in-law or daughter-in-law of a family client, or a spouse or a spousal equivalent of any of the foregoing.
(18) Customer facilitation vehicles. (i) Subject to paragraph (c)(18)(ii) of this section, an issuer that is formed by or at the request of a customer of the banking entity for the purpose of providing such customer (which may include one or more affiliates of such customer) with exposure to a transaction, investment strategy, or other service provided by the banking entity.
(ii) A banking entity may rely on the exclusion in paragraph (c)(18)(i) of this section with respect to an issuer provided that:
(A) All of the ownership interests of the issuer are owned by the customer (which may include one or more of its affiliates) for whom the issuer was created;
(B) Notwithstanding paragraph (c)(18)(ii)(A) of this section, up to an aggregate 0.5 percent of the issuer’s outstanding ownership interests may be acquired or retained by one or more entities that are not customers if the ownership interest is acquired or retained by such parties for the purpose of and to the extent necessary for establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns; and
(C) The banking entity and its affiliates:
(1) Maintain documentation outlining how the banking entity intends to facilitate the customer’s exposure to such transaction, investment strategy, or service;
(2) Do not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of such issuer;
(3) Comply with the disclosure obligations under § 248.11(a)(8), as if such issuer were a covered fund, provided that the content may be modified to prevent the disclosure from being misleading and the manner of disclosure may be modified to accommodate the specific circumstances of the issuer;
(4) Do not acquire or retain, as principal, an ownership interest in the issuer, other than as described in paragraph (c)(18)(ii)(B) of this section;
(5) Comply with the requirements of §§ 248.14(b) and 248.15, as if such issuer were a covered fund; and
(6) Except for riskless principal transactions as defined in paragraph (d)(11) of this section, comply with the requirements of 12 CFR 223.15(a), as if such banking entity and its affiliates were a member bank and the issuer were an affiliate thereof.
(d) Definition of other terms related to covered funds. For purposes of this subpart:
(1) Applicable accounting standards means U.S. generally accepted accounting principles, or such other accounting standards applicable to a banking entity that the Board determines are appropriate and that the banking entity uses in the ordinary course of its business in preparing its consolidated financial statements.
(2) Asset-backed security has the meaning specified in Section 3(a)(79) of the Exchange Act (15 U.S.C. 78c(a)(79).
(3) Director has the same meaning as provided in section 215.2(d)(1) of the Board’s Regulation O (12 CFR 215.2(d)(1)).
(4) Issuer has the same meaning as in section 2(a)(22) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(22)).
(5) Issuing entity means with respect to asset-backed securities the special purpose vehicle that owns or holds the pool assets underlying asset-backed securities and in whose name the asset-backed securities supported or serviced by the pool assets are issued.
(6) Ownership interest – (i) Ownership interest means any equity, partnership, or other similar interest. An “other similar interest” means an interest that:
(A) Has the right to participate in the selection or removal of a general partner, managing member, member of the board of directors or trustees, investment manager, investment adviser, or commodity trading advisor of the covered fund, excluding:
(1) The rights of a creditor to exercise remedies upon the occurrence of an event of default or an acceleration event; and
(2) The right to participate in the removal of an investment manager for “cause” or participate in the selection of a replacement manager upon an investment manager’s resignation or removal. For purposes of this paragraph (d)(6)(i)(A)(2), “cause” for removal of an investment manager means one or more of the following events:
(i) The bankruptcy, insolvency, conservatorship or receivership of the investment manager;
(ii) The breach by the investment manager of any material provision of the covered fund’s transaction agreements applicable to the investment manager;
(iii) The breach by the investment manager of material representations or warranties;
(iv) The occurrence of an act that constitutes fraud or criminal activity in the performance of the investment manager’s obligations under the covered fund’s transaction agreements;
(v) The indictment of the investment manager for a criminal offense, or the indictment of any officer, member, partner or other principal of the investment manager for a criminal offense materially related to his or her investment management activities;
(vi) A change in control with respect to the investment manager;
(vii) The loss, separation or incapacitation of an individual critical to the operation of the investment manager or primarily responsible for the management of the covered fund’s assets; or
(viii) Other similar events that constitute “cause” for removal of an investment manager, provided that such events are not solely related to the performance of the covered fund or the investment manager’s exercise of investment discretion under the covered fund’s transaction agreements;
(B) Has the right under the terms of the interest to receive a share of the income, gains or profits of the covered fund;
(C) Has the right to receive the underlying assets of the covered fund after all other interests have been redeemed and/or paid in full (excluding the rights of a creditor to exercise remedies upon the occurrence of an event of default or an acceleration event);
(D) Has the right to receive all or a portion of excess spread (the positive difference, if any, between the aggregate interest payments received from the underlying assets of the covered fund and the aggregate interest paid to the holders of other outstanding interests);
(E) Provides under the terms of the interest that the amounts payable by the covered fund with respect to the interest could be reduced based on losses arising from the underlying assets of the covered fund, such as allocation of losses, write-downs or charge-offs of the outstanding principal balance, or reductions in the amount of interest due and payable on the interest;
(F) Receives income on a pass-through basis from the covered fund, or has a rate of return that is determined by reference to the performance of the underlying assets of the covered fund; or
(G) Any synthetic right to have, receive, or be allocated any of the rights in paragraphs (d)(6)(i)(A) through (F) of this section.
(ii) Ownership interest does not include:
(A) Restricted profit interest, which is an interest held by an entity (or an employee or former employee thereof) in a covered fund for which the entity (or employee thereof) serves as investment manager, investment adviser, commodity trading advisor, or other service provider, so long as:
(1) The sole purpose and effect of the interest is to allow the entity (or employee or former employee thereof) to share in the profits of the covered fund as performance compensation for the investment management, investment advisory, commodity trading advisory, or other services provided to the covered fund by the entity (or employee or former employee thereof), provided that the entity (or employee or former employee thereof) may be obligated under the terms of such interest to return profits previously received;
(2) All such profit, once allocated, is distributed to the entity (or employee or former employee thereof) promptly after being earned or, if not so distributed, is retained by the covered fund for the sole purpose of establishing a reserve amount to satisfy contractual obligations with respect to subsequent losses of the covered fund and such undistributed profit of the entity (or employee or former employee thereof) does not share in the subsequent investment gains of the covered fund;
(3) Any amounts invested in the covered fund, including any amounts paid by the entity in connection with obtaining the restricted profit interest, are within the limits of § 248.12 of this subpart; and
(4) The interest is not transferable by the entity (or employee or former employee thereof) except to an affiliate thereof (or an employee of the banking entity or affiliate), to immediate family members, or through the intestacy, of the employee or former employee, or in connection with a sale of the business that gave rise to the restricted profit interest by the entity (or employee or former employee thereof) to an unaffiliated party that provides investment management, investment advisory, commodity trading advisory, or other services to the fund.
(B) Any senior loan or senior debt interest that has the following characteristics:
(1) Under the terms of the interest the holders of such interest do not have the right to receive a share of the income, gains, or profits of the covered fund, but are entitled to receive only:
(i) Interest at a stated interest rate, as well as commitment fees or other fees, which are not determined by reference to the performance of the underlying assets of the covered fund; and
(ii) Repayment of a fixed principal amount, on or before a maturity date, in a contractually-determined manner (which may include prepayment premiums intended solely to reflect, and compensate holders of the interest for, forgone income resulting from an early prepayment);
(2) The entitlement to payments under the terms of the interest are absolute and could not be reduced based on losses arising from the underlying assets of the covered fund, such as allocation of losses, write-downs or charge-offs of the outstanding principal balance, or reductions in the amount of interest due and payable on the interest; and
(3) The holders of the interest are not entitled to receive the underlying assets of the covered fund after all other interests have been redeemed or paid in full (excluding the rights of a creditor to exercise remedies upon the occurrence of an event of default or an acceleration event).
(7) Prime brokerage transaction means any transaction that would be a covered transaction, as defined in section 23A(b)(7) of the Federal Reserve Act (12 U.S.C. 371c(b)(7)), that is provided in connection with custody, clearance and settlement, securities borrowing or lending services, trade execution, financing, or data, operational, and administrative support.
(8) Resident of the United States means a person that is a “U.S. person” as defined in rule 902(k) of the SEC’s Regulation S (17 CFR 230.902(k)).
(9) Sponsor means, with respect to a covered fund:
(i) To serve as a general partner, managing member, or trustee of a covered fund, or to serve as a commodity pool operator with respect to a covered fund as defined in (b)(1)(ii) of this section;
(ii) In any manner to select or to control (or to have employees, officers, or directors, or agents who constitute) a majority of the directors, trustees, or management of a covered fund; or
(iii) To share with a covered fund, for corporate, marketing, promotional, or other purposes, the same name or a variation of the same name, except as permitted under § 248.11(a)(6).
(10) Trustee. (i) For purposes of paragraph (d)(9) of this section and § 248.11 of subpart C, a trustee does not include:
(A) A trustee that does not exercise investment discretion with respect to a covered fund, including a trustee that is subject to the direction of an unaffiliated named fiduciary who is not a trustee pursuant to section 403(a)(1) of the Employee’s Retirement Income Security Act (29 U.S.C. 1103(a)(1)); or
(B) A trustee that is subject to fiduciary standards imposed under foreign law that are substantially equivalent to those described in paragraph (d)(10)(i)(A) of this section;
(ii) Any entity that directs a person described in paragraph (d)(10)(i) of this section, or that possesses authority and discretion to manage and control the investment decisions of a covered fund for which such person serves as trustee, shall be considered to be a trustee of such covered fund.
(11) Riskless principal transaction. Riskless principal transaction means a transaction in which a banking entity, after receiving an order from a customer to buy (or sell) a security, purchases (or sells) the security in the secondary market for its own account to offset a contemporaneous sale to (or purchase from) the customer.
§ 248.11 Permitted organizing and offering, underwriting, and market making with respect to a covered fund.
(a) Organizing and offering a covered fund in general. Notwithstanding § 248.10(a) of this subpart, a banking entity is not prohibited from acquiring or retaining an ownership interest in, or acting as sponsor to, a covered fund in connection with, directly or indirectly, organizing and offering a covered fund, including serving as a general partner, managing member, trustee, or commodity pool operator of the covered fund and in any manner selecting or controlling (or having employees, officers, directors, or agents who constitute) a majority of the directors, trustees, or management of the covered fund, including any necessary expenses for the foregoing, only if:
(1) The banking entity (or an affiliate thereof) provides bona fide trust, fiduciary, investment advisory, or commodity trading advisory services;
(2) The covered fund is organized and offered only in connection with the provision of bona fide trust, fiduciary, investment advisory, or commodity trading advisory services and only to persons that are customers of such services of the banking entity (or an affiliate thereof), pursuant to a written plan or similar documentation outlining how the banking entity or such affiliate intends to provide advisory or similar services to its customers through organizing and offering such fund;
(3) The banking entity and its affiliates do not acquire or retain an ownership interest in the covered fund except as permitted under § 248.12 of this subpart;
(4) The banking entity and its affiliates comply with the requirements of § 248.14 of this subpart;
(5) The banking entity and its affiliates do not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the covered fund or of any covered fund in which such covered fund invests;
(6) The covered fund, for corporate, marketing, promotional, or other purposes:
(i) Does not share the same name or a variation of the same name with the banking entity (or an affiliate thereof) except that a covered fund may share the same name or a variation of the same name with a banking entity that is an investment adviser to the covered fund if:
(A) The investment adviser is not an insured depository institution, a company that controls an insured depository institution, or a company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978 (12 U.S.C. 3106); and
(B) The investment adviser does not share the same name or a variation of the same name as an insured depository institution, a company that controls an insured depository institution, or a company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978 (12 U.S.C. 3106); and
(ii) Does not use the word “bank” in its name;
(7) No director or employee of the banking entity (or an affiliate thereof) takes or retains an ownership interest in the covered fund, except for any director or employee of the banking entity or such affiliate who is directly engaged in providing investment advisory, commodity trading advisory, or other services to the covered fund at the time the director or employee takes the ownership interest; and
(8) The banking entity:
(i) Clearly and conspicuously discloses, in writing, to any prospective and actual investor in the covered fund (such as through disclosure in the covered fund’s offering documents):
(A) That “any losses in [such covered fund] will be borne solely by investors in [the covered fund] and not by [the banking entity] or its affiliates; therefore, [the banking entity’s] losses in [such covered fund] will be limited to losses attributable to the ownership interests in the covered fund held by [the banking entity] and any affiliate in its capacity as investor in the [covered fund] or as beneficiary of a restricted profit interest held by [the banking entity] or any affiliate”;
(B) That such investor should read the fund offering documents before investing in the covered fund;
(C) That the “ownership interests in the covered fund are not insured by the FDIC, and are not deposits, obligations of, or endorsed or guaranteed in any way, by any banking entity” (unless that happens to be the case); and
(D) The role of the banking entity and its affiliates and employees in sponsoring or providing any services to the covered fund; and
(ii) Complies with any additional rules of the appropriate Federal banking agencies, the SEC, or the CFTC, as provided in section 13(b)(2) of the BHC Act, designed to ensure that losses in such covered fund are borne solely by investors in the covered fund and not by the covered banking entity and its affiliates.
(b) Organizing and offering an issuing entity of asset-backed securities. (1) Notwithstanding § 248.10(a) of this subpart, a banking entity is not prohibited from acquiring or retaining an ownership interest in, or acting as sponsor to, a covered fund that is an issuing entity of asset-backed securities in connection with, directly or indirectly, organizing and offering that issuing entity, so long as the banking entity and its affiliates comply with all of the requirements of paragraph (a)(3) through (8) of this section.
(2) For purposes of this paragraph (b), organizing and offering a covered fund that is an issuing entity of asset-backed securities means acting as the securitizer, as that term is used in section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)) of the issuing entity, or acquiring or retaining an ownership interest in the issuing entity as required by section 15G of that Act (15 U.S.C.78o-11) and the implementing regulations issued thereunder.
(c) Underwriting and market making in ownership interests of a covered fund. The prohibition contained in § 248.10(a) does not apply to a banking entity’s underwriting activities or market making-related activities involving a covered fund so long as:
(1) Those activities are conducted in accordance with the requirements of § 248.4(a) or (b), respectively; and
(2) With respect to any banking entity (or any affiliate thereof) that: Acts as a sponsor, investment adviser or commodity trading advisor to a particular covered fund or otherwise acquires and retains an ownership interest in such covered fund in reliance on paragraph (a) of this section; or acquires and retains an ownership interest in such covered fund and is either a securitizer, as that term is used in section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is acquiring and retaining an ownership interest in such covered fund in compliance with section 15G of that Act (15 U.S.C.78o-11) and the implementing regulations issued thereunder each as permitted by paragraph (b) of this section, then in each such case any ownership interests acquired or retained by the banking entity and its affiliates in connection with underwriting and market making related activities for that particular covered fund are included in the calculation of ownership interests permitted to be held by the banking entity and its affiliates under the limitations of § 248.12(a)(2)(ii) and (iii) and (d).
§ 248.12 Permitted investment in a covered fund.
(a) Authority and limitations on permitted investments in covered funds. (1) Notwithstanding the prohibition contained in § 248.10(a) of this subpart, a banking entity may acquire and retain an ownership interest in a covered fund that the banking entity or an affiliate thereof organizes and offers pursuant to § 248.11, for the purposes of:
(i) Establishment. Establishing the fund and providing the fund with sufficient initial equity for investment to permit the fund to attract unaffiliated investors, subject to the limits contained in paragraphs (a)(2)(i) and (iii) of this section; or
(ii) De minimis investment. Making and retaining an investment in the covered fund subject to the limits contained in paragraphs (a)(2)(ii) and (iii) of this section.
(2) Investment limits – (i) Seeding period. With respect to an investment in any covered fund made or held pursuant to paragraph (a)(1)(i) of this section, the banking entity and its affiliates:
(A) Must actively seek unaffiliated investors to reduce, through redemption, sale, dilution, or other methods, the aggregate amount of all ownership interests of the banking entity in the covered fund to the amount permitted in paragraph (a)(2)(i)(B) of this section; and
(B) Must, no later than 1 year after the date of establishment of the fund (or such longer period as may be provided by the Board pursuant to paragraph (e) of this section), conform its ownership interest in the covered fund to the limits in paragraph (a)(2)(ii) of this section;
(ii) Per-fund limits. (A) Except as provided in paragraph (a)(2)(ii)(B) of this section, an investment by a banking entity and its affiliates in any covered fund made or held pursuant to paragraph (a)(1)(ii) of this section may not exceed 3 percent of the total number or value of the outstanding ownership interests of the fund.
(B) An investment by a banking entity and its affiliates in a covered fund that is an issuing entity of asset-backed securities may not exceed 3 percent of the total fair market value of the ownership interests of the fund measured in accordance with paragraph (b)(3) of this section, unless a greater percentage is retained by the banking entity and its affiliates in compliance with the requirements of section 15G of the Exchange Act (15 U.S.C. 78o-11) and the implementing regulations issued thereunder, in which case the investment by the banking entity and its affiliates in the covered fund may not exceed the amount, number, or value of ownership interests of the fund required under section 15G of the Exchange Act and the implementing regulations issued thereunder.
(iii) Aggregate limit. The aggregate value of all ownership interests of the banking entity and its affiliates in all covered funds acquired or retained under this section may not exceed 3 percent of the tier 1 capital of the banking entity, as provided under paragraph (c) of this section, and shall be calculated as of the last day of each calendar quarter.
(iv) Date of establishment. For purposes of this section, the date of establishment of a covered fund shall be:
(A) In general. The date on which the investment adviser or similar entity to the covered fund begins making investments pursuant to the written investment strategy for the fund;
(B) Issuing entities of asset-backed securities. In the case of an issuing entity of asset-backed securities, the date on which the assets are initially transferred into the issuing entity of asset-backed securities.
(b) Rules of construction – (1) Attribution of ownership interests to a covered banking entity. (i) For purposes of paragraph (a)(2) of this section, the amount and value of a banking entity’s permitted investment in any single covered fund shall include any ownership interest held under § 248.12 directly by the banking entity, including any affiliate of the banking entity.
(ii) Treatment of registered investment companies, SEC-regulated business development companies, and foreign public funds. For purposes of paragraph (b)(1)(i) of this section, a registered investment company, SEC-regulated business development companies, or foreign public fund as described in § 248.10(c)(1) will not be considered to be an affiliate of the banking entity so long as:
(A) The banking entity, together with its affiliates, does not own, control, or hold with the power to vote 25 percent or more of the voting shares of the company or fund; and
(B) The banking entity, or an affiliate of the banking entity, provides investment advisory, commodity trading advisory, administrative, and other services to the company or fund in compliance with the limitations under applicable regulation, order, or other authority.
(iii) Covered funds. For purposes of paragraph (b)(1)(i) of this section, a covered fund will not be considered to be an affiliate of a banking entity so long as the covered fund is held in compliance with the requirements of this subpart.
(iv) Treatment of employee and director investments financed by the banking entity. For purposes of paragraph (b)(1)(i) of this section, an investment by a director or employee of a banking entity who acquires an ownership interest in his or her personal capacity in a covered fund sponsored by the banking entity will be attributed to the banking entity if the banking entity, directly or indirectly, extends financing for the purpose of enabling the director or employee to acquire the ownership interest in the fund and the financing is used to acquire such ownership interest in the covered fund.
(2) Calculation of permitted ownership interests in a single covered fund. Except as provided in paragraph (b)(3) or (4), for purposes of determining whether an investment in a single covered fund complies with the restrictions on ownership interests under paragraphs (a)(2)(i)(B) and (a)(2)(ii)(A) of this section:
(i) The aggregate number of the outstanding ownership interests held by the banking entity shall be the total number of ownership interests held under this section by the banking entity in a covered fund divided by the total number of ownership interests held by all entities in that covered fund, as of the last day of each calendar quarter (both measured without regard to committed funds not yet called for investment);
(ii) The aggregate value of the outstanding ownership interests held by the banking entity shall be the aggregate fair market value of all investments in and capital contributions made to the covered fund by the banking entity, divided by the value of all investments in and capital contributions made to that covered fund by all entities, as of the last day of each calendar quarter (all measured without regard to committed funds not yet called for investment). If fair market value cannot be determined, then the value shall be the historical cost basis of all investments in and contributions made by the banking entity to the covered fund;
(iii) For purposes of the calculation under paragraph (b)(2)(ii) of this section, once a valuation methodology is chosen, the banking entity must calculate the value of its investment and the investments of all others in the covered fund in the same manner and according to the same standards.
(3) Issuing entities of asset-backed securities. In the case of an ownership interest in an issuing entity of asset-backed securities, for purposes of determining whether an investment in a single covered fund complies with the restrictions on ownership interests under paragraphs (a)(2)(i)(B) and (a)(2)(ii)(B) of this section:
(i) For securitizations subject to the requirements of section 15G of the Exchange Act (15 U.S.C. 78o-11), the calculations shall be made as of the date and according to the valuation methodology applicable pursuant to the requirements of section 15G of the Exchange Act (15 U.S.C. 78o-11) and the implementing regulations issued thereunder; or
(ii) For securitization transactions completed prior to the compliance date of such implementing regulations (or as to which such implementing regulations do not apply), the calculations shall be made as of the date of establishment as defined in paragraph (a)(2)(iv)(B) of this section or such earlier date on which the transferred assets have been valued for purposes of transfer to the covered fund, and thereafter only upon the date on which additional securities of the issuing entity of asset-backed securities are priced for purposes of the sales of ownership interests to unaffiliated investors.
(iii) For securitization transactions completed prior to the compliance date of such implementing regulations (or as to which such implementing regulations do not apply), the aggregate value of the outstanding ownership interests in the covered fund shall be the fair market value of the assets transferred to the issuing entity of the securitization and any other assets otherwise held by the issuing entity at such time, determined in a manner that is consistent with its determination of the fair market value of those assets for financial statement purposes.
(iv) For purposes of the calculation under paragraph (b)(3)(iii) of this section, the valuation methodology used to calculate the fair market value of the ownership interests must be the same for both the ownership interests held by a banking entity and the ownership interests held by all others in the covered fund in the same manner and according to the same standards.
(4) Multi-tier fund investments – (i) Master-feeder fund investments. If the principal investment strategy of a covered fund (the “feeder fund”) is to invest substantially all of its assets in another single covered fund (the “master fund”), then for purposes of the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of this section, the banking entity’s permitted investment in such funds shall be measured only by reference to the value of the master fund. The banking entity’s permitted investment in the master fund shall include any investment by the banking entity in the master fund, as well as the banking entity’s pro-rata share of any ownership interest in the master fund that is held through the feeder fund; and
(ii) Fund-of-funds investments. If a banking entity organizes and offers a covered fund pursuant to § 248.11 for the purpose of investing in other covered funds (a “fund of funds”) and that fund of funds itself invests in another covered fund that the banking entity is permitted to own, then the banking entity’s permitted investment in that other fund shall include any investment by the banking entity in that other fund, as well as the banking entity’s pro-rata share of any ownership interest in the fund that is held through the fund of funds. The investment of the banking entity may not represent more than 3 percent of the amount or value of any single covered fund.
(5) Parallel Investments and Co-Investments. (i) A banking entity shall not be required to include in the calculation of the investment limits under paragraph (a)(2) of this section any investment the banking entity makes alongside a covered fund as long as the investment is made in compliance with applicable laws and regulations, including applicable safety and soundness standards.
(ii) A banking entity shall not be restricted under this section in the amount of any investment the banking entity makes alongside a covered fund as long as the investment is made in compliance with applicable laws and regulations, including applicable safety and soundness standards.
(c) Aggregate permitted investments in all covered funds. (1)(i) For purposes of paragraph (a)(2)(iii) of this section, the aggregate value of all ownership interests held by a banking entity shall be the sum of all amounts paid or contributed by the banking entity in connection with acquiring or retaining an ownership interest in covered funds (together with any amounts paid by the entity in connection with obtaining a restricted profit interest under § 248.10(d)(6)(ii)), on a historical cost basis;
(ii) Treatment of employee and director restricted profit interests financed by the banking entity. For purposes of paragraph (c)(1)(i) of this section, an investment by a director or employee of a banking entity who acquires a restricted profit interest in his or her personal capacity in a covered fund sponsored by the banking entity will be attributed to the banking entity if the banking entity, directly or indirectly, extends financing for the purpose of enabling the director or employee to acquire the restricted profit interest in the fund and the financing is used to acquire such ownership interest in the covered fund.
(2) Calculation of tier 1 capital. For purposes of paragraph (a)(2)(iii) of this section:
(i) Entities that are required to hold and report tier 1 capital. If a banking entity is required to calculate and report tier 1 capital, the banking entity’s tier 1 capital shall be equal to the amount of tier 1 capital of the banking entity as of the last day of the most recent calendar quarter, as reported to its primary financial regulatory agency; and
(ii) If a banking entity is not required to calculate and report tier 1 capital, the banking entity’s tier 1 capital shall be determined to be equal to:
(A) In the case of a banking entity that is controlled, directly or indirectly, by a depository institution that calculates and reports tier 1 capital, be equal to the amount of tier 1 capital reported by such controlling depository institution in the manner described in paragraph (c)(2)(i) of this section;
(B) In the case of a banking entity that is not controlled, directly or indirectly, by a depository institution that calculates and reports tier 1 capital:
(1) Bank holding company subsidiaries. If the banking entity is a subsidiary of a bank holding company or company that is treated as a bank holding company, be equal to the amount of tier 1 capital reported by the top-tier affiliate of such covered banking entity that calculates and reports tier 1 capital in the manner described in paragraph (c)(2)(i) of this section; and
(2) Other holding companies and any subsidiary or affiliate thereof. If the banking entity is not a subsidiary of a bank holding company or a company that is treated as a bank holding company, be equal to the total amount of shareholders’ equity of the top-tier affiliate within such organization as of the last day of the most recent calendar quarter that has ended, as determined under applicable accounting standards.
(iii) Treatment of foreign banking entities – (A) Foreign banking entities. Except as provided in paragraph (c)(2)(iii)(B) of this section, with respect to a banking entity that is not itself, and is not controlled directly or indirectly by, a banking entity that is located or organized under the laws of the United States or of any State, the tier 1 capital of the banking entity shall be the consolidated tier 1 capital of the entity as calculated under applicable home country standards.
(B) U.S. affiliates of foreign banking entities. With respect to a banking entity that is located or organized under the laws of the United States or of any State and is controlled by a foreign banking entity identified under paragraph (c)(2)(iii)(A) of this section, the banking entity’s tier 1 capital shall be as calculated under paragraphs (c)(2)(i) or (ii) of this section.
(d) Capital treatment for a permitted investment in a covered fund. For purposes of calculating compliance with the applicable regulatory capital requirements, a banking entity shall deduct from the banking entity’s tier 1 capital (as determined under paragraph (c)(2) of this section) the greater of:
(1)(i) The sum of all amounts paid or contributed by the banking entity in connection with acquiring or retaining an ownership interest (together with any amounts paid by the entity in connection with obtaining a restricted profit interest under § 248.10(d)(6)(ii) of subpart C of this part), on a historical cost basis, plus any earnings received; and
(ii) The fair market value of the banking entity’s ownership interests in the covered fund as determined under paragraph (b)(2)(ii) or (b)(3) of this section (together with any amounts paid by the entity in connection with obtaining a restricted profit interest under § 248.10(d)(6)(ii) of subpart C of this part), if the banking entity accounts for the profits (or losses) of the fund investment in its financial statements.
(2) Treatment of employee and director restricted profit interests financed by the banking entity. For purposes of paragraph (d)(1) of this section, an investment by a director or employee of a banking entity who acquires a restricted profit interest in his or her personal capacity in a covered fund sponsored by the banking entity will be attributed to the banking entity if the banking entity, directly or indirectly, extends financing for the purpose of enabling the director or employee to acquire the restricted profit interest in the fund and the financing is used to acquire such ownership interest in the covered fund.
(e) Extension of time to divest an ownership interest – (1) Extension period. Upon application by a banking entity, the Board may extend the period under paragraph (a)(2)(i) of this section for up to 2 additional years if the Board finds that an extension would be consistent with safety and soundness and not detrimental to the public interest.
(2) Application requirements. An application for extension must:
(i) Be submitted to the Board at least 90 days prior to the expiration of the applicable time period;
(ii) Provide the reasons for application, including information that addresses the factors in paragraph (e)(3) of this section; and
(iii) Explain the banking entity’s plan for reducing the permitted investment in a covered fund through redemption, sale, dilution or other methods as required in paragraph (a)(2) of this section.
(3) Factors governing the Board determinations. In reviewing any application under paragraph (e)(1) of this section, the Board may consider all the facts and circumstances related to the permitted investment in a covered fund, including:
(i) Whether the investment would result, directly or indirectly, in a material exposure by the banking entity to high-risk assets or high-risk trading strategies;
(ii) The contractual terms governing the banking entity’s interest in the covered fund;
(iii) The date on which the covered fund is expected to have attracted sufficient investments from investors unaffiliated with the banking entity to enable the banking entity to comply with the limitations in paragraph (a)(2)(i) of this section;
(iv) The total exposure of the covered banking entity to the investment and the risks that disposing of, or maintaining, the investment in the covered fund may pose to the banking entity and the financial stability of the United States;
(v) The cost to the banking entity of divesting or disposing of the investment within the applicable period;
(vi) Whether the investment or the divestiture or conformance of the investment would involve or result in a material conflict of interest between the banking entity and unaffiliated parties, including clients, customers, or counterparties to which it owes a duty;
(vii) The banking entity’s prior efforts to reduce through redemption, sale, dilution, or other methods its ownership interests in the covered fund, including activities related to the marketing of interests in such covered fund;
(viii) Market conditions; and
(ix) Any other factor that the Board believes appropriate.
(4) Authority to impose restrictions on activities or investment during any extension period. The Board may impose such conditions on any extension approved under paragraph (e)(1) of this section as the Board determines are necessary or appropriate to protect the safety and soundness of the banking entity or the financial stability of the United States, address material conflicts of interest or other unsound banking practices, or otherwise further the purposes of section 13 of the BHC Act and this part.
(5) Consultation. In the case of a banking entity that is primarily regulated by another Federal banking agency, the SEC, or the CFTC, the Board will consult with such agency prior to acting on an application by the banking entity for an extension under paragraph (e)(1) of this section.
§ 248.13 Other permitted covered fund activities and investments.
(a) Permitted risk-mitigating hedging activities. (1) The prohibition contained in § 248.10(a) does not apply with respect to an ownership interest in a covered fund acquired or retained by a banking entity that is designed to reduce or otherwise significantly mitigate the specific, identifiable risks to the banking entity in connection with:
(i) A compensation arrangement with an employee of the banking entity or an affiliate thereof that directly provides investment advisory, commodity trading advisory or other services to the covered fund; or
(ii) A position taken by the banking entity when acting as intermediary on behalf of a customer that is not itself a banking entity to facilitate the exposure by the customer to the profits and losses of the covered fund.
(2) Requirements. The risk-mitigating hedging activities of a banking entity are permitted under this paragraph (a) only if:
(i) The banking entity has established and implements, maintains and enforces an internal compliance program in accordance with subpart D of this part that is reasonably designed to ensure the banking entity’s compliance with the requirements of this section, including:
(A) Reasonably designed written policies and procedures; and
(B) Internal controls and ongoing monitoring, management, and authorization procedures, including relevant escalation procedures; and
(ii) The acquisition or retention of the ownership interest:
(A) Is made in accordance with the written policies, procedures, and internal controls required under this section;
(B) At the inception of the hedge, is designed to reduce or otherwise significantly mitigate one or more specific, identifiable risks arising:
(1) Out of a transaction conducted solely to accommodate a specific customer request with respect to the covered fund; or
(2) In connection with the compensation arrangement with the employee that directly provides investment advisory, commodity trading advisory, or other services to the covered fund;
(C) Does not give rise, at the inception of the hedge, to any significant new or additional risk that is not itself hedged contemporaneously in accordance with this section; and
(D) Is subject to continuing review, monitoring and management by the banking entity.
(iii) With respect to risk-mitigating hedging activity conducted pursuant to paragraph (a)(1)(i), the compensation arrangement relates solely to the covered fund in which the banking entity or any affiliate has acquired an ownership interest pursuant to paragraph (a)(1)(i) and such compensation arrangement provides that any losses incurred by the banking entity on such ownership interest will be offset by corresponding decreases in amounts payable under such compensation arrangement.
(b) Certain permitted covered fund activities and investments outside of the United States. (1) The prohibition contained in § 248.10(a) of this subpart does not apply to the acquisition or retention of any ownership interest in, or the sponsorship of, a covered fund by a banking entity only if:
(i) The banking entity is not organized or directly or indirectly controlled by a banking entity that is organized under the laws of the United States or of one or more States;
(ii) The activity or investment by the banking entity is pursuant to paragraph (9) or (13) of section 4(c) of the BHC Act;
(iii) No ownership interest in the covered fund is offered for sale or sold to a resident of the United States; and
(iv) The activity or investment occurs solely outside of the United States.
(2) An activity or investment by the banking entity is pursuant to paragraph (9) or (13) of section 4(c) of the BHC Act for purposes of paragraph (b)(1)(ii) of this section only if:
(i) The activity or investment is conducted in accordance with the requirements of this section; and
(ii)(A) With respect to a banking entity that is a foreign banking organization, the banking entity meets the qualifying foreign banking organization requirements of section 211.23(a), (c) or (e) of the Board’s Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable; or
(B) With respect to a banking entity that is not a foreign banking organization, the banking entity is not organized under the laws of the United States or of one or more States and the banking entity, on a fully-consolidated basis, meets at least two of the following requirements:
(1) Total assets of the banking entity held outside of the United States exceed total assets of the banking entity held in the United States;
(2) Total revenues derived from the business of the banking entity outside of the United States exceed total revenues derived from the business of the banking entity in the United States; or
(3) Total net income derived from the business of the banking entity outside of the United States exceeds total net income derived from the business of the banking entity in the United States.
(3) An ownership interest in a covered fund is not offered for sale or sold to a resident of the United States for purposes of paragraph (b)(1)(iii) of this section only if it is not sold and has not been sold pursuant to an offering that targets residents of the United States in which the banking entity or any affiliate of the banking entity participates. If the banking entity or an affiliate sponsors or serves, directly or indirectly, as the investment manager, investment adviser, commodity pool operator or commodity trading advisor to a covered fund, then the banking entity or affiliate will be deemed for purposes of this paragraph (b)(3) to participate in any offer or sale by the covered fund of ownership interests in the covered fund.
(4) An activity or investment occurs solely outside of the United States for purposes of paragraph (b)(1)(iv) of this section only if:
(i) The banking entity acting as sponsor, or engaging as principal in the acquisition or retention of an ownership interest in the covered fund, is not itself, and is not controlled directly or indirectly by, a banking entity that is located in the United States or organized under the laws of the United States or of any State;
(ii) The banking entity (including relevant personnel) that makes the decision to acquire or retain the ownership interest or act as sponsor to the covered fund is not located in the United States or organized under the laws of the United States or of any State; and
(iii) The investment or sponsorship, including any transaction arising from risk-mitigating hedging related to an ownership interest, is not accounted for as principal directly or indirectly on a consolidated basis by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State.
(5) For purposes of this section, a U.S. branch, agency, or subsidiary of a foreign bank, or any subsidiary thereof, is located in the United States; however, a foreign bank of which that branch, agency, or subsidiary is a part is not considered to be located in the United States solely by virtue of operation of the U.S. branch, agency, or subsidiary.
(c) Permitted covered fund interests and activities by a regulated insurance company. The prohibition contained in § 248.10(a) of this subpart does not apply to the acquisition or retention by an insurance company, or an affiliate thereof, of any ownership interest in, or the sponsorship of, a covered fund only if:
(1) The insurance company or its affiliate acquires and retains the ownership interest solely for the general account of the insurance company or for one or more separate accounts established by the insurance company;
(2) The acquisition and retention of the ownership interest is conducted in compliance with, and subject to, the insurance company investment laws and regulations of the State or jurisdiction in which such insurance company is domiciled; and
(3) The appropriate Federal banking agencies, after consultation with the Financial Stability Oversight Council and the relevant insurance commissioners of the States and foreign jurisdictions, as appropriate, have not jointly determined, after notice and comment, that a particular law or regulation described in paragraph (c)(2) of this section is insufficient to protect the safety and soundness of the banking entity, or the financial stability of the United States.
(d) Permitted covered fund activities and investments of qualifying foreign excluded funds. (1) The prohibition contained in § 248.10(a) does not apply to a qualifying foreign excluded fund.
(2) For purposes of this paragraph (d), a qualifying foreign excluded fund means a banking entity that:
(i) Is organized or established outside the United States, and the ownership interests of which are offered and sold solely outside the United States;
(ii)(A) Would be a covered fund if the entity were organized or established in the United States, or
(B) Is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in financial instruments for resale or other disposition or otherwise trading in financial instruments;
(iii) Would not otherwise be a banking entity except by virtue of the acquisition or retention of an ownership interest in, sponsorship of, or relationship with the entity, by another banking entity that meets the following:
(A) The banking entity is not organized, or directly or indirectly controlled by a banking entity that is organized, under the laws of the United States or of any State; and
(B) The banking entity’s acquisition of an ownership interest in or sponsorship of the fund by the foreign banking entity meets the requirements for permitted covered fund activities and investments solely outside the United States, as provided in § 248.13(b);
(iv) Is established and operated as part of a bona fide asset management business; and
(v) Is not operated in a manner that enables the banking entity that sponsors or controls the qualifying foreign excluded fund, or any of its affiliates, to evade the requirements of section 13 of the BHC Act or this part.
§ 248.14 Limitations on relationships with a covered fund.
(a) Relationships with a covered fund. (1) Except as provided for in paragraph (a)(2) of this section, no banking entity that serves, directly or indirectly, as the investment manager, investment adviser, commodity trading advisor, or sponsor to a covered fund, that organizes and offers a covered fund pursuant to § 248.11 of this subpart, or that continues to hold an ownership interest in accordance with § 248.11(b) of this subpart, and no affiliate of such entity, may enter into a transaction with the covered fund, or with any other covered fund that is controlled by such covered fund, that would be a covered transaction as defined in section 23A of the Federal Reserve Act (12 U.S.C. 371c(b)(7)), as if such banking entity and the affiliate thereof were a member bank and the covered fund were an affiliate thereof.
(2) Notwithstanding paragraph (a)(1) of this section, a banking entity may:
(i) Acquire and retain any ownership interest in a covered fund in accordance with the requirements of § 248.11, § 248.12, or § 248.13;
(ii) Enter into any prime brokerage transaction with any covered fund in which a covered fund managed, sponsored, or advised by such banking entity (or an affiliate thereof) has taken an ownership interest, if:
(A) The banking entity is in compliance with each of the limitations set forth in § 248.11 of this subpart with respect to a covered fund organized and offered by such banking entity (or an affiliate thereof);
(B) The chief executive officer (or equivalent officer) of the banking entity certifies in writing annually no later than March 31 to the Board (with a duty to update the certification if the information in the certification materially changes) that the banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the covered fund or of any covered fund in which such covered fund invests; and
(C) The Board has not determined that such transaction is inconsistent with the safe and sound operation and condition of the banking entity; and
(iii) Enter into a transaction with a covered fund that would be an exempt covered transaction under 12 U.S.C. 371c(d) or § 223.42 of the Board’s Regulation W (12 CFR 223.42) subject to the limitations specified under 12 U.S.C. 371c(d) or § 223.42 of the Board’s Regulation W (12 CFR 223.42), as applicable,
(iv) Enter into a riskless principal transaction with a covered fund; and
(v) Extend credit to or purchase assets from a covered fund, provided:
(A) Each extension of credit or purchase of assets is in the ordinary course of business in connection with payment transactions; settlement services; or futures, derivatives, and securities clearing;
(B) Each extension of credit is repaid, sold, or terminated by the end of five business days; and
(C) The banking entity making each extension of credit meets the requirements of § 223.42(l)(1)(i) and (ii) of the Board’s Regulation W (12 CFR 223.42(l)(1)(i) and(ii)), as if the extension of credit was an intraday extension of credit, regardless of the duration of the extension of credit.
(3) Any transaction or activity permitted under paragraphs (a)(2)(iii), (iv) or (v) must comply with the limitations in § 248.15.
(b) Restrictions on transactions with covered funds. A banking entity that serves, directly or indirectly, as the investment manager, investment adviser, commodity trading advisor, or sponsor to a covered fund, or that organizes and offers a covered fund pursuant to § 248.11 of this subpart, or that continues to hold an ownership interest in accordance with § 248.11(b) of this subpart, shall be subject to section 23B of the Federal Reserve Act (12 U.S.C. 371c-1), as if such banking entity were a member bank and such covered fund were an affiliate thereof.
(c) Restrictions on other permitted transactions. Any transaction permitted under paragraphs (a)(2)(ii), (iii), or (iv) of this section shall be subject to section 23B of the Federal Reserve Act (12 U.S.C. 371c-1) as if the counterparty were an affiliate of the banking entity under section 23B.
§ 248.15 Other limitations on permitted covered fund activities.
(a) No transaction, class of transactions, or activity may be deemed permissible under §§ 248.11 through 248.13 of this subpart if the transaction, class of transactions, or activity would:
(1) Involve or result in a material conflict of interest between the banking entity and its clients, customers, or counterparties;
(2) Result, directly or indirectly, in a material exposure by the banking entity to a high-risk asset or a high-risk trading strategy; or
(3) Pose a threat to the safety and soundness of the banking entity or to the financial stability of the United States.
(b) Definition of material conflict of interest. (1) For purposes of this section, a material conflict of interest between a banking entity and its clients, customers, or counterparties exists if the banking entity engages in any transaction, class of transactions, or activity that would involve or result in the banking entity’s interests being materially adverse to the interests of its client, customer, or counterparty with respect to such transaction, class of transactions, or activity, and the banking entity has not taken at least one of the actions in paragraph (b)(2) of this section.
(2) Prior to effecting the specific transaction or class or type of transactions, or engaging in the specific activity, the banking entity:
(i) Timely and effective disclosure. (A) Has made clear, timely, and effective disclosure of the conflict of interest, together with other necessary information, in reasonable detail and in a manner sufficient to permit a reasonable client, customer, or counterparty to meaningfully understand the conflict of interest; and
(B) Such disclosure is made in a manner that provides the client, customer, or counterparty the opportunity to negate, or substantially mitigate, any materially adverse effect on the client, customer, or counterparty created by the conflict of interest; or
(ii) Information barriers. Has established, maintained, and enforced information barriers that are memorialized in written policies and procedures, such as physical separation of personnel, or functions, or limitations on types of activity, that are reasonably designed, taking into consideration the nature of the banking entity’s business, to prevent the conflict of interest from involving or resulting in a materially adverse effect on a client, customer, or counterparty. A banking entity may not rely on such information barriers if, in the case of any specific transaction, class or type of transactions or activity, the banking entity knows or should reasonably know that, notwithstanding the banking entity’s establishment of information barriers, the conflict of interest may involve or result in a materially adverse effect on a client, customer, or counterparty.
(c) Definition of high-risk asset and high-risk trading strategy. For purposes of this section:
(1) High-risk asset means an asset or group of related assets that would, if held by a banking entity, significantly increase the likelihood that the banking entity would incur a substantial financial loss or would pose a threat to the financial stability of the United States.
(2) High-risk trading strategy means a trading strategy that would, if engaged in by a banking entity, significantly increase the likelihood that the banking entity would incur a substantial financial loss or would pose a threat to the financial stability of the United States.
§ 248.16 Ownership of interests in and sponsorship of issuers of certain collateralized debt obligations backed by trust-preferred securities.
(a) The prohibition contained in § 248.10(a)(1) does not apply to the ownership by a banking entity of an interest in, or sponsorship of, any issuer if:
(1) The issuer was established, and the interest was issued, before May 19, 2010;
(2) The banking entity reasonably believes that the offering proceeds received by the issuer were invested primarily in Qualifying TruPS Collateral; and
(3) The banking entity acquired such interest on or before December 10, 2013 (or acquired such interest in connection with a merger with or acquisition of a banking entity that acquired the interest on or before December 10, 2013).
(b) For purposes of this § 248.16, Qualifying TruPS Collateral shall mean any trust preferred security or subordinated debt instrument issued prior to May 19, 2010 by a depository institution holding company that, as of the end of any reporting period within 12 months immediately preceding the issuance of such trust preferred security or subordinated debt instrument, had total consolidated assets of less than $15,000,000,000 or issued prior to May 19, 2010 by a mutual holding company.
(c) Notwithstanding paragraph (a)(3) of this section, a banking entity may act as a market maker with respect to the interests of an issuer described in paragraph (a) of this section in accordance with the applicable provisions of §§ 248.4 and 248.11.
(d) Without limiting the applicability of paragraph (a) of this section, the Board, the FDIC and the OCC will make public a non-exclusive list of issuers that meet the requirements of paragraph (a). A banking entity may rely on the list published by the Board, the FDIC and the OCC.
§§ 248.17-248.19 [Reserved]
Subpart D – Compliance Program Requirement; Violations
§ 248.20 Program for compliance; reporting.
(a) Program requirement. Each banking entity (other than a banking entity with limited trading assets and liabilities or a qualifying foreign excluded fund under § 248.6(f) or § 248.13(d)) shall develop and provide for the continued administration of a compliance program reasonably designed to ensure and monitor compliance with the prohibitions and restrictions on proprietary trading and covered fund activities and investments set forth in section 13 of the BHC Act and this part. The terms, scope, and detail of the compliance program shall be appropriate for the types, size, scope, and complexity of activities and business structure of the banking entity.
(b) Banking entities with significant trading assets and liabilities. With respect to a banking entity with significant trading assets and liabilities, the compliance program required by paragraph (a) of this section, at a minimum, shall include:
(1) Written policies and procedures reasonably designed to document, describe, monitor and limit trading activities subject to subpart B (including those permitted under §§ 248.3 to 248.6 of subpart B), including setting, monitoring and managing required limits set out in §§ 2484 and 248.5, and activities and investments with respect to a covered fund subject to subpart C (including those permitted under §§ 248.11 through 248.14 of subpart C) conducted by the banking entity to ensure that all activities and investments conducted by the banking entity that are subject to section 13 of the BHC Act and this part comply with section 13 of the BHC Act and this part;
(2) A system of internal controls reasonably designed to monitor compliance with section 13 of the BHC Act and this part and to prevent the occurrence of activities or investments that are prohibited by section 13 of the BHC Act and this part;
(3) A management framework that clearly delineates responsibility and accountability for compliance with section 13 of the BHC Act and this part and includes appropriate management review of trading limits, strategies, hedging activities, investments, incentive compensation and other matters identified in this part or by management as requiring attention;
(4) Independent testing and audit of the effectiveness of the compliance program conducted periodically by qualified personnel of the banking entity or by a qualified outside party;
(5) Training for trading personnel and managers, as well as other appropriate personnel, to effectively implement and enforce the compliance program; and
(6) Records sufficient to demonstrate compliance with section 13 of the BHC Act and this part, which a banking entity must promptly provide to the Board upon request and retain for a period of no less than 5 years or such longer period as required by the Board.
(c) CEO attestation. The CEO of a banking entity that has significant trading assets and liabilities must, based on a review by the CEO of the banking entity, attest in writing to the Board, each year no later than March 31, that the banking entity has in place processes to establish, maintain, enforce, review, test and modify the compliance program required by paragraph (b) of this section in a manner reasonably designed to achieve compliance with section 13 of the BHC Act and this part. In the case of a U.S. branch or agency of a foreign banking entity, the attestation may be provided for the entire U.S. operations of the foreign banking entity by the senior management officer of the U.S. operations of the foreign banking entity who is located in the United States.
(d) Reporting requirements under appendix A to this part. (1) A banking entity (other than a qualifying foreign excluded fund under section 248.6(f) or 248.13(d)) engaged in proprietary trading activity permitted under subpart B shall comply with the reporting requirements described in appendix A to this part, if:
(i) The banking entity has significant trading assets and liabilities; or
(ii) The Board notifies the banking entity in writing that it must satisfy the reporting requirements contained in appendix A to this part.
(2) Frequency of reporting: Unless the Board notifies the banking entity in writing that it must report on a different basis, a banking entity subject to appendix A to this part shall report the information required by appendix A for each quarter within 30 days of the end of the quarter.
(e) Additional documentation for covered funds. A banking entity with significant trading assets and liabilities (other than a qualifying foreign excluded fund under section 248.6(f) or 248.13(d)) shall maintain records that include:
(1) Documentation of the exclusions or exemptions other than sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 relied on by each fund sponsored by the banking entity (including all subsidiaries and affiliates) in determining that such fund is not a covered fund;
(2) For each fund sponsored by the banking entity (including all subsidiaries and affiliates) for which the banking entity relies on one or more of the exclusions from the definition of covered fund provided by § 248.10(c)(1), 248.10(c)(5), 248.10(c)(8), 248.10(c)(9), or 248.10(c)(10) of subpart C, documentation supporting the banking entity’s determination that the fund is not a covered fund pursuant to one or more of those exclusions;
(3) For each seeding vehicle described in § 248.10(c)(12)(i) or (iii) of subpart C that will become a registered investment company or SEC-regulated business development company, a written plan documenting the banking entity’s determination that the seeding vehicle will become a registered investment company or SEC-regulated business development company; the period of time during which the vehicle will operate as a seeding vehicle; and the banking entity’s plan to market the vehicle to third-party investors and convert it into a registered investment company or SEC-regulated business development company within the time period specified in § 248.12(a)(2)(i)(B) of subpart C;
(4) For any banking entity that is, or is controlled directly or indirectly by a banking entity that is, located in or organized under the laws of the United States or of any State, if the aggregate amount of ownership interests in foreign public funds that are described in § 248.10(c)(1) of subpart C owned by such banking entity (including ownership interests owned by any affiliate that is controlled directly or indirectly by a banking entity that is located in or organized under the laws of the United States or of any State) exceeds $50 million at the end of two or more consecutive calendar quarters, beginning with the next succeeding calendar quarter, documentation of the value of the ownership interests owned by the banking entity (and such affiliates) in each foreign public fund and each jurisdiction in which any such foreign public fund is organized, calculated as of the end of each calendar quarter, which documentation must continue until the banking entity’s aggregate amount of ownership interests in foreign public funds is below $50 million for two consecutive calendar quarters; and
(5) For purposes of paragraph (e)(4) of this section, a U.S. branch, agency, or subsidiary of a foreign banking entity is located in the United States; however, the foreign bank that operates or controls that branch, agency, or subsidiary is not considered to be located in the United States solely by virtue of operating or controlling the U.S. branch, agency, or subsidiary.
(f) Simplified programs for less active banking entities – (1) Banking entities with no covered activities. A banking entity that does not engage in activities or investments pursuant to subpart B or subpart C (other than trading activities permitted pursuant to § 248.6(a) of subpart B) may satisfy the requirements of this section by establishing the required compliance program prior to becoming engaged in such activities or making such investments (other than trading activities permitted pursuant to § 248.6(a) of subpart B).
(2) Banking entities with moderate trading assets and liabilities. A banking entity with moderate trading assets and liabilities may satisfy the requirements of this section by including in its existing compliance policies and procedures appropriate references to the requirements of section 13 of the BHC Act and this part and adjustments as appropriate given the activities, size, scope, and complexity of the banking entity.
(g) Rebuttable presumption of compliance for banking entities with limited trading assets and liabilities – (1) Rebuttable presumption. Except as otherwise provided in this paragraph, a banking entity with limited trading assets and liabilities shall be presumed to be compliant with subpart B and subpart C of this part and shall have no obligation to demonstrate compliance with this part on an ongoing basis.
(2) Rebuttal of presumption. If upon examination or audit, the Board determines that the banking entity has engaged in proprietary trading or covered fund activities that are otherwise prohibited under subpart B or subpart C of this part, the Board may require the banking entity to be treated under this part as if it did not have limited trading assets and liabilities. The Board’s rebuttal of the presumption in this paragraph must be made in accordance with the notice and response procedures in paragraph (i) of this section.
(h) Reservation of authority. Notwithstanding any other provision of this part, the Board retains its authority to require a banking entity without significant trading assets and liabilities to apply any requirements of this part that would otherwise apply if the banking entity had significant or moderate trading assets and liabilities if the Board determines that the size or complexity of the banking entity’s trading or investment activities, or the risk of evasion of subpart B or subpart C of this part, does not warrant a presumption of compliance under paragraph (g) of this section or treatment as a banking entity with moderate trading assets and liabilities, as applicable. The Board’s exercise of this reservation of authority must be made in accordance with the notice and response procedures in paragraph (i) of this section.
(i) Notice and response procedures – (1) Notice. The Board will notify the banking entity in writing of any determination requiring notice under this part and will provide an explanation of the determination.
(2) Response. The banking entity may respond to any or all items in the notice described in paragraph (i)(1) of this section. The response should include any matters that the banking entity would have the Board consider in deciding whether to make the determination. The response must be in writing and delivered to the designated Board official within 30 days after the date on which the banking entity received the notice. The Board may shorten the time period when, in the opinion of the Board, the activities or condition of the banking entity so requires, provided that the banking entity is informed of the time period at the time of notice, or with the consent of the banking entity. In its discretion, the Board may extend the time period for good cause.
(3) Waiver. Failure to respond within 30 days or such other time period as may be specified by the Board shall constitute a waiver of any objections to the Board’s determination.
(4) Decision. The Board will notify the banking entity of the decision in writing. The notice will include an explanation of the decision.
§ 248.21 Termination of activities or investments; penalties for violations.
(a) Any banking entity that engages in an activity or makes an investment in violation of section 13 of the BHC Act or this part, or acts in a manner that functions as an evasion of the requirements of section 13 of the BHC Act or this part, including through an abuse of any activity or investment permitted under subparts B or C, or otherwise violates the restrictions and requirements of section 13 of the BHC Act or this part, shall, upon discovery, promptly terminate the activity and, as relevant, dispose of the investment.
(b) Whenever the Board finds reasonable cause to believe any banking entity has engaged in an activity or made an investment in violation of section 13 of the BHC Act or this part, or engaged in any activity or made any investment that functions as an evasion of the requirements of section 13 of the BHC Act or this part, the Board may take any action permitted by law to enforce compliance with section 13 of the BHC Act and this part, including directing the banking entity to restrict, limit, or terminate any or all activities under this part and dispose of any investment.
Appendix A to Part 248 – Reporting and Recordkeeping Requirements for Covered Trading Activities
a. This appendix sets forth reporting and recordkeeping requirements that certain banking entities must satisfy in connection with the restrictions on proprietary trading set forth in subpart B (“proprietary trading restrictions”). Pursuant to § 248.20(d), this appendix applies to a banking entity that, together with its affiliates and subsidiaries, has significant trading assets and liabilities. These entities are required to (i) furnish periodic reports to the Board regarding a variety of quantitative measurements of their covered trading activities, which vary depending on the scope and size of covered trading activities, and (ii) create and maintain records documenting the preparation and content of these reports. The requirements of this appendix must be incorporated into the banking entity’s internal compliance program under § 248.20.
b. The purpose of this appendix is to assist banking entities and the Board in:
(1) Better understanding and evaluating the scope, type, and profile of the banking entity’s covered trading activities;
(2) Monitoring the banking entity’s covered trading activities;
(3) Identifying covered trading activities that warrant further review or examination by the banking entity to verify compliance with the proprietary trading restrictions;
(4) Evaluating whether the covered trading activities of trading desks engaged in market making-related activities subject to § 248.4(b) are consistent with the requirements governing permitted market making-related activities;
(5) Evaluating whether the covered trading activities of trading desks that are engaged in permitted trading activity subject to § 248.4, 248.5, or 248.6(a)-(b) (i.e., underwriting and market making-related activity, risk-mitigating hedging, or trading in certain government obligations) are consistent with the requirement that such activity not result, directly or indirectly, in a material exposure to high-risk assets or high-risk trading strategies;
(6) Identifying the profile of particular covered trading activities of the banking entity, and the individual trading desks of the banking entity, to help establish the appropriate frequency and scope of examination by Board of such activities; and
(7) Assessing and addressing the risks associated with the banking entity’s covered trading activities.
c. Information that must be furnished pursuant to this appendix is not intended to serve as a dispositive tool for the identification of permissible or impermissible activities.
d. In addition to the quantitative measurements required in this appendix, a banking entity may need to develop and implement other quantitative measurements in order to effectively monitor its covered trading activities for compliance with section 13 of the BHC Act and this part and to have an effective compliance program, as required by § 248.20. The effectiveness of particular quantitative measurements may differ based on the profile of the banking entity’s businesses in general and, more specifically, of the particular trading desk, including types of instruments traded, trading activities and strategies, and history and experience (e.g., whether the trading desk is an established, successful market maker or a new entrant to a competitive market). In all cases, banking entities must ensure that they have robust measures in place to identify and monitor the risks taken in their trading activities, to ensure that the activities are within risk tolerances established by the banking entity, and to monitor and examine for compliance with the proprietary trading restrictions in this part.
e. On an ongoing basis, banking entities must carefully monitor, review, and evaluate all furnished quantitative measurements, as well as any others that they choose to utilize in order to maintain compliance with section 13 of the BHC Act and this part. All measurement results that indicate a heightened risk of impermissible proprietary trading, including with respect to otherwise-permitted activities under § 248.4 through 248.6(a)-(b), or that result in a material exposure to high-risk assets or high-risk trading strategies, must be escalated within the banking entity for review, further analysis, explanation to Board, and remediation, where appropriate. The quantitative measurements discussed in this appendix should be helpful to banking entities in identifying and managing the risks related to their covered trading activities.
The terms used in this appendix have the same meanings as set forth in § 248.2 and § 248.3. In addition, for purposes of this appendix, the following definitions apply:
Applicability identifies the trading desks for which a banking entity is required to calculate and report a particular quantitative measurement based on the type of covered trading activity conducted by the trading desk.
Calculation period means the period of time for which a particular quantitative measurement must be calculated.
Comprehensive profit and loss means the net profit or loss of a trading desk’s material sources of trading revenue over a specific period of time, including, for example, any increase or decrease in the market value of a trading desk’s holdings, dividend income, and interest income and expense.
Covered trading activity means trading conducted by a trading desk under § 248.4, § 248.5, § 248.6(a), or § 248.6(b). A banking entity may include in its covered trading activity trading conducted under § 248.3(d), § 248.6(c), § 248.6(d) or § 248.6(e).
Measurement frequency means the frequency with which a particular quantitative metric must be calculated and recorded.
Trading day means a calendar day on which a trading desk is open for trading.
1. Quantitative measurements. Each banking entity made subject to this appendix by § 248.20 must furnish the following quantitative measurements, as applicable, for each trading desk of the banking entity engaged in covered trading activities and calculate these quantitative measurements in accordance with this appendix:
i. Internal Limits and Usage;
ii. Value-at-Risk;
iii. Comprehensive Profit and Loss Attribution;
iv. Positions; and
v. Transaction Volumes.
2. Trading desk information. Each banking entity made subject to this appendix by § 248.20 must provide certain descriptive information, as further described in this appendix, regarding each trading desk engaged in covered trading activities.
3. Quantitative measurements identifying information. Each banking entity made subject to this appendix by § 248.20 must provide certain identifying and descriptive information, as further described in this appendix, regarding its quantitative measurements.
4. Narrative statement. Each banking entity made subject to this appendix by § 248.20 may provide an optional narrative statement, as further described in this appendix.
5. File identifying information. Each banking entity made subject to this appendix by § 248.20 must provide file identifying information in each submission to the Board pursuant to this appendix, including the name of the banking entity, the RSSD ID assigned to the top-tier banking entity by the Board, and identification of the reporting period and creation date and time.
1. Each banking entity must provide descriptive information regarding each trading desk engaged in covered trading activities, including:
i. Name of the trading desk used internally by the banking entity and a unique identification label for the trading desk;
ii. Identification of each type of covered trading activity in which the trading desk is engaged;
iii. Brief description of the general strategy of the trading desk;
v. A list identifying each Agency receiving the submission of the trading desk;
2. Indication of whether each calendar date is a trading day or not a trading day for the trading desk; and
3. Currency reported and daily currency conversion rate.
Each banking entity must provide the following information regarding the quantitative measurements:
1. An Internal Limits Information Schedule that provides identifying and descriptive information for each limit reported pursuant to the Internal Limits and Usage quantitative measurement, including the name of the limit, a unique identification label for the limit, a description of the limit, the unit of measurement for the limit, the type of limit, and identification of the corresponding risk factor attribution in the particular case that the limit type is a limit on a risk factor sensitivity and profit and loss attribution to the same risk factor is reported; and
2. A Risk Factor Attribution Information Schedule that provides identifying and descriptive information for each risk factor attribution reported pursuant to the Comprehensive Profit and Loss Attribution quantitative measurement, including the name of the risk factor or other factor, a unique identification label for the risk factor or other factor, a description of the risk factor or other factor, and the risk factor or other factor’s change unit.
Each banking entity made subject to this appendix by § 248.20 may submit in a separate electronic document a Narrative Statement to the Board with any information the banking entity views as relevant for assessing the information reported. The Narrative Statement may include further description of or changes to calculation methods, identification of material events, description of and reasons for changes in the banking entity’s trading desk structure or trading desk strategies, and when any such changes occurred.
A banking entity must calculate any applicable quantitative measurement for each trading day. A banking entity must report the Trading Desk Information, the Quantitative Measurements Identifying Information, and each applicable quantitative measurement electronically to the Board on the reporting schedule established in § 248.20 unless otherwise requested by the Board. A banking entity must report the Trading Desk Information, the Quantitative Measurements Identifying Information, and each applicable quantitative measurement to the Board in accordance with the XML Schema specified and published on the Board’s website.
A banking entity must, for any quantitative measurement furnished to the Board pursuant to this appendix and § 248.20(d), create and maintain records documenting the preparation and content of these reports, as well as such information as is necessary to permit the Board to verify the accuracy of such reports, for a period of five years from the end of the calendar year for which the measurement was taken. A banking entity must retain the Narrative Statement, the Trading Desk Information, and the Quantitative Measurements Identifying Information for a period of five years from the end of the calendar year for which the information was reported to the Board.
i. Description: For purposes of this appendix, Internal Limits are the constraints that define the amount of risk and the positions that a trading desk is permitted to take at a point in time, as defined by the banking entity for a specific trading desk. Usage represents the value of the trading desk’s risk or positions that are accounted for by the current activity of the desk. Internal limits and their usage are key compliance and risk management tools used to control and monitor risk taking and include, but are not limited to, the limits set out in §§ 248.4 and 248.5. A trading desk’s risk limits, commonly including a limit on “Value-at-Risk,” are useful in the broader context of the trading desk’s overall activities, particularly for the market making activities under § 248.4(b) and hedging activity under § 248.5. Accordingly, the limits required under §§ 248.4(b)(2)(iii)(C) and 248.5(b)(1)(i)(A) must meet the applicable requirements under §§ 248.4(b)(2)(iii)(C) and 248.5(b)(1)(i)(A) and also must include appropriate metrics for the trading desk limits including, at a minimum, “Value-at-Risk” except to the extent the “Value-at-Risk” metric is demonstrably ineffective for measuring and monitoring the risks of a trading desk based on the types of positions traded by, and risk exposures of, that desk.
A. A banking entity must provide the following information for each limit reported pursuant to this quantitative measurement: The unique identification label for the limit reported in the Internal Limits Information Schedule, the limit size (distinguishing between an upper and a lower limit), and the value of usage of the limit.
ii. Calculation Period: One trading day.
iii. Measurement Frequency: Daily.
iv. Applicability: All trading desks engaged in covered trading activities.
i. Description: For purposes of this appendix, Value-at-Risk (“VaR”) is the measurement of the risk of future financial loss in the value of a trading desk’s aggregated positions at the ninety-nine percent confidence level over a one-day period, based on current market conditions.
ii. Calculation Period: One trading day.
iii. Measurement Frequency: Daily.
iv. Applicability: All trading desks engaged in covered trading activities.
i. Description: For purposes of this appendix, Comprehensive Profit and Loss Attribution is an analysis that attributes the daily fluctuation in the value of a trading desk’s positions to various sources. First, the daily profit and loss of the aggregated positions is divided into two categories: (i) Profit and loss attributable to a trading desk’s existing positions that were also positions held by the trading desk as of the end of the prior day (“existing positions”); and (ii) profit and loss attributable to new positions resulting from the current day’s trading activity (“new positions”).
A. The comprehensive profit and loss associated with existing positions must reflect changes in the value of these positions on the applicable day. The comprehensive profit and loss from existing positions must be further attributed, as applicable, to (i) changes in the specific risk factors and other factors that are monitored and managed as part of the trading desk’s overall risk management policies and procedures; and (ii) any other applicable elements, such as cash flows, carry, changes in reserves, and the correction, cancellation, or exercise of a trade.
B. For the attribution of comprehensive profit and loss from existing positions to specific risk factors and other factors, a banking entity must provide the following information for the factors that explain the preponderance of the profit or loss changes due to risk factor changes: The unique identification label for the risk factor or other factor listed in the Risk Factor Attribution Information Schedule, and the profit or loss due to the risk factor or other factor change.
C. The comprehensive profit and loss attributed to new positions must reflect commissions and fee income or expense and market gains or losses associated with transactions executed on the applicable day. New positions include purchases and sales of financial instruments and other assets/liabilities and negotiated amendments to existing positions. The comprehensive profit and loss from new positions may be reported in the aggregate and does not need to be further attributed to specific sources.
D. The portion of comprehensive profit and loss from existing positions that is not attributed to changes in specific risk factors and other factors must be allocated to a residual category. Significant unexplained profit and loss must be escalated for further investigation and analysis.
ii. Calculation Period: One trading day.
iii. Measurement Frequency: Daily.
iv. Applicability: All trading desks engaged in covered trading activities.
c. Positions and Transaction Volumes Measurements
i. Description: For purposes of this appendix, Positions is the value of securities and derivatives positions managed by the trading desk. For purposes of the Positions quantitative measurement, do not include in the Positions calculation for “securities” those securities that are also “derivatives,” as those terms are defined under subpart A; instead, report those securities that are also derivatives as “derivatives.”
ii. Calculation Period: One trading day.
iii. Measurement Frequency: Daily.
iv. Applicability: All trading desks that rely on § 248.4(a) or § 248.4(b) to conduct underwriting activity or market-making-related activity, respectively.
i. Description: For purposes of this appendix, Transaction Volumes measures three exclusive categories of covered trading activity conducted by a trading desk. A banking entity is required to report the value and number of security and derivative transactions conducted by the trading desk with: (i) Customers, excluding internal transactions; (ii) non-customers, excluding internal transactions; and (iii) trading desks and other organizational units where the transaction is booked into either the same banking entity or an affiliated banking entity. For securities, value means gross market value. For derivatives, value means gross notional value. For purposes of calculating the Transaction Volumes quantitative measurement, do not include in the Transaction Volumes calculation for “securities” those securities that are also “derivatives,” as those terms are defined under subpart A; instead, report those securities that are also derivatives as “derivatives.”
ii. Calculation Period: One trading day.
iii. Measurement Frequency: Daily.
iv. Applicability: All trading desks that rely on § 248.4(a) or § 248.4(b) to conduct underwriting activity or market-making-related activity, respectively.
PART 249 – LIQUIDITY RISK MEASUREMENT, STANDARDS, AND MONITORING (REGULATION WW)
Subpart A – General Provisions
§ 249.1 Purpose and applicability.
(a) Purpose. This part establishes a minimum liquidity standard and a minimum stable funding standard for certain Board-regulated institutions on a consolidated basis, as set forth herein.
(b) Applicability. (1) A Board-regulated institution is subject to the minimum liquidity standard and a minimum stable funding standard, and other requirements of this part if:
(i) It is a:
(A) Global systemically important BHC;
(B) GSIB depository institution;
(C) Category II Board-regulated institution;
(D) Category III Board-regulated institution; or
(E) Category IV Board-regulated institution with $50 billion or more in average weighted short-term wholesale funding;
(ii) It is a covered nonbank company; or
(iii) The Board has determined that application of this part is appropriate in light of the Board-regulated institution’s asset size, level of complexity, risk profile, scope of operations, affiliation with foreign or domestic covered entities, or risk to the financial system.
(2) This part does not apply to:
(i) A bridge financial company as defined in 12 U.S.C. 5381(a)(3), or a subsidiary of a bridge financial company; or
(ii) A new depository institution or a bridge depository institution, as defined in 12 U.S.C. 1813(i).
(3) In making a determination under paragraph (b)(1)(iii) of this section, the Board will apply, as appropriate, notice and response procedures in the same manner and to the same extent as the notice and response procedures set forth in 12 CFR 263.202.
(c) Covered nonbank companies. The Board will establish a minimum liquidity standard and minimum stable funding standard and other requirements for a designated company under this part by rule or order. In establishing such standards, the Board will consider the factors set forth in sections 165(a)(2) and (b)(3) of the Dodd-Frank Act and may tailor the application of the requirements of this part to the designated company based on the nature, scope, size, scale, concentration, interconnectedness, mix of the activities of the designated company, or any other risk-related factor that the Board determines is appropriate.
(a) The Board may require a Board-regulated institution to hold an amount of high-quality liquid assets (HQLA) greater than otherwise required under this part, or to take any other measure to improve the Board-regulated institution’s liquidity risk profile, if the Board determines that the Board-regulated institution’s liquidity requirements as calculated under this part are not commensurate with the Board-regulated institution’s liquidity risks. In making determinations under this section, the Board will apply notice and response procedures as set forth in 12 CFR 263.202.
(b) The Board may require a Board-regulated institution to maintain an amount of available stable funding greater than otherwise required under this part, or to take any other measure to improve the Board-regulated institution’s stable funding, if the Board determines that the Board-regulated institution’s stable funding requirements as calculated under this part are not commensurate with the Board-regulated institution’s funding risks. In making determinations under this section, the Board will apply notice and response procedures as set forth in 12 CFR 263.202.
(c) Nothing in this part limits the authority of the Board under any other provision of law or regulation to take supervisory or enforcement action, including action to address unsafe or unsound practices or conditions, deficient liquidity levels, deficient stable funding levels, or violations of law.
§ 249.3 Definitions.
For the purposes of this part:
Affiliated depository institution means with respect to a Board-regulated institution that is a depository institution, another depository institution that is a consolidated subsidiary of a bank holding company or savings and loan holding company of which the Board-regulated institution is also a consolidated subsidiary.
Asset exchange means a transaction in which, as of the calculation date, the counterparties have previously exchanged non-cash assets, and have each agreed to return such assets to each other at a future date. Asset exchanges do not include secured funding and secured lending transactions.
Average weighted short-term wholesale funding means the average of the weighted short-term wholesale funding for each of the four most recent calendar quarters as reported quarterly on the FR Y-15 or, if the Board-regulated institution has not filed the FR Y-15 for each of the four most recent calendar quarters, for the most recent quarter or averaged over the most recent quarters, as applicable.
Bank holding company is defined in section 2 of the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1841 et seq.).
Board means the Board of Governors of the Federal Reserve System.
Board-regulated institution means a state member bank, covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company.
Brokered deposit means any deposit held at the Board-regulated institution that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker as that term is defined in section 29 of the Federal Deposit Insurance Act (12 U.S.C. 1831f(g)) and the Federal Deposit Insurance Corporation’s regulations.
Brokered reciprocal deposit means a brokered deposit that a Board-regulated institution receives through a deposit placement network on a reciprocal basis, such that:
(1) For any deposit received, the Board-regulated institution (as agent for the depositors) places the same amount with other depository institutions through the network; and
(2) Each member of the network sets the interest rate to be paid on the entire amount of funds it places with other network members.
Calculation date means, for subparts B through J of this part, any date on which a Board-regulated institution calculates its liquidity coverage ratio under § 249.10, and for subparts K through N of this part, any date on which a Board-regulated institution calculates its net stable funding ratio under § 249.100.
Call Report means the Consolidated Reports of Condition and Income.
Carrying value means, with respect to an asset, NSFR regulatory capital element, or NSFR liability, the value on the balance sheet of the Board-regulated institution, each as determined in accordance with GAAP.
Category II Board-regulated institution means:
(1) A covered depository institution holding company that is identified as a Category II banking organization pursuant to 12 CFR 252.5 or 12 CFR 238.10;
(2) A U.S. intermediate holding company that is identified as a Category II banking organization pursuant to 12 CFR 252.5;
(3)(i) A state member bank that:
(A) Is a consolidated subsidiary of:
(1) A company described in paragraph (1) or (2) of this definition; or
(2) A depository institution that meets the criteria in paragraph (4)(ii)(A) or (B) of this definition; and
(B) That has total consolidated assets, calculated based on the average of the state member bank’s total consolidated assets for the four most recent calendar quarters as reported on the Call Report, equal to $10 billion or more.
(ii) If the state member bank has not filed the Call Report for each of the four most recent calendar quarters, total consolidated assets is calculated based on its total consolidated assets, as reported on the Call Report, for the most recent quarter or the average of the most recent quarters, as applicable. After meeting the criteria under this paragraph (3), a state member bank continues to be a Category II Board-regulated institution until the state member bank has less than $10 billion in total consolidated assets, as reported on the Call Report, for each of the four most recent calendar quarters, or the state member bank is no longer a consolidated subsidiary of a company described in paragraph (3)(i)(A)(1) or (2) of this definition; or
(4) A state member bank that:
(i) Is not a subsidiary of a depository institution holding company; and
(ii)(A) Has total consolidated assets, calculated based on the average of the depository institution’s total consolidated assets for the four most recent calendar quarters as reported on the Call Report, equal to $700 billion or more. If the depository institution has not filed the Call Report for each of the four most recent calendar quarters, total consolidated assets is calculated based on its total consolidated assets, as reported on the Call Report, for the most recent quarter or the average of the most recent quarters, as applicable; or
(B) Has:
(1) Total consolidated assets, calculated based on the average of the depository institution’s total consolidated assets for the four most recent calendar quarters as reported on the Call Report, of $100 billion or more but less than $700 billion. If the depository institution has not filed the Call Report for each of the four most recent calendar quarters, total consolidated assets means its total consolidated assets, as reported on the Call Report, for the most recent quarter or the average of the most recent quarters, as applicable; and
(2) Cross-jurisdictional activity, calculated based on the average of its cross-jurisdictional activity for the four most recent calendar quarters, of $75 billion or more. Cross-jurisdictional activity is the sum of cross-jurisdictional claims and cross-jurisdictional liabilities, calculated in accordance with the instructions to the FR Y-15 or equivalent reporting form.
(iii) After meeting the criteria in paragraphs (4)(i) and (ii) of this definition, a state member bank continues to be a Category II Board-regulated institution until the state member bank:
(A)(1) Has less than $700 billion in total consolidated assets, as reported on the Call Report, for each of the four most recent calendar quarters; and
(2) Has less than $75 billion in cross-jurisdictional activity for each of the four most recent calendar quarters. Cross-jurisdictional activity is the sum of cross-jurisdictional claims and cross-jurisdictional liabilities, calculated in accordance with the instructions to the FR Y-15 or equivalent reporting form;
(B) Has less than $100 billion in total consolidated assets, as reported on the Call Report, for each of the four most recent calendar quarters; or
(C) Is a GSIB depository institution.
Category III Board-regulated institution means:
(1) A covered depository institution holding company that is identified as a Category III banking organization pursuant to 12 CFR 252.5 or 12 CFR 238.10, as applicable;
(2) A U.S. intermediate holding company that is identified as a Category III banking organization pursuant to 12 CFR 252.5;
(3)(i) A state member bank that is:
(A) A consolidated subsidiary of:
(1) A company described in paragraph (1) or (2) of this definition; or
(2) A depository institution that meets the criteria in paragraph (4)(ii)(A) or (B) of this definition; and
(B) Has total consolidated assets, calculated based on the average of the state member bank’s total consolidated assets for the four most recent calendar quarters as reported on the Call Report, equal to $10 billion or more.
(ii) If the state member bank has not filed the Call Report for each of the four most recent calendar quarters, total consolidated assets means its total consolidated assets, as reported on the Call Report, for the most recent quarter or the average of the most recent quarters, as applicable. After meeting the criteria under this paragraph (3), a state member bank continues to be a Category III Board-regulated institution until the state member bank has less than $10 billion in total consolidated assets, as reported on the Call Report, for each of the four most recent calendar quarters, or the state member bank is no longer a consolidated subsidiary of a company described in paragraph (3)(i)(A)(1) or (2) of this definition; or
(4) A state member bank that:
(i) Is not a depository institution holding company; and
(ii)(A) Has total consolidated assets, calculated based on the average of the depository institution’s total consolidated assets in the four most recent quarters as reported on the most recent Call Report, equal to $250 billion or more. If the depository institution has not filed the Call Report for each of the four most recent calendar quarters, total consolidated assets means its total consolidated assets, as reported on the Call Report, for the most recent quarter or the average of the most recent quarters, as applicable; or
(B) Has:
(1) Total consolidated assets, calculated based on the average of the depository institution’s total consolidated assets in the four most recent calendar quarters as reported on the most recent Call Report, of $100 billion or more but less than $250 billion. If the depository institution has not filed the Call Report for each of the four most recent calendar quarters, total consolidated assets means its total consolidated assets, as reported on the Call Report, for the most recent quarter or the average of the most recent quarters, as applicable; and
(2) At least one of the following in paragraphs (4)(ii)(B)(2)(i) through (iii) of this definition, each measured as the average of the four most recent calendar quarters, or if the depository institution has not filed the FR Y-9LP or equivalent reporting form, Call Report, or FR Y-15 or equivalent reporting form, as applicable, for each of the four most recent calendar quarters, for the most recent quarter or the average of the most recent quarters, as applicable:
(i) Total nonbank assets, calculated in accordance with instructions to the FR Y-9LP or equivalent reporting form, equal to $75 billion or more;
(ii) Off-balance sheet exposure, calculated in accordance with the instructions to the FR Y-15 or equivalent reporting form, minus the total consolidated assets of the depository institution, as reported on the Call Report, equal to $75 billion or more; or
(iii) Weighted short-term wholesale funding, calculated in accordance with the instructions to the FR Y-15 or equivalent reporting form, equal to $75 billion or more.
(iii) After meeting the criteria in paragraphs (4)(i) and (ii) of this definition, a state member bank continues to be a Category III Board-regulated institution until the state member bank:
(A)(1) Has less than $250 billion in total consolidated assets, as reported on the Call Report, for each of the four most recent calendar quarters;
(2) Has less than $75 billion in total nonbank assets, calculated in accordance with the instructions to the FR Y-9LP or equivalent reporting form, for each of the four most recent calendar quarters;
(3) Has less than $75 billion in off-balance sheet exposure for each of the four most recent calendar quarters. Off-balance sheet exposure is a state member bank’s total exposure, calculated in accordance with the instructions to the FR Y-15 or equivalent reporting form, minus the total consolidated assets of the state member bank, as reported on the Call Report; and
(4) Has less than $75 billion in weighted short-term wholesale funding, calculated in accordance with the instructions to the FR Y-15 or equivalent reporting form, for each of the four most recent calendar quarters;
(B) Has less than $100 billion in total consolidated assets, as reported on the Call Report, for each of the four most recent calendar quarters;
(C) Is a Category II Board-regulated institution; or
(D) Is a GSIB depository institution.
Category IV Board-regulated institution means:
(1) A covered depository institution holding company that is identified as a Category IV banking organization pursuant to 12 CFR 252.5 or 12 CFR 238.10, as applicable; or
(2) A U.S. intermediate holding company that is identified as a Category IV banking organization pursuant to 12 CFR 252.5.
Client pool security means a security that is owned by a customer of the Board-regulated institution that is not an asset of the Board-regulated institution, regardless of a Board-regulated institution’s hypothecation rights with respect to the security.
Collateralized deposit means:
(1) A deposit of a public sector entity held at the Board-regulated institution that is required to be secured under applicable law by a lien on assets owned by the Board-regulated institution and that gives the depositor, as holder of the lien, priority over the assets in the event the Board-regulated institution enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding;
(2) A deposit of a fiduciary account awaiting investment or distribution held at the Board-regulated institution for which the Board-regulated institution is a fiduciary and is required under 12 CFR 9.10(b) (national banks), 12 CFR 150.300 through 150.320 (Federal savings associations), or applicable state law (state member and nonmember banks, and state savings associations) to set aside assets owned by the Board-regulated institution as security, which gives the depositor priority over the assets in the event the Board-regulated institution enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding; or
(3) A deposit of a fiduciary account awaiting investment or distribution held at the Board-regulated institution for which the Board-regulated institution’s affiliated insured depository institution is a fiduciary and where the Board-regulated institution under 12 CFR 9.10(c) (national banks), 12 CFR 150.310 (Federal savings associations), or applicable state law (state member and nonmember banks, state savings associations) has set aside assets owned by the Board-regulated institution as security, which gives the depositor priority over the assets in the event the Board-regulated institution enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding.
Committed means, with respect to a credit or liquidity facility, that under the terms of the facility, it is not unconditionally cancelable.
Company means a corporation, partnership, limited liability company, depository institution, business trust, special purpose entity, association, or similar organization.
Consolidated subsidiary means a company that is consolidated on the balance sheet of a Board-regulated institution or other company under GAAP.
Controlled subsidiary means, with respect to a company or a Board-regulated institution, a consolidated subsidiary or a company that otherwise meets the definition of “subsidiary” in section 2(d) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(d)).
Covered depository institution holding company means a top-tier bank holding company or savings and loan holding company domiciled in the United States other than:
(1) A top-tier savings and loan holding company that is:
(i) A grandfathered unitary savings and loan holding company as defined in section 10(c)(9)(A) of the Home Owners’ Loan Act (12 U.S.C. 1461 et seq.); and
(ii) As of June 30 of the previous calendar year, derived 50 percent or more of its total consolidated assets or 50 percent of its total revenues on an enterprise-wide basis (as calculated under GAAP) from activities that are not financial in nature under section 4(k) of the Bank Holding Company Act (12 U.S.C. 1843(k));
(2) A top-tier depository institution holding company that is an insurance underwriting company;
(3)(i) A top-tier depository institution holding company that, as of June 30 of the previous calendar year, held 25 percent or more of its total consolidated assets in subsidiaries that are insurance underwriting companies (other than assets associated with insurance for credit risk); and
(ii) For purposes of paragraph (3)(i) of this definition, the company must calculate its total consolidated assets in accordance with GAAP, or if the company does not calculate its total consolidated assets under GAAP for any regulatory purpose (including compliance with applicable securities laws), the company may estimate its total consolidated assets, subject to review and adjustment by the Board of Governors of the Federal Reserve System; or
(4) A U.S. intermediate holding company.
Covered Federal Reserve Facility Funding means a non-recourse loan that is extended as part of the Money Market Mutual Fund Liquidity Facility or Paycheck Protection Program Liquidity Facility authorized by the Board pursuant to section 13(3) of the Federal Reserve Act.
Covered nonbank company means a designated company that the Board of Governors of the Federal Reserve System has required by separate rule or order to comply with the requirements of 12 CFR part 249.
Credit facility means a legally binding agreement to extend funds if requested at a future date, including a general working capital facility such as a revolving credit facility for general corporate or working capital purposes. A credit facility does not include a legally binding written agreement to extend funds at a future date to a counterparty that is made for the purpose of refinancing the debt of the counterparty when it is unable to obtain a primary or anticipated source of funding. See liquidity facility.
Customer short position means a legally binding written agreement pursuant to which the customer must deliver to the Board-regulated institution a non-cash asset that the customer has already sold.
Deposit means “deposit” as defined in section 3(l) of the Federal Deposit Insurance Act (12 U.S.C. 1813(l)) or an equivalent liability of the Board-regulated institution in a jurisdiction outside of the United States.
Depository institution is defined in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
Depository institution holding company means a bank holding company or savings and loan holding company.
Deposit insurance means deposit insurance provided by the Federal Deposit Insurance Corporation under the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.).
Derivative transaction means a financial contract whose value is derived from the values of one or more underlying assets, reference rates, or indices of asset values or reference rates. Derivative contracts include interest rate derivative contracts, exchange rate derivative contracts, equity derivative contracts, commodity derivative contracts, credit derivative contracts, forward contracts, and any other instrument that poses similar counterparty credit risks. Derivative contracts also include unsettled securities, commodities, and foreign currency exchange transactions with a contractual settlement or delivery lag that is longer than the lesser of the market standard for the particular instrument or five business days. A derivative does not include any identified banking product, as that term is defined in section 402(b) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)), that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
Designated company means a company that the Financial Stability Oversight Council has determined under section 113 of the Dodd-Frank Act (12 U.S.C. 5323) shall be supervised by the Board of Governors of the Federal Reserve System and for which such determination is still in effect.
Dodd-Frank Act means the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).
Eligible HQLA means a high-quality liquid asset that meets the requirements set forth in § 249.22.
Encumbered means, with respect to an asset, that the asset:
(1) Is subject to legal, regulatory, contractual, or other restriction on the ability of the Board-regulated institution to monetize the asset; or
(2) Is pledged, explicitly or implicitly, to secure or to provide credit enhancement to any transaction, not including when the asset is pledged to a central bank or a U.S. government-sponsored enterprise where:
(i) Potential credit secured by the asset is not currently extended to the Board-regulated institution or its consolidated subsidiaries; and
(ii) The pledged asset is not required to support access to the payment services of a central bank.
Fair value means fair value as determined under GAAP.
Financial sector entity means an investment adviser, investment company, pension fund, non-regulated fund, regulated financial company, or identified company.
Foreign withdrawable reserves means a Board-regulated institution’s balances held by or on behalf of the Board-regulated institution at a foreign central bank that are not subject to restrictions on the Board-regulated institution’s ability to use the reserves.
FR Y-9LP means the Parent Company Only Financial Statements for Large Holding Companies.
FR Y-15 means the Systemic Risk Report.
GAAP means generally accepted accounting principles as used in the United States.
Global systemically important BHC means a bank holding company identified as a global systemically important BHC pursuant to 12 CFR 217.402.
GSIB depository institution means a depository institution that is a consolidated subsidiary of a global systemically important BHC and has total consolidated assets equal to $10 billion or more, calculated based on the average of the depository institution’s total consolidated assets for the four most recent calendar quarters as reported on the Call Report. If the depository institution has not filed the Call Report for each of the four most recent calendar quarters, total consolidated assets means its total consolidated assets, as reported on the Call Report, for the most recent calendar quarter or the average of the most recent calendar quarters, as applicable. After meeting the criteria under this definition, a depository institution continues to be a GSIB depository institution until the depository institution has less than $10 billion in total consolidated assets, as reported on the Call Report, for each of the four most recent calendar quarters, or the depository institution is no longer a consolidated subsidiary of a global systemically important BHC.
High-quality liquid asset (HQLA) means an asset that is a level 1 liquid asset, level 2A liquid asset, or level 2B liquid asset, in accordance with the criteria set forth in § 249.20.
HQLA amount means the HQLA amount as calculated under § 249.21.
Identified company means any company that the Board has determined should be treated for the purposes of this part the same as a regulated financial company, investment company, non-regulated fund, pension fund, or investment adviser, based on activities similar in scope, nature, or operations to those entities.
Individual means a natural person, and does not include a sole proprietorship.
Investment adviser means a company registered with the SEC as an investment adviser under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.) or foreign equivalents of such company.
Investment company means a person or company registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or foreign equivalents of such persons or companies.
Liquid and readily-marketable means, with respect to a security, that the security is traded in an active secondary market with:
(1) More than two committed market makers;
(2) A large number of non-market maker participants on both the buying and selling sides of transactions;
(3) Timely and observable market prices; and
(4) A high trading volume.
Liquidity facility means a legally binding written agreement to extend funds at a future date to a counterparty that is made for the purpose of refinancing the debt of the counterparty when it is unable to obtain a primary or anticipated source of funding. A liquidity facility includes an agreement to provide liquidity support to asset-backed commercial paper by lending to, or purchasing assets from, any structure, program or conduit in the event that funds are required to repay maturing asset-backed commercial paper. Liquidity facilities exclude facilities that are established solely for the purpose of general working capital, such as revolving credit facilities for general corporate or working capital purposes. If a facility has characteristics of both credit and liquidity facilities, the facility must be classified as a liquidity facility. See credit facility.
Multilateral development bank means the International Bank for Reconstruction and Development, the Multilateral Investment Guarantee Agency, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the European Investment Fund, the Nordic Investment Bank, the Caribbean Development Bank, the Islamic Development Bank, the Council of Europe Development Bank, and any other entity that provides financing for national or regional development in which the U.S. government is a shareholder or contributing member or which the Board determines poses comparable risk.
Municipal obligation means an obligation of:
(1) A state or any political subdivision thereof; or
(2) Any agency or instrumentality of a state or any political subdivision thereof.
Non-regulated fund means any hedge fund or private equity fund whose investment adviser is required to file SEC Form PF (Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors), other than a small business investment company as defined in section 102 of the Small Business Investment Act of 1958 (15 U.S.C. 661 et seq.).
Nonperforming exposure means an exposure that is past due by more than 90 days or nonaccrual.
NSFR liability means any liability or equity reported on a Board-regulated institution’s balance sheet that is not an NSFR regulatory capital element.
NSFR regulatory capital element means any capital element included in a Board-regulated institution’s common equity tier 1 capital, additional tier 1 capital, and tier 2 capital, in each case as defined in § 217.20 of Regulation Q (12 CFR part 217), prior to application of capital adjustments or deductions as set forth in § 217.22 of Regulation Q (12 CFR part 217), excluding any debt or equity instrument that does not meet the criteria for additional tier 1 or tier 2 capital instruments in § 217.22 of Regulation Q (12 CFR part 217) and is being phased out of tier 1 capital or tier 2 capital pursuant to subpart G of Regulation Q (12 CFR part 217).
Operational deposit means short-term unsecured wholesale funding that is a deposit, unsecured wholesale lending that is a deposit, or a collateralized deposit, in each case that meets the requirements of § 249.4(b) with respect to that deposit and is necessary for the provision of operational services as an independent third-party intermediary, agent, or administrator to the wholesale customer or counterparty providing the deposit.
Operational services means the following services, provided they are performed as part of cash management, clearing, or custody services:
(1) Payment remittance;
(2) Administration of payments and cash flows related to the safekeeping of investment assets, not including the purchase or sale of assets;
(3) Payroll administration and control over the disbursement of funds;
(4) Transmission, reconciliation, and confirmation of payment orders;
(5) Daylight overdraft;
(6) Determination of intra-day and final settlement positions;
(7) Settlement of securities transactions;
(8) Transfer of capital distributions and recurring contractual payments;
(9) Customer subscriptions and redemptions;
(10) Scheduled distribution of customer funds;
(11) Escrow, funds transfer, stock transfer, and agency services, including payment and settlement services, payment of fees, taxes, and other expenses; and
(12) Collection and aggregation of funds.
Pension fund means an employee benefit plan as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974 (29 U.S.C. 1001 et seq.), a “governmental plan” (as defined in 29 U.S.C. 1002(32)) that complies with the tax deferral qualification requirements provided in the Internal Revenue Code, or any similar employee benefit plan established under the laws of a foreign jurisdiction.
Public sector entity means a state, local authority, or other governmental subdivision below the U.S. sovereign entity level.
Publicly traded means, with respect to an equity security, that the equity security is traded on:
(1) Any exchange registered with the SEC as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f); or
(2) Any non-U.S.-based securities exchange that:
(i) Is registered with, or approved by, a national securities regulatory authority; and
(ii) Provides a liquid, two-way market for the security in question.
QMNA netting set means a group of derivative transactions with a single counterparty that is subject to a qualifying master netting agreement and is netted under the qualifying master netting agreement.
Qualifying master netting agreement means a written, legally enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default following any stay permitted by paragraph (2) of this definition, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty;
(2) The agreement provides the Board-regulated institution the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case:
(i) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than:
(A) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any similar insolvency law applicable to GSEs, or laws of foreign jurisdictions that are substantially similar
(B) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (2)(i)(A) of this definition; and
(ii) The agreement may limit the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty to the extent necessary for the counterparty to comply with the requirements of subpart I of the Board’s Regulation YY (part 252 of this chapter), part 47 of this title, or part 382 of this title, as applicable;
Regulated financial company means:
(1) A depository institution holding company or designated company;
(2) A company included in the organization chart of a depository institution holding company on the Form FR Y-6, as listed in the hierarchy report of the depository institution holding company produced by the National Information Center (NIC) website,
(3) A depository institution; foreign bank; credit union; industrial loan company, industrial bank, or other similar institution described in section 2 of the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1841 et seq.); national bank, state member bank, or state non-member bank that is not a depository institution;
(4) An insurance company;
(5) A securities holding company as defined in section 618 of the Dodd-Frank Act (12 U.S.C. 1850a); broker or dealer registered with the SEC under section 15 of the Securities Exchange Act (15 U.S.C. 78o); futures commission merchant as defined in section 1a of the Commodity Exchange Act of 1936 (7 U.S.C. 1a); swap dealer as defined in section 1a of the Commodity Exchange Act (7 U.S.C. 1a); or security-based swap dealer as defined in section 3 of the Securities Exchange Act (15 U.S.C. 78c);
(6) A designated financial market utility, as defined in section 803 of the Dodd-Frank Act (12 U.S.C. 5462);
(7) A U.S. intermediate holding company; and
(8) Any company not domiciled in the United States (or a political subdivision thereof) that is supervised and regulated in a manner similar to entities described in paragraphs (1) through (7) of this definition (e.g., a foreign banking organization, foreign insurance company, foreign securities broker or dealer or foreign financial market utility).
(9) A regulated financial company does not include:
(i) U.S. government-sponsored enterprises;
(ii) Small business investment companies, as defined in section 102 of the Small Business Investment Act of 1958 (15 U.S.C. 661 et seq.);
(iii) Entities designated as Community Development Financial Institutions (CDFIs) under 12 U.S.C. 4701 et seq. and 12 CFR part 1805; or
(iv) Central banks, the Bank for International Settlements, the International Monetary Fund, or multilateral development banks.
Reserve Bank balances means:
(1) Balances held in a master account of the Board-regulated institution at a Federal Reserve Bank, less any balances that are attributable to any respondent of the Board-regulated institution if the Board-regulated institution is a correspondent for a pass-through account as defined in section 204.2(l) of Regulation D (12 CFR 204.2(l));
(2) Balances held in a master account of a correspondent of the Board-regulated institution that are attributable to the Board-regulated institution if the Board-regulated institution is a respondent for a pass-through account as defined in section 204.2(l) of Regulation D;
(3) “Excess balances” of the Board-regulated institution as defined in section 204.2(z) of Regulation D (12 CFR 204.2(z)) that are maintained in an “excess balance account” as defined in section 204.2(aa) of Regulation D (12 CFR 204.2(aa)) if the Board-regulated institution is an excess balance account participant; or
(4) “Term deposits” of the Board-regulated institution as defined in section 204.2(dd) of Regulation D (12 CFR 204.2(dd)) if such term deposits are offered and maintained pursuant to terms and conditions that:
(i) Explicitly and contractually permit such term deposits to be withdrawn upon demand prior to the expiration of the term, or that
(ii) Permit such term deposits to be pledged as collateral for term or automatically-renewing overnight advances from the Federal Reserve Bank.
Retail customer or counterparty means a customer or counterparty that is:
(1) An individual;
(2) A business customer, but solely if and to the extent that:
(i) The Board-regulated institution manages its transactions with the business customer, including deposits, unsecured funding, and credit facility and liquidity facility transactions, in the same way it manages its transactions with individuals;
(ii) Transactions with the business customer have liquidity risk characteristics that are similar to comparable transactions with individuals; and
(iii) The total aggregate funding raised from the business customer is less than $1.5 million; or
(3) A living or testamentary trust that:
(i) Is solely for the benefit of natural persons;
(ii) Does not have a corporate trustee; and
(iii) Terminates within 21 years and 10 months after the death of grantors or beneficiaries of the trust living on the effective date of the trust or within 25 years, if applicable under state law.
Retail deposit means a demand or term deposit that is placed with the Board-regulated institution by a retail customer or counterparty, other than a brokered deposit.
Retail mortgage means a mortgage that is primarily secured by a first or subsequent lien on one-to-four family residential property.
Savings and loan holding company means a savings and loan holding company as defined in section 10 of the Home Owners’ Loan Act (12 U.S.C. 1467a).
SEC means the Securities and Exchange Commission.
Secured funding transaction means any funding transaction that is subject to a legally binding agreement that gives rise to a cash obligation of the Board-regulated institution to a wholesale customer or counterparty that is secured under applicable law by a lien on securities or loans provided by the Board-regulated institution, which gives the wholesale customer or counterparty, as holder of the lien, priority over the securities or loans in the event the Board-regulated institution enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding. Secured funding transactions include repurchase transactions, securities lending transactions, other secured loans, and borrowings from a Federal Reserve Bank. Secured funding transactions do not include securities.
Secured lending transaction means any lending transaction that is subject to a legally binding agreement that gives rise to a cash obligation of a wholesale customer or counterparty to the Board-regulated institution that is secured under applicable law by a lien on securities or loans provided by the wholesale customer or counterparty, which gives the Board-regulated institution, as holder of the lien, priority over the securities or loans in the event the counterparty enters into receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding. Secured lending transactions include reverse repurchase transactions and securities borrowing transactions. Secured lending transactions do not include securities.
Securities Exchange Act means the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).
Sovereign entity means a central government (including the U.S. government) or an agency, department, ministry, or central bank of a central government.
Special purpose entity means a company organized for a specific purpose, the activities of which are significantly limited to those appropriate to accomplish a specific purpose, and the structure of which is intended to isolate the credit risk of the special purpose entity.
Stable retail deposit means a retail deposit that is entirely covered by deposit insurance and:
(1) Is held by the depositor in a transactional account; or
(2) The depositor that holds the account has another established relationship with the Board-regulated institution such as another deposit account, a loan, bill payment services, or any similar service or product provided to the depositor that the Board-regulated institution demonstrates to the satisfaction of the Board would make deposit withdrawal highly unlikely during a liquidity stress event.
State means any state, commonwealth, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, or the United States Virgin Islands.
State member bank means a state bank that is a member of the Federal Reserve System.
Structured security means a security whose cash flow characteristics depend upon one or more indices or that has embedded forwards, options, or other derivatives or a security where an investor’s investment return and the issuer’s payment obligations are contingent on, or highly sensitive to, changes in the value of underlying assets, indices, interest rates, or cash flows.
Structured transaction means a secured transaction in which repayment of obligations and other exposures to the transaction is largely derived, directly or indirectly, from the cash flow generated by the pool of assets that secures the obligations and other exposures to the transaction.
Sweep deposit means a deposit held at the Board-regulated institution by a customer or counterparty through a contractual feature that automatically transfers to the Board-regulated institution from another regulated financial company at the close of each business day amounts identified under the agreement governing the account from which the amount is being transferred.
Two-way market means a market where there are independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined within one day and settled at that price within a relatively short time frame conforming to trade custom.
U.S. government-sponsored enterprise means an entity established or chartered by the Federal government to serve public purposes specified by the United States Congress, but whose debt obligations are not explicitly guaranteed by the full faith and credit of the United States government.
U.S. intermediate holding company means a top-tier company that is required to be established pursuant to 12 CFR 252.153.
Unconditionally cancelable means, with respect to a credit or liquidity facility, that a Board-regulated institution may, at any time, with or without cause, refuse to extend credit under the facility (to the extent permitted under applicable law).
Unsecured wholesale funding means a liability or general obligation of the Board-regulated institution to a wholesale customer or counterparty that is not a secured funding transaction. Unsecured wholesale funding includes wholesale deposits. Unsecured wholesale funding does not include asset exchanges.
Unsecured wholesale lending means a liability or general obligation of a wholesale customer or counterparty to the Board-regulated institution that is not a secured lending transaction or a security. Unsecured wholesale lending does not include asset exchanges.
Wholesale customer or counterparty means a customer or counterparty that is not a retail customer or counterparty.
Wholesale deposit means a demand or term deposit that is provided by a wholesale customer or counterparty.
§ 249.4 Certain operational requirements.
(a) Qualifying master netting agreements. In order to recognize an agreement as a qualifying master netting agreement as defined in § 249.3, a Board-regulated institution must:
(1) Conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that:
(i) The agreement meets the requirements of the definition of qualifying master netting agreement in § 249.3; and
(ii) In the event of a legal challenge (including one resulting from default or from receivership, bankruptcy, insolvency, liquidation, resolution, or similar proceeding) the relevant judicial and administrative authorities would find the agreement to be legal, valid, binding, and enforceable under the law of the relevant jurisdictions; and
(2) Establish and maintain written procedures to monitor possible changes in relevant law and to ensure that the agreement continues to satisfy the requirements of the definition of qualifying master netting agreement in § 249.3.
(b) Operational deposits. In order to recognize a deposit as an operational deposit as defined in § 249.3:
(1) The related operational services must be performed pursuant to a legally binding written agreement, and:
(i) The termination of the agreement must be subject to a minimum 30 calendar-day notice period; or
(ii) As a result of termination of the agreement or transfer of services to a third-party provider, the customer providing the deposit would incur significant contractual termination costs or switching costs (switching costs include significant technology, administrative, and legal service costs incurred in connection with the transfer of the operational services to a third-party provider);
(2) The deposit must be held in an account designated as an operational account;
(3) The customer must hold the deposit at the Board-regulated institution for the primary purpose of obtaining the operational services provided by the Board-regulated institution;
(4) The deposit account must not be designed to create an economic incentive for the customer to maintain excess funds therein through increased revenue, reduction in fees, or other offered economic incentives;
(5) The Board-regulated institution must demonstrate that the deposit is empirically linked to the operational services and that it has a methodology that takes into account the volatility of the average balance for identifying any excess amount, which must be excluded from the operational deposit amount;
(6) The deposit must not be provided in connection with the Board-regulated institution’s provision of prime brokerage services, which, for the purposes of this part, are a package of services offered by the Board-regulated institution whereby the Board-regulated institution, among other services, executes, clears, settles, and finances transactions entered into by the customer or a third-party entity on behalf of the customer (such as an executing broker), and where the Board-regulated institution has a right to use or rehypothecate assets provided by the customer, including in connection with the extension of margin and other similar financing of the customer, subject to applicable law, and includes operational services provided to a non-regulated fund; and
(7) The deposits must not be for arrangements in which the Board-regulated institution (as correspondent) holds deposits owned by another depository institution bank (as respondent) and the respondent temporarily places excess funds in an overnight deposit with the Board-regulated institution.
Subpart B – Liquidity Coverage Ratio
§ 249.10 Liquidity coverage ratio.
(a) Minimum liquidity coverage ratio requirement. Subject to the transition provisions in subpart F of this part, a Board-regulated institution must calculate and maintain a liquidity coverage ratio that is equal to or greater than 1.0 on each business day (or, in the case of a Category IV Board-regulated institution, on the last business day of the applicable month) in accordance with this part. A Board-regulated institution must calculate its liquidity coverage ratio as of the same time on each calculation date (the elected calculation time). The Board-regulated institution must select this time by written notice to the Board prior to December 31, 2019. The Board-regulated institution may not thereafter change its elected calculation time without prior written approval from the Board.
(b) Transition from monthly calculation to daily calculation. A Board-regulated institution that was a Category IV Board-regulated institution immediately prior to moving to a different category must begin calculating and maintaining a liquidity coverage ratio each business day beginning on the first day of the fifth quarter after becoming a Category I Board-regulated institution, Category II Board-regulated institution, or Category III Board-regulated institution.
(c) Calculation of the liquidity coverage ratio. A Board-regulated institution’s liquidity coverage ratio equals:
(1) The Board-regulated institution’s HQLA amount as of the calculation date, calculated under subpart C of this part; divided by
(2) The Board-regulated institution’s total net cash outflow amount as of the calculation date, calculated under subpart D of this part.
Subpart C – High-Quality Liquid Assets
§ 249.20 High-quality liquid asset criteria.
(a) Level 1 liquid assets. An asset is a level 1 liquid asset if it is one of the following types of assets:
(1) Reserve Bank balances;
(2) Foreign withdrawable reserves;
(3) A security that is issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, the U.S. Department of the Treasury;
(4) A security that is issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, a U.S. government agency (other than the U.S. Department of the Treasury) whose obligations are fully and explicitly guaranteed by the full faith and credit of the U.S. government, provided that the security is liquid and readily-marketable;
(5) A security that is issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, a sovereign entity, the Bank for International Settlements, the International Monetary Fund, the European Central Bank, European Community, or a multilateral development bank, that is:
(i) Assigned a zero percent risk weight under subpart D of Regulation Q (12 CFR part 217) as of the calculation date;
(ii) Liquid and readily-marketable;
(iii) Issued or guaranteed by an entity whose obligations have a proven record as a reliable source of liquidity in repurchase or sales markets during stressed market conditions; and
(iv) Not an obligation of a financial sector entity and not an obligation of a consolidated subsidiary of a financial sector entity; or
(6) A security issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, a sovereign entity that is not assigned a zero percent risk weight under subpart D of Regulation Q (12 CFR part 217), where the sovereign entity issues the security in its own currency, the security is liquid and readily-marketable, and the Board-regulated institution holds the security in order to meet its net cash outflows in the jurisdiction of the sovereign entity, as calculated under subpart D of this part.
(b) Level 2A liquid assets. An asset is a level 2A liquid asset if the asset is liquid and readily-marketable and is one of the following types of assets:
(1) A security issued by, or guaranteed as to the timely payment of principal and interest by, a U.S. government-sponsored enterprise, that is investment grade under 12 CFR part 1 as of the calculation date, provided that the claim is senior to preferred stock; or
(2) A security that is issued by, or guaranteed as to the timely payment of principal and interest by, a sovereign entity or multilateral development bank that is:
(i) Not included in level 1 liquid assets;
(ii) Assigned no higher than a 20 percent risk weight under subpart D of Regulation Q (12 CFR part 217) as of the calculation date;
(iii) Issued or guaranteed by an entity whose obligations have a proven record as a reliable source of liquidity in repurchase or sales markets during stressed market conditions, as demonstrated by:
(A) The market price of the security or equivalent securities of the issuer declining by no more than 10 percent during a 30 calendar-day period of significant stress, or
(B) The market haircut demanded by counterparties to secured lending and secured funding transactions that are collateralized by the security or equivalent securities of the issuer increasing by no more than 10 percentage points during a 30 calendar-day period of significant stress; and
(iv) Not an obligation of a financial sector entity, and not an obligation of a consolidated subsidiary of a financial sector entity.
(c) Level 2B liquid assets. An asset is a level 2B liquid asset if the asset is liquid and readily-marketable and is one of the following types of assets:
(1) A corporate debt security that is:
(i) Investment grade under 12 CFR part 1 as of the calculation date;
(ii) Issued or guaranteed by an entity whose obligations have a proven record as a reliable source of liquidity in repurchase or sales markets during stressed market conditions, as demonstrated by:
(A) The market price of the corporate debt security or equivalent securities of the issuer declining by no more than 20 percent during a 30 calendar-day period of significant stress, or
(B) The market haircut demanded by counterparties to secured lending and secured funding transactions that are collateralized by the corporate debt security or equivalent securities of the issuer increasing by no more than 20 percentage points during a 30 calendar-day period of significant stress; and
(iii) Not an obligation of a financial sector entity and not an obligation of a consolidated subsidiary of a financial sector entity;
(2) A publicly traded common equity share that is:
(i) Included in:
(A) The Russell 1000 Index; or
(B) An index that a Board-regulated institution’s supervisor in a foreign jurisdiction recognizes for purposes of including equity shares in level 2B liquid assets under applicable regulatory policy, if the share is held in that foreign jurisdiction;
(ii) Issued in:
(A) U.S. dollars; or
(B) The currency of a jurisdiction where the Board-regulated institution operates and the Board-regulated institution holds the common equity share in order to cover its net cash outflows in that jurisdiction, as calculated under subpart D of this part;
(iii) Issued by an entity whose publicly traded common equity shares have a proven record as a reliable source of liquidity in repurchase or sales markets during stressed market conditions, as demonstrated by:
(A) The market price of the security or equivalent securities of the issuer declining by no more than 40 percent during a 30 calendar-day period of significant stress, or
(B) The market haircut demanded by counterparties to securities borrowing and lending transactions that are collateralized by the publicly traded common equity shares or equivalent securities of the issuer increasing by no more than 40 percentage points, during a 30 calendar day period of significant stress;
(iv) Not issued by a financial sector entity and not issued by a consolidated subsidiary of a financial sector entity;
(v) If held by a depository institution, is not acquired in satisfaction of a debt previously contracted (DPC); and
(vi) If held by a consolidated subsidiary of a depository institution, the depository institution can include the publicly traded common equity share in its level 2B liquid assets only if the share is held to cover net cash outflows of the depository institution’s consolidated subsidiary in which the publicly traded common equity share is held, as calculated by the Board-regulated institution under subpart D of this part; or
(3) A municipal obligation that is investment grade under 12 CFR part 1 as of the calculation date.
§ 249.21 High-quality liquid asset amount.
(a) Calculation of the HQLA amount. As of the calculation date, a Board-regulated institution’s HQLA amount equals:
(1) The level 1 liquid asset amount; plus
(2) The level 2A liquid asset amount; plus
(3) The level 2B liquid asset amount; minus
(4) The greater of:
(i) The unadjusted excess HQLA amount; and
(ii) The adjusted excess HQLA amount.
(b) Calculation of liquid asset amounts – (1) Level 1 liquid asset amount. The level 1 liquid asset amount equals the fair value of all level 1 liquid assets held by the Board-regulated institution as of the calculation date that are eligible HQLA, less the amount of the reserve balance requirement under section 204.5 of Regulation D (12 CFR 204.5).
(2) Level 2A liquid asset amount. The level 2A liquid asset amount equals 85 percent of the fair value of all level 2A liquid assets held by the Board-regulated institution as of the calculation date that are eligible HQLA.
(3) Level 2B liquid asset amount. The level 2B liquid asset amount equals 50 percent of the fair value of all level 2B liquid assets held by the Board-regulated institution as of the calculation date that are eligible HQLA.
(c) Calculation of the unadjusted excess HQLA amount. As of the calculation date, the unadjusted excess HQLA amount equals:
(1) The level 2 cap excess amount; plus
(2) The level 2B cap excess amount.
(d) Calculation of the level 2 cap excess amount. As of the calculation date, the level 2 cap excess amount equals the greater of:
(1) The level 2A liquid asset amount plus the level 2B liquid asset amount minus 0.6667 times the level 1 liquid asset amount; and
(2) 0.
(e) Calculation of the level 2B cap excess amount. As of the calculation date, the level 2B excess amount equals the greater of:
(1) The level 2B liquid asset amount minus the level 2 cap excess amount minus 0.1765 times the sum of the level 1 liquid asset amount and the level 2A liquid asset amount; and
(2) 0.
(f) Calculation of adjusted liquid asset amounts – (1) Adjusted level 1 liquid asset amount. A Board-regulated institution’s adjusted level 1 liquid asset amount equals the fair value of all level 1 liquid assets that would be eligible HQLA and would be held by the Board-regulated institution upon the unwind of any secured funding transaction (other than a collateralized deposit), secured lending transaction, asset exchange, or collateralized derivatives transaction that matures within 30 calendar days of the calculation date where the Board-regulated institution will provide an asset that is eligible HQLA and the counterparty will provide an asset that will be eligible HQLA; less the amount of the reserve balance requirement under section 204.5 of Regulation D (12 CFR 204.5).
(2) Adjusted level 2A liquid asset amount. A Board-regulated institution’s adjusted level 2A liquid asset amount equals 85 percent of the fair value of all level 2A liquid assets that would be eligible HQLA and would be held by the Board-regulated institution upon the unwind of any secured funding transaction (other than a collateralized deposit), secured lending transaction, asset exchange, or collateralized derivatives transaction that matures within 30 calendar days of the calculation date where the Board-regulated institution will provide an asset that is eligible HQLA and the counterparty will provide an asset that will be eligible HQLA.
(3) Adjusted level 2B liquid asset amount. A Board-regulated institution’s adjusted level 2B liquid asset amount equals 50 percent of the fair value of all level 2B liquid assets that would be eligible HQLA and would be held by the Board-regulated institution upon the unwind of any secured funding transaction (other than a collateralized deposit), secured lending transaction, asset exchange, or collateralized derivatives transaction that matures within 30 calendar days of the calculation date where the Board-regulated institution will provide an asset that is eligible HQLA and the counterparty will provide an asset that will be eligible HQLA.
(g) Calculation of the adjusted excess HQLA amount. As of the calculation date, the adjusted excess HQLA amount equals:
(1) The adjusted level 2 cap excess amount; plus
(2) The adjusted level 2B cap excess amount.
(h) Calculation of the adjusted level 2 cap excess amount. As of the calculation date, the adjusted level 2 cap excess amount equals the greater of:
(1) The adjusted level 2A liquid asset amount plus the adjusted level 2B liquid asset amount minus 0.6667 times the adjusted level 1 liquid asset amount; and
(2) 0.
(i) Calculation of the adjusted level 2B excess amount. As of the calculation date, the adjusted level 2B excess liquid asset amount equals the greater of:
(1) The adjusted level 2B liquid asset amount minus the adjusted level 2 cap excess amount minus 0.1765 times the sum of the adjusted level 1 liquid asset amount and the adjusted level 2A liquid asset amount; and
(2) 0.
§ 249.22 Requirements for eligible high-quality liquid assets.
(a) Operational requirements for eligible HQLA. With respect to each asset that is eligible for inclusion in a Board-regulated institution’s HQLA amount, a Board-regulated institution must meet all of the following operational requirements:
(1) The Board-regulated institution must demonstrate the operational capability to monetize the HQLA by:
(i) Implementing and maintaining appropriate procedures and systems to monetize any HQLA at any time in accordance with relevant standard settlement periods and procedures; and
(ii) Periodically monetizing a sample of HQLA that reasonably reflects the composition of the Board-regulated institution’s eligible HQLA, including with respect to asset type, maturity, and counterparty characteristics;
(2) The Board-regulated institution must implement policies that require eligible HQLA to be under the control of the management function in the Board-regulated institution that is charged with managing liquidity risk, and this management function must evidence its control over the HQLA by either:
(i) Segregating the HQLA from other assets, with the sole intent to use the HQLA as a source of liquidity; or
(ii) Demonstrating the ability to monetize the assets and making the proceeds available to the liquidity management function without conflicting with a business or risk management strategy of the Board-regulated institution;
(3) The fair value of the eligible HQLA must be reduced by the outflow amount that would result from the termination of any specific transaction hedging eligible HQLA;
(4) The Board-regulated institution must implement and maintain policies and procedures that determine the composition of its eligible HQLA on each calculation date, by:
(i) Identifying its eligible HQLA by legal entity, geographical location, currency, account, or other relevant identifying factors as of the calculation date;
(ii) Determining that eligible HQLA meet the criteria set forth in this section; and
(iii) Ensuring the appropriate diversification of the eligible HQLA by asset type, counterparty, issuer, currency, borrowing capacity, or other factors associated with the liquidity risk of the assets; and
(5) The Board-regulated institution must have a documented methodology that results in a consistent treatment for determining that the Board-regulated institution’s eligible HQLA meet the requirements set forth in this section.
(b) Generally applicable criteria for eligible HQLA. A Board-regulated institution’s eligible HQLA must meet all of the following criteria:
(1) The assets are not encumbered.
(2) The asset is not:
(i) A client pool security held in a segregated account; or
(ii) An asset received from a secured funding transaction involving client pool securities that were held in a segregated account;
(3) For eligible HQLA held in a legal entity that is a U.S. consolidated subsidiary of a Board-regulated institution:
(i) If the U.S. consolidated subsidiary is subject to a minimum liquidity standard under this part, 12 CFR part 50, or 12 CFR part 329, the Board-regulated institution may include the eligible HQLA of the U.S. consolidated subsidiary in its HQLA amount up to:
(A) The amount of net cash outflows of the U.S. consolidated subsidiary calculated by the U.S. consolidated subsidiary for its own minimum liquidity standard under this part, 12 CFR part 50, or 12 CFR part 329; plus
(B) Any additional amount of assets, including proceeds from the monetization of assets, that would be available for transfer to the top-tier Board-regulated institution during times of stress without statutory, regulatory, contractual, or supervisory restrictions, including sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 12 U.S.C. 371c-1) and Regulation W (12 CFR part 223);
(ii) If the U.S. consolidated subsidiary is not subject to a minimum liquidity standard under this part, or 12 CFR part 50, or 12 CFR part 329, the Board-regulated institution may include the eligible HQLA of the U.S. consolidated subsidiary in its HQLA amount up to:
(A) The amount of the net cash outflows of the U.S. consolidated subsidiary as of the 30th calendar day after the calculation date, as calculated by the Board-regulated institution for the Board-regulated institution’s minimum liquidity standard under this part; plus
(B) Any additional amount of assets, including proceeds from the monetization of assets, that would be available for transfer to the top-tier Board-regulated institution during times of stress without statutory, regulatory, contractual, or supervisory restrictions, including sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 12 U.S.C. 371c-1) and Regulation W (12 CFR part 223); and
(4) For HQLA held by a consolidated subsidiary of the Board-regulated institution that is organized under the laws of a foreign jurisdiction, the Board-regulated institution may include the eligible HQLA of the consolidated subsidiary organized under the laws of a foreign jurisdiction in its HQLA amount up to:
(i) The amount of net cash outflows of the consolidated subsidiary as of the 30th calendar day after the calculation date, as calculated by the Board-regulated institution for the Board-regulated institution’s minimum liquidity standard under this part; plus
(ii) Any additional amount of assets that are available for transfer to the top-tier Board-regulated institution during times of stress without statutory, regulatory, contractual, or supervisory restrictions;
(5) The Board-regulated institution must not include as eligible HQLA any assets, or HQLA resulting from transactions involving an asset that the Board-regulated institution received with rehypothecation rights, if the counterparty that provided the asset or the beneficial owner of the asset has a contractual right to withdraw the assets without an obligation to pay more than de minimis remuneration at any time during the 30 calendar days following the calculation date; and
(6) The Board-regulated institution has not designated the assets to cover operational costs.
(c) Maintenance of U.S. eligible HQLA. A Board-regulated institution is generally expected to maintain as eligible HQLA an amount and type of eligible HQLA in the United States that is sufficient to meet its total net cash outflow amount in the United States under subpart D of this part.
Subpart D – Total Net Cash Outflow
§ 249.30 Total net cash outflow amount.
(a) Calculation of total net cash outflow amount. As of the calculation date, a Board-regulated institution’s total net cash outflow amount equals the Board-regulated institution’s outflow adjustment percentage as determined under paragraph (c) of this section multiplied by:
(1) The sum of the outflow amounts calculated under § 249.32(a) through (l); minus
(2) The lesser of:
(i) The sum of the inflow amounts calculated under § 249.33(b) through (g); and
(ii) 75 percent of the amount calculated under paragraph (a)(1) of this section; plus
(3) The maturity mismatch add-on as calculated under paragraph (b) of this section.
(b) Calculation of maturity mismatch add-on. (1) For purposes of this section:
(i) The net cumulative maturity outflow amount for any of the 30 calendar days following the calculation date is equal to the sum of the outflow amounts for instruments or transactions identified in § 249.32(g), (h)(1), (h)(2), (h)(5), (j), (k), and (l) that have a maturity date prior to or on that calendar day minus the sum of the inflow amounts for instruments or transactions identified in § 249.33(c), (d), (e), and (f) that have a maturity date prior to or on that calendar day.
(ii) The net day 30 cumulative maturity outflow amount is equal to, as of the 30th day following the calculation date, the sum of the outflow amounts for instruments or transactions identified in § 249.32(g), (h)(1), (h)(2), (h)(5), (j), (k), and (l) that have a maturity date 30 calendar days or less from the calculation date minus the sum of the inflow amounts for instruments or transactions identified in § 249.33(c), (d), (e), and (f) that have a maturity date 30 calendar days or less from the calculation date.
(2) As of the calculation date, a Board-regulated institution’s maturity mismatch add-on is equal to:
(i) The greater of:
(A) 0; and
(B) The largest net cumulative maturity outflow amount as calculated under paragraph (b)(1)(i) of this section for any of the 30 calendar days following the calculation date; minus
(ii) The greater of:
(A) 0; and
(B) The net day 30 cumulative maturity outflow amount as calculated under paragraph (b)(1)(ii) of this section.
(3) Other than the transactions identified in § 249.32(h)(2), (h)(5), or (j) or § 249.33(d) or (f), the maturity of which is determined under § 249.31(a), transactions that have an open maturity are not included in the calculation of the maturity mismatch add-on.
(c) Outflow adjustment percentage. A Board-regulated institution’s outflow adjustment percentage is determined pursuant to Table 1 to this paragraph (c).
Table 1 to § 249.30(
| Percent | |
|---|---|
| Global systemically important BHC or GSIB depository institution | 100 |
| Category II Board-regulated institution | 100 |
| Category III Board-regulated institution with $75 billion or more in average weighted short-term wholesale funding and any Category III Board-regulated institution that is a consolidated subsidiary of such a Category III Board-regulated institution | 100 |
| Category III Board-regulated institution with less than $75 billion in average weighted short-term wholesale funding and any Category III Board-regulated institution that is a consolidated subsidiary of such a Category III Board-regulated institution | 85 |
| Category IV Board-regulated institution with $50 billion or more in average weighted short-term wholesale funding | 70 |
(d) Transition into a different outflow adjustment percentage. (1) A Board-regulated institution whose outflow adjustment percentage increases from a lower to a higher outflow adjustment percentage may continue to use its previous lower outflow adjustment percentage until the first day of the third calendar quarter after the outflow adjustment percentage increases.
(2) A Board-regulated institution whose outflow adjustment percentage decreases from a higher to a lower outflow adjustment percentage must continue to use its previous higher outflow adjustment percentage until the first day of the first calendar quarter after the outflow adjustment percentage decreases.
§ 249.31 Determining maturity.
(a) For purposes of calculating its liquidity coverage ratio and the components thereof under this subpart, a Board-regulated institution shall assume an asset or transaction matures:
(1) With respect to an instrument or transaction subject to § 249.32, on the earliest possible contractual maturity date or the earliest possible date the transaction could occur, taking into account any option that could accelerate the maturity date or the date of the transaction, except that when considering the earliest possible contractual maturity date or the earliest possible date the transaction could occur, the Board-regulated institution should exclude any contingent options that are triggered only by regulatory actions or changes in law or regulation, as follows:
(i) If an investor or funds provider has an option that would reduce the maturity, the Board-regulated institution must assume that the investor or funds provider will exercise the option at the earliest possible date;
(ii) If an investor or funds provider has an option that would extend the maturity, the Board-regulated institution must assume that the investor or funds provider will not exercise the option to extend the maturity;
(iii) If the Board-regulated institution has an option that would reduce the maturity of an obligation, the Board-regulated institution must assume that the Board-regulated institution will exercise the option at the earliest possible date, except if either of the following criteria are satisfied, in which case the maturity of the obligation for purposes of this part will be the original maturity date at issuance:
(A) The original maturity of the obligation is greater than one year and the option does not go into effect for a period of 180 days following the issuance of the instrument; or
(B) The counterparty is a sovereign entity, a U.S. government-sponsored enterprise, or a public sector entity.
(iv) If the Board-regulated institution has an option that would extend the maturity of an obligation it issued, the Board-regulated institution must assume the Board-regulated institution will not exercise that option to extend the maturity; and
(v) If an option is subject to a contractually defined notice period, the Board-regulated institution must determine the earliest possible contractual maturity date regardless of the notice period.
(2) With respect to an instrument or transaction subject to § 249.33, on the latest possible contractual maturity date or the latest possible date the transaction could occur, taking into account any option that could extend the maturity date or the date of the transaction, except that when considering the latest possible contractual maturity date or the latest possible date the transaction could occur, the Board-regulated institution may exclude any contingent options that are triggered only by regulatory actions or changes in law or regulation, as follows:
(i) If the borrower has an option that would extend the maturity, the Board-regulated institution must assume that the borrower will exercise the option to extend the maturity to the latest possible date;
(ii) If the borrower has an option that would reduce the maturity, the Board-regulated institution must assume that the borrower will not exercise the option to reduce the maturity;
(iii) If the Board-regulated institution has an option that would reduce the maturity of an instrument or transaction, the Board-regulated institution must assume the Board-regulated institution will not exercise the option to reduce the maturity;
(iv) If the Board-regulated institution has an option that would extend the maturity of an instrument or transaction, the Board-regulated institution must assume the Board-regulated institution will exercise the option to extend the maturity to the latest possible date; and
(v) If an option is subject to a contractually defined notice period, the Board-regulated institution must determine the latest possible contractual maturity date based on the borrower using the entire notice period.
(3) With respect to a transaction subject to § 249.33(f)(1)(iii) through (vii) (secured lending transactions) or § 249.33(f)(2)(ii) through (x) (asset exchanges), to the extent the transaction is secured by collateral that has been pledged in connection with either a secured funding transaction or asset exchange that has a remaining maturity of 30 calendar days or less as of the calculation date, the maturity date is the later of the maturity date determined under paragraph (a)(2) of this section for the secured lending transaction or asset exchange or the maturity date determined under paragraph (a)(1) of this section for the secured funding transaction or asset exchange for which the collateral has been pledged.
(4) With respect to a transaction that has an open maturity, is not an operational deposit, and is subject to the provisions of § 249.32(h)(2), (h)(5), (j), or (k) or § 249.33(d) or (f), the maturity date is the first calendar day after the calculation date. Any other transaction that has an open maturity and is subject to the provisions of § 249.32 shall be considered to mature within 30 calendar days of the calculation date.
(5) With respect to a transaction subject to the provisions of § 249.33(g), on the date of the next scheduled calculation of the amount required under applicable legal requirements for the protection of customer assets with respect to each broker-dealer segregated account, in accordance with the Board-regulated institution’s normal frequency of recalculating such requirements.
(b) [Reserved]
§ 249.32 Outflow amounts.
(a) Retail funding outflow amount. A Board-regulated institution’s retail funding outflow amount as of the calculation date includes (regardless of maturity or collateralization):
(1) 3 percent of all stable retail deposits held at the Board-regulated institution;
(2) 10 percent of all other retail deposits held at the Board-regulated institution;
(3) 20 percent of all deposits placed at the Board-regulated institution by a third party on behalf of a retail customer or counterparty that are not brokered deposits, where the retail customer or counterparty owns the account and the entire amount is covered by deposit insurance;
(4) 40 percent of all deposits placed at the Board-regulated institution by a third party on behalf of a retail customer or counterparty that are not brokered deposits, where the retail customer or counterparty owns the account and where less than the entire amount is covered by deposit insurance; and
(5) 40 percent of all funding from a retail customer or counterparty that is not:
(i) A retail deposit;
(ii) A brokered deposit provided by a retail customer or counterparty; or
(iii) A debt instrument issued by the Board-regulated institution that is owned by a retail customer or counterparty (see paragraph (h)(2)(ii) of this section).
(b) Structured transaction outflow amount. If the Board-regulated institution is a sponsor of a structured transaction where the issuing entity is not consolidated on the Board-regulated institution’s balance sheet under GAAP, the structured transaction outflow amount for each such structured transaction as of the calculation date is the greater of:
(1) 100 percent of the amount of all debt obligations of the issuing entity that mature 30 calendar days or less from such calculation date and all commitments made by the issuing entity to purchase assets within 30 calendar days or less from such calculation date; and
(2) The maximum contractual amount of funding the Board-regulated institution may be required to provide to the issuing entity 30 calendar days or less from such calculation date through a liquidity facility, a return or repurchase of assets from the issuing entity, or other funding agreement.
(c) Net derivative cash outflow amount. The net derivative cash outflow amount as of the calculation date is the sum of the net derivative cash outflow amount for each counterparty. The net derivative cash outflow amount does not include forward sales of mortgage loans and any derivatives that are mortgage commitments subject to paragraph (d) of this section. The net derivative cash outflow amount for a counterparty is the sum of:
(1) The amount, if greater than zero, of contractual payments and collateral that the Board-regulated institution will make or deliver to the counterparty 30 calendar days or less from the calculation date under derivative transactions other than transactions described in paragraph (c)(2) of this section, less the contractual payments and collateral that the Board-regulated institution will receive from the counterparty 30 calendar days or less from the calculation date under derivative transactions other than transactions described in paragraph (c)(2) of this section, provided that the derivative transactions are subject to a qualifying master netting agreement; and
(2) The amount, if greater than zero, of contractual principal payments that the Board-regulated institution will make to the counterparty 30 calendar days or less from the calculation date under foreign currency exchange derivative transactions that result in the full exchange of contractual cash principal payments in different currencies within the same business day, less the contractual principal payments that the Board-regulated institution will receive from the counterparty 30 calendar days or less from the calculation date under foreign currency exchange derivative transactions that result in the full exchange of contractual cash principal payments in different currencies within the same business day.
(d) Mortgage commitment outflow amount. The mortgage commitment outflow amount as of a calculation date is 10 percent of the amount of funds the Board-regulated institution has contractually committed for its own origination of retail mortgages that can be drawn upon 30 calendar days or less from such calculation date.
(e) Commitment outflow amount. (1) A Board-regulated institution’s commitment outflow amount as of the calculation date includes:
(i) Zero percent of the undrawn amount of all committed credit and liquidity facilities extended by a Board-regulated institution that is a depository institution to an affiliated depository institution that is subject to a minimum liquidity standard under this part;
(ii) 5 percent of the undrawn amount of all committed credit and liquidity facilities extended by the Board-regulated institution to retail customers or counterparties;
(iii) 10 percent of the undrawn amount of all committed credit facilities extended by the Board-regulated institution to a wholesale customer or counterparty that is not a financial sector entity or a consolidated subsidiary thereof, including a special purpose entity (other than those described in paragraph (e)(1)(viii) of this section) that is a consolidated subsidiary of such wholesale customer or counterparty;
(iv) 30 percent of the undrawn amount of all committed liquidity facilities extended by the Board-regulated institution to a wholesale customer or counterparty that is not a financial sector entity or a consolidated subsidiary thereof, including a special purpose entity (other than those described in paragraph (e)(1)(viii) of this section) that is a consolidated subsidiary of such wholesale customer or counterparty;
(v) 50 percent of the undrawn amount of all committed credit and liquidity facilities extended by the Board-regulated institution to depository institutions, depository institution holding companies, and foreign banks, but excluding commitments described in paragraph (e)(1)(i) of this section;
(vi) 40 percent of the undrawn amount of all committed credit facilities extended by the Board-regulated institution to a financial sector entity or a consolidated subsidiary thereof, including a special purpose entity (other than those described in paragraph (e)(1)(viii) of this section) that is a consolidated subsidiary of a financial sector entity, but excluding other commitments described in paragraph (e)(1)(i) or (v) of this section;
(vii) 100 percent of the undrawn amount of all committed liquidity facilities extended by the Board-regulated institution to a financial sector entity or a consolidated subsidiary thereof, including a special purpose entity (other than those described in paragraph (e)(1)(viii) of this section) that is a consolidated subsidiary of a financial sector entity, but excluding other commitments described in paragraph (e)(1)(i) or (v) of this section and liquidity facilities included in paragraph (b)(2) of this section;
(viii) 100 percent of the undrawn amount of all committed credit and liquidity facilities extended to a special purpose entity that issues or has issued commercial paper or securities (other than equity securities issued to a company of which the special purpose entity is a consolidated subsidiary) to finance its purchases or operations, and excluding liquidity facilities included in paragraph (b)(2) of this section; and
(ix) 100 percent of the undrawn amount of all other committed credit or liquidity facilities extended by the Board-regulated institution.
(2) For the purposes of this paragraph (e), the undrawn amount of a committed credit facility or committed liquidity facility is the entire unused amount of the facility that could be drawn upon within 30 calendar days of the calculation date under the governing agreement, less the amount of level 1 liquid assets and the amount of level 2A liquid assets securing the facility.
(3) For the purposes of this paragraph (e), the amount of level 1 liquid assets and level 2A liquid assets securing a committed credit or liquidity facility is the fair value of level 1 liquid assets and 85 percent of the fair value of level 2A liquid assets that are required to be pledged as collateral by the counterparty to secure the facility, provided that:
(i) The assets pledged upon a draw on the facility would be eligible HQLA; and
(ii) The Board-regulated institution has not included the assets as eligible HQLA under subpart C of this part as of the calculation date.
(f) Collateral outflow amount. The collateral outflow amount as of the calculation date includes:
(1) Changes in financial condition. 100 percent of all additional amounts of collateral the Board-regulated institution could be contractually required to pledge or to fund under the terms of any transaction as a result of a change in the Board-regulated institution’s financial condition;
(2) Derivative collateral potential valuation changes. 20 percent of the fair value of any collateral securing a derivative transaction pledged to a counterparty by the Board-regulated institution that is not a level 1 liquid asset;
(3) Potential derivative valuation changes. The absolute value of the largest 30-consecutive calendar day cumulative net mark-to-market collateral outflow or inflow realized during the preceding 24 months resulting from derivative transaction valuation changes;
(4) Excess collateral. 100 percent of the fair value of collateral that:
(i) The Board-regulated institution could be required by contract to return to a counterparty because the collateral pledged to the Board-regulated institution exceeds the current collateral requirement of the counterparty under the governing contract;
(ii) Is not segregated from the Board-regulated institution’s other assets such that it cannot be rehypothecated; and
(iii) Is not already excluded as eligible HQLA by the Board-regulated institution under § 249.22(b)(5);
(5) Contractually required collateral. 100 percent of the fair value of collateral that the Board-regulated institution is contractually required to pledge to a counterparty and, as of such calculation date, the Board-regulated institution has not yet pledged;
(6) Collateral substitution. (i) Zero percent of the fair value of collateral pledged to the Board-regulated institution by a counterparty where the collateral qualifies as level 1 liquid assets and eligible HQLA and where, under the contract governing the transaction, the counterparty may replace the pledged collateral with other assets that qualify as level 1 liquid assets, without the consent of the Board-regulated institution;
(ii) 15 percent of the fair value of collateral pledged to the Board-regulated institution by a counterparty, where the collateral qualifies as level 1 liquid assets and eligible HQLA and where, under the contract governing the transaction, the counterparty may replace the pledged collateral with assets that qualify as level 2A liquid assets, without the consent of the Board-regulated institution;
(iii) 50 percent of the fair value of collateral pledged to the Board-regulated institution by a counterparty where the collateral qualifies as level 1 liquid assets and eligible HQLA and where under, the contract governing the transaction, the counterparty may replace the pledged collateral with assets that qualify as level 2B liquid assets, without the consent of the Board-regulated institution;
(iv) 100 percent of the fair value of collateral pledged to the Board-regulated institution by a counterparty where the collateral qualifies as level 1 liquid assets and eligible HQLA and where, under the contract governing the transaction, the counterparty may replace the pledged collateral with assets that do not qualify as HQLA, without the consent of the Board-regulated institution;
(v) Zero percent of the fair value of collateral pledged to the Board-regulated institution by a counterparty where the collateral qualifies as level 2A liquid assets and eligible HQLA and where, under the contract governing the transaction, the counterparty may replace the pledged collateral with assets that qualify as level 1 or level 2A liquid assets, without the consent of the Board-regulated institution;
(vi) 35 percent of the fair value of collateral pledged to the Board-regulated institution by a counterparty where the collateral qualifies as level 2A liquid assets and eligible HQLA and where, under the contract governing the transaction, the counterparty may replace the pledged collateral with assets that qualify as level 2B liquid assets, without the consent of the Board-regulated institution;
(vii) 85 percent of the fair value of collateral pledged to the Board-regulated institution by a counterparty where the collateral qualifies as level 2A liquid assets and eligible HQLA and where, under the contract governing the transaction, the counterparty may replace the pledged collateral with assets that do not qualify as HQLA, without the consent of the Board-regulated institution;
(viii) Zero percent of the fair value of collateral pledged to the Board-regulated institution by a counterparty where the collateral qualifies as level 2B liquid assets and eligible HQLA and where, under the contract governing the transaction, the counterparty may replace the pledged collateral with other assets that qualify as HQLA, without the consent of the Board-regulated institution; and
(ix) 50 percent of the fair value of collateral pledged to the Board-regulated institution by a counterparty where the collateral qualifies as level 2B liquid assets and eligible HQLA and where, under the contract governing the transaction, the counterparty may replace the pledged collateral with assets that do not qualify as HQLA, without the consent of the Board-regulated institution.
(g) Brokered deposit outflow amount for retail customers or counterparties. The brokered deposit outflow amount for retail customers or counterparties as of the calculation date includes:
(1) 100 percent of all brokered deposits at the Board-regulated institution provided by a retail customer or counterparty that are not described in paragraphs (g)(5) through (9) of this section and which mature 30 calendar days or less from the calculation date;
(2) 10 percent of all brokered deposits at the Board-regulated institution provided by a retail customer or counterparty that are not described in paragraphs (g)(5) through (9) of this section and which mature later than 30 calendar days from the calculation date;
(3) 20 percent of all brokered deposits at the Board-regulated institution provided by a retail customer or counterparty that are not described in paragraphs (g)(5) through (9) of this section and which are held in a transactional account with no contractual maturity date, where the entire amount is covered by deposit insurance;
(4) 40 percent of all brokered deposits at the Board-regulated institution provided by a retail customer or counterparty that are not described in paragraphs (g)(5) through (9) of this section and which are held in a transactional account with no contractual maturity date, where less than the entire amount is covered by deposit insurance;
(5) 10 percent of all brokered reciprocal deposits at the Board-regulated institution provided by a retail customer or counterparty, where the entire amount is covered by deposit insurance;
(6) 25 percent of all brokered reciprocal deposits at the Board-regulated institution provided by a retail customer or counterparty, where less than the entire amount is covered by deposit insurance;
(7) 10 percent of all sweep deposits at the Board-regulated institution provided by a retail customer or counterparty:
(i) That are deposited in accordance with a contract between the retail customer or counterparty and the Board-regulated institution, a controlled subsidiary of the Board-regulated institution, or a company that is a controlled subsidiary of the same top-tier company of which the Board-regulated institution is a controlled subsidiary; and
(ii) Where the entire amount of the deposits is covered by deposit insurance;
(8) 25 percent of all sweep deposits at the Board-regulated institution provided by a retail customer or counterparty:
(i) That are not deposited in accordance with a contract between the retail customer or counterparty and the Board-regulated institution, a controlled subsidiary of the Board-regulated institution, or a company that is a controlled subsidiary of the same top-tier company of which the Board-regulated institution is a controlled subsidiary; and
(ii) Where the entire amount of the deposits is covered by deposit insurance; and
(9) 40 percent of all sweep deposits at the Board-regulated institution provided by a retail customer or counterparty where less than the entire amount of the deposit balance is covered by deposit insurance.
(h) Unsecured wholesale funding outflow amount. A Board-regulated institution’s unsecured wholesale funding outflow amount, for all transactions that mature within 30 calendar days or less of the calculation date, as of the calculation date includes:
(1) For unsecured wholesale funding that is not an operational deposit and is not provided by a financial sector entity or consolidated subsidiary of a financial sector entity:
(i) 20 percent of all such funding, where the entire amount is covered by deposit insurance and the funding is not a brokered deposit;
(ii) 40 percent of all such funding, where:
(A) Less than the entire amount is covered by deposit insurance; or
(B) The funding is a brokered deposit;
(2) 100 percent of all unsecured wholesale funding that is not an operational deposit and is not included in paragraph (h)(1) of this section, including:
(i) Funding provided by a company that is a consolidated subsidiary of the same top-tier company of which the Board-regulated institution is a consolidated subsidiary; and
(ii) Debt instruments issued by the Board-regulated institution, including such instruments owned by retail customers or counterparties;
(3) 5 percent of all operational deposits, other than operational deposits that are held in escrow accounts, where the entire deposit amount is covered by deposit insurance;
(4) 25 percent of all operational deposits not included in paragraph (h)(3) of this section; and
(5) 100 percent of all unsecured wholesale funding that is not otherwise described in this paragraph (h).
(i) Debt security buyback outflow amount. A Board-regulated institution’s debt security buyback outflow amount for debt securities issued by the Board-regulated institution that mature more than 30 calendar days after the calculation date and for which the Board-regulated institution or a consolidated subsidiary of the Board-regulated institution is the primary market maker in such debt securities includes:
(1) 3 percent of all such debt securities that are not structured securities; and
(2) 5 percent of all such debt securities that are structured securities.
(j) Secured funding and asset exchange outflow amount. (1) A Board-regulated institution’s secured funding outflow amount, for all transactions that mature within 30 calendar days or less of the calculation date, as of the calculation date includes:
(i) Zero percent of all funds the Board-regulated institution must pay pursuant to secured funding transactions, to the extent that the funds are secured by level 1 liquid assets;
(ii) 15 percent of all funds the Board-regulated institution must pay pursuant to secured funding transactions, to the extent that the funds are secured by level 2A liquid assets;
(iii) 25 percent of all funds the Board-regulated institution must pay pursuant to secured funding transactions with sovereign entities, multilateral development banks, or U.S. government-sponsored enterprises that are assigned a risk weight of 20 percent under subpart D of Regulation Q (12 CFR part 217), to the extent that the funds are not secured by level 1 or level 2A liquid assets;
(iv) 50 percent of all funds the Board-regulated institution must pay pursuant to secured funding transactions, to the extent that the funds are secured by level 2B liquid assets;
(v) 50 percent of all funds received from secured funding transactions that are customer short positions where the customer short positions are covered by other customers’ collateral and the collateral does not consist of HQLA; and
(vi) 100 percent of all other funds the Board-regulated institution must pay pursuant to secured funding transactions, to the extent that the funds are secured by assets that are not HQLA.
(2) If an outflow rate specified in paragraph (j)(1) of this section for a secured funding transaction is greater than the outflow rate that the Board-regulated institution is required to apply under paragraph (h) of this section to an unsecured wholesale funding transaction that is not an operational deposit with the same counterparty, the Board-regulated institution may apply to the secured funding transaction the outflow rate that applies to an unsecured wholesale funding transaction that is not an operational deposit with that counterparty, except in the case of:
(i) Secured funding transactions that are secured by collateral that was received by the Board-regulated institution under a secured lending transaction or asset exchange, in which case the Board-regulated institution must apply the outflow rate specified in paragraph (j)(1) of this section for the secured funding transaction; and
(ii) Collateralized deposits that are operational deposits, in which case the Board-regulated institution may apply to the operational deposit amount, as calculated in accordance with § 249.4(b), the operational deposit outflow rate specified in paragraph (h)(3) or (4) of this section, as applicable, if such outflow rate is lower than the outflow rate specified in paragraph (j)(1) of this section.
(3) A Board-regulated institution’s asset exchange outflow amount, for all transactions that mature within 30 calendar days or less of the calculation date, as of the calculation date includes:
(i) Zero percent of the fair value of the level 1 liquid assets the Board-regulated institution must post to a counterparty pursuant to asset exchanges, not described in paragraphs (j)(3)(x) through (xiii) of this section, where the Board-regulated institution will receive level 1 liquid assets from the asset exchange counterparty;
(ii) 15 percent of the fair value of the level 1 liquid assets the Board-regulated institution must post to a counterparty pursuant to asset exchanges, not described in paragraphs (j)(3)(x) through (xiii) of this section, where the Board-regulated institution will receive level 2A liquid assets from the asset exchange counterparty;
(iii) 50 percent of the fair value of the level 1 liquid assets the Board-regulated institution must post to a counterparty pursuant to asset exchanges, not described in paragraphs (j)(3)(x) through (xiii) of this section, where the Board-regulated institution will receive level 2B liquid assets from the asset exchange counterparty;
(iv) 100 percent of the fair value of the level 1 liquid assets the Board-regulated institution must post to a counterparty pursuant to asset exchanges, not described in paragraphs (j)(3)(x) through (xiii) of this section, where the Board-regulated institution will receive assets that are not HQLA from the asset exchange counterparty;
(v) Zero percent of the fair value of the level 2A liquid assets that Board-regulated institution must post to a counterparty pursuant to asset exchanges, not described in paragraphs (j)(3)(x) through (xiii) of this section, where Board-regulated institution will receive level 1 or level 2A liquid assets from the asset exchange counterparty;
(vi) 35 percent of the fair value of the level 2A liquid assets the Board-regulated institution must post to a counterparty pursuant to asset exchanges, not described in paragraphs (j)(3)(x) through (xiii) of this section, where the Board-regulated institution will receive level 2B liquid assets from the asset exchange counterparty;
(vii) 85 percent of the fair value of the level 2A liquid assets the Board-regulated institution must post to a counterparty pursuant to asset exchanges, not described in paragraphs (j)(3)(x) through (xiii) of this section, where the Board-regulated institution will receive assets that are not HQLA from the asset exchange counterparty;
(viii) Zero percent of the fair value of the level 2B liquid assets the Board-regulated institution must post to a counterparty pursuant to asset exchanges, not described in paragraphs (j)(3)(x) through (xiii) of this section, where the Board-regulated institution will receive HQLA from the asset exchange counterparty; and
(ix) 50 percent of the fair value of the level 2B liquid assets the Board-regulated institution must post to a counterparty pursuant to asset exchanges, not described in paragraphs (j)(3)(x) through (xiii) of this section, where the Board-regulated institution will receive assets that are not HQLA from the asset exchange counterparty;
(x) Zero percent of the fair value of the level 1 liquid assets the Board-regulated institution will receive from a counterparty pursuant to an asset exchange where the Board-regulated institution has rehypothecated the assets posted by the asset exchange counterparty, and, as of the calculation date, the assets will not be returned to the Board-regulated institution within 30 calendar days;
(xi) 15 percent of the fair value of the level 2A liquid assets the Board-regulated institution will receive from a counterparty pursuant to an asset exchange where the Board-regulated institution has rehypothecated the assets posted by the asset exchange counterparty, and, as of the calculation date, the assets will not be returned to the Board-regulated institution within 30 calendar days;
(xii) 50 percent of the fair value of the level 2B liquid assets the Board-regulated institution will receive from a counterparty pursuant to an asset exchange where the Board-regulated institution has rehypothecated the assets posted by the asset exchange counterparty, and, as of the calculation date, the assets will not be returned to the Board-regulated institution within 30 calendar days; and
(xiii) 100 percent of the fair value of the non-HQLA the Board-regulated institution will receive from a counterparty pursuant to an asset exchange where the Board-regulated institution has rehypothecated the assets posted by the asset exchange counterparty, and, as of the calculation date, the assets will not be returned to the Board-regulated institution within 30 calendar days.
(k) Foreign central bank borrowing outflow amount. A Board-regulated institution’s foreign central bank borrowing outflow amount is, in a foreign jurisdiction where the Board-regulated institution has borrowed from the jurisdiction’s central bank, the outflow amount assigned to borrowings from central banks in a minimum liquidity standard established in that jurisdiction. If the foreign jurisdiction has not specified a central bank borrowing outflow amount in a minimum liquidity standard, the foreign central bank borrowing outflow amount must be calculated in accordance with paragraph (j) of this section.
(l) Other contractual outflow amount. A Board-regulated institution’s other contractual outflow amount is 100 percent of funding or amounts, with the exception of operating expenses of the Board-regulated institution (such as rents, salaries, utilities, and other similar payments), payable by the Board-regulated institution to counterparties under legally binding agreements that are not otherwise specified in this section.
(m) Excluded amounts for intragroup transactions. The outflow amounts set forth in this section do not include amounts arising out of transactions between:
(1) The Board-regulated institution and a consolidated subsidiary of the Board-regulated institution; or
(2) A consolidated subsidiary of the Board-regulated institution and another consolidated subsidiary of the Board-regulated institution.
§ 249.33 Inflow amounts.
(a) The inflows in paragraphs (b) through (g) of this section do not include:
(1) Amounts the Board-regulated institution holds in operational deposits at other regulated financial companies;
(2) Amounts the Board-regulated institution expects, or is contractually entitled to receive, 30 calendar days or less from the calculation date due to forward sales of mortgage loans and any derivatives that are mortgage commitments subject to § 249.32(d);
(3) The amount of any credit or liquidity facilities extended to the Board-regulated institution;
(4) The amount of any asset that is eligible HQLA and any amounts payable to the Board-regulated institution with respect to that asset;
(5) Any amounts payable to the Board-regulated institution from an obligation of a customer or counterparty that is a nonperforming asset as of the calculation date or that the Board-regulated institution has reason to expect will become a nonperforming exposure 30 calendar days or less from the calculation date; and
(6) Amounts payable to the Board-regulated institution with respect to any transaction that has no contractual maturity date or that matures after 30 calendar days of the calculation date (as determined by § 249.31).
(b) Net derivative cash inflow amount. The net derivative cash inflow amount as of the calculation date is the sum of the net derivative cash inflow amount for each counterparty. The net derivative cash inflow amount does not include amounts excluded from inflows under paragraph (a)(2) of this section. The net derivative cash inflow amount for a counterparty is the sum of:
(1) The amount, if greater than zero, of contractual payments and collateral that the Board-regulated institution will receive from the counterparty 30 calendar days or less from the calculation date under derivative transactions other than transactions described in paragraph (b)(2) of this section, less the contractual payments and collateral that the Board-regulated institution will make or deliver to the counterparty 30 calendar days or less from the calculation date under derivative transactions other than transactions described in paragraph (b)(2) of this section, provided that the derivative transactions are subject to a qualifying master netting agreement; and
(2) The amount, if greater than zero, of contractual principal payments that the Board-regulated institution will receive from the counterparty 30 calendar days or less from the calculation date under foreign currency exchange derivative transactions that result in the full exchange of contractual cash principal payments in different currencies within the same business day, less the contractual principal payments that the Board-regulated institution will make to the counterparty 30 calendar days or less from the calculation date under foreign currency exchange derivative transactions that result in the full exchange of contractual cash principal payments in different currencies within the same business day.
(c) Retail cash inflow amount. The retail cash inflow amount as of the calculation date includes 50 percent of all payments contractually payable to the Board-regulated institution from retail customers or counterparties.
(d) Unsecured wholesale cash inflow amount. The unsecured wholesale cash inflow amount as of the calculation date includes:
(1) 100 percent of all payments contractually payable to the Board-regulated institution from financial sector entities, or from a consolidated subsidiary thereof, or central banks; and
(2) 50 percent of all payments contractually payable to the Board-regulated institution from wholesale customers or counterparties that are not financial sector entities or consolidated subsidiaries thereof, provided that, with respect to revolving credit facilities, the amount of the existing loan is not included in the unsecured wholesale cash inflow amount and the remaining undrawn balance is included in the outflow amount under § 249.32(e)(1).
(e) Securities cash inflow amount. The securities cash inflow amount as of the calculation date includes 100 percent of all contractual payments due to the Board-regulated institution on securities it owns that are not eligible HQLA.
(f) Secured lending and asset exchange cash inflow amount. (1) A Board-regulated institution’s secured lending cash inflow amount as of the calculation date includes:
(i) Zero percent of all contractual payments due to the Board-regulated institution pursuant to secured lending transactions, including margin loans extended to customers, to the extent that the payments are secured by collateral that has been rehypothecated in a transaction and, as of the calculation date, will not be returned to the Board-regulated institution within 30 calendar days;
(ii) 100 percent of all contractual payments due to the Board-regulated institution pursuant to secured lending transactions not described in paragraph (f)(1)(vii) of this section, to the extent that the payments are secured by assets that are not eligible HQLA, but are still held by the Board-regulated institution and are available for immediate return to the counterparty at any time;
(iii) Zero percent of all contractual payments due to the Board-regulated institution pursuant to secured lending transactions not described in paragraphs (f)(1)(i) or (ii) of this section, to the extent that the payments are secured by level 1 liquid assets;
(iv) 15 percent of all contractual payments due to the Board-regulated institution pursuant to secured lending transactions not described in paragraphs (f)(1)(i) or (ii) of this section, to the extent that the payments are secured by level 2A liquid assets;
(v) 50 percent of all contractual payments due to the Board-regulated institution pursuant to secured lending transactions not described in paragraphs (f)(1)(i) or (ii) of this section, to the extent that the payments are secured by level 2B liquid assets;
(vi) 100 percent of all contractual payments due to the Board-regulated institution pursuant to secured lending transactions not described in paragraphs (f)(1)(i), (ii), or (vii) of this section, to the extent that the payments are secured by assets that are not HQLA; and
(vii) 50 percent of all contractual payments due to the Board-regulated institution pursuant to collateralized margin loans extended to customers, not described in paragraph (f)(1)(i) of this section, provided that the loans are secured by assets that are not HQLA.
(2) A Board-regulated institution’s asset exchange inflow amount as of the calculation date includes:
(i) Zero percent of the fair value of assets the Board-regulated institution will receive from a counterparty pursuant to asset exchanges, to the extent that the asset received by the Board-regulated institution from the counterparty has been rehypothecated in a transaction and, as of the calculation date, will not be returned to the Board-regulated institution within 30 calendar days;
(ii) Zero percent of the fair value of level 1 liquid assets the Board-regulated institution will receive from a counterparty pursuant to asset exchanges, not described in paragraph (f)(2)(i) of this section, where the Board-regulated institution must post level 1 liquid assets to the asset exchange counterparty;
(iii) 15 percent of the fair value of level 1 liquid assets the Board-regulated institution will receive from a counterparty pursuant to asset exchanges, not described in paragraph (f)(2)(i) of this section, where the Board-regulated institution must post level 2A liquid assets to the asset exchange counterparty;
(iv) 50 percent of the fair value of level 1 liquid assets the Board-regulated institution will receive from counterparty pursuant to asset exchanges, not described in paragraph (f)(2)(i) of this section, where the Board-regulated institution must post level 2B liquid assets to the asset exchange counterparty;
(v) 100 percent of the fair value of level 1 liquid assets the Board-regulated institution will receive from a counterparty pursuant to asset exchanges, not described in paragraph (f)(2)(i) of this section, where the Board-regulated institution must post assets that are not HQLA to the asset exchange counterparty;
(vi) Zero percent of the fair value of level 2A liquid assets the Board-regulated institution will receive from a counterparty pursuant to asset exchanges, not described in paragraph (f)(2)(i) of this section, where the Board-regulated institution must post level 1 or level 2A liquid assets to the asset exchange counterparty;
(vii) 35 percent of the fair value of level 2A liquid assets the Board-regulated institution will receive from a counterparty pursuant to asset exchanges, not described in paragraph (f)(2)(i) of this section, where the Board-regulated institution must post level 2B liquid assets to the asset exchange counterparty;
(viii) 85 percent of the fair value of level 2A liquid assets the Board-regulated institution will receive from a counterparty pursuant to asset exchanges, not described in paragraph (f)(2)(i) of this section, where the Board-regulated institution must post assets that are not HQLA to the asset exchange counterparty;
(ix) Zero percent of the fair value of level 2B liquid assets the Board-regulated institution will receive from a counterparty pursuant to asset exchanges, not described in paragraph (f)(2)(i) of this section, where the Board-regulated institution must post assets that are HQLA to the asset exchange counterparty; and
(x) 50 percent of the fair value of level 2B liquid assets the Board-regulated institution will receive from a counterparty pursuant to asset exchanges, not described in paragraph (f)(2)(i) of this section, where the Board-regulated institution must post assets that are not HQLA to the asset exchange counterparty.
(g) Broker-dealer segregated account inflow amount. A Board-regulated institution’s broker-dealer segregated account inflow amount is the fair value of all assets released from broker-dealer segregated accounts maintained in accordance with statutory or regulatory requirements for the protection of customer trading assets, provided that the calculation of the broker-dealer segregated account inflow amount, for any transaction affecting the calculation of the segregated balance (as required by applicable law), shall be consistent with the following:
(1) In calculating the broker-dealer segregated account inflow amount, the Board-regulated institution must calculate the fair value of the required balance of the customer reserve account as of 30 calendar days from the calculation date by assuming that customer cash and collateral positions have changed consistent with the outflow and inflow calculations required under §§ 249.32 and 249.33.
(2) If the fair value of the required balance of the customer reserve account as of 30 calendar days from the calculation date, as calculated consistent with the outflow and inflow calculations required under §§ 249.32 and 249.33, is less than the fair value of the required balance as of the calculation date, the difference is the segregated account inflow amount.
(3) If the fair value of the required balance of the customer reserve account as of 30 calendar days from the calculation date, as calculated consistent with the outflow and inflow calculations required under §§ 249.32 and 249.33, is more than the fair value of the required balance as of the calculation date, the segregated account inflow amount is zero.
(h) Other cash inflow amounts. A Board-regulated institution’s inflow amount as of the calculation date includes zero percent of other cash inflow amounts not included in paragraphs (b) through (g) of this section.
(i) Excluded amounts for intragroup transactions. The inflow amounts set forth in this section do not include amounts arising out of transactions between:
(1) The Board-regulated institution and a consolidated subsidiary of the Board-regulated institution; or
(2) A consolidated subsidiary of the Board-regulated institution and another consolidated subsidiary of the Board-regulated institution.
(a) Treatment of Covered Federal Reserve Facility Funding. Notwithstanding any other section of this part and except as provided in paragraph (b) of this section, outflow amounts and inflow amounts related to Covered Federal Reserve Facility Funding and the assets securing Covered Federal Reserve Facility Funding are excluded from the calculation of a Board-regulated institution’s total net cash outflow amount calculated under § 249.30.
(b) Exception. To the extent the Covered Federal Reserve Facility Funding is secured by securities, debt obligations, or other instruments issued by the Board-regulated institution or one of its consolidated subsidiaries, the Covered Federal Reserve Facility Funding is not subject to paragraph (a) of this section and this outflow amount must be included in the Board-regulated institution’s total net cash outflow amount calculated under § 249.30.
Subpart E – Liquidity Coverage Shortfall
§ 249.40 Liquidity coverage shortfall: Supervisory framework.
(a) Notification requirements. A Board-regulated institution must notify the Board on any business day when its liquidity coverage ratio is calculated to be less than the minimum requirement in § 249.10.
(b) Liquidity plan. (1) For the period during which a Board-regulated institution must calculate a liquidity coverage ratio on the last business day of each applicable calendar month under subparts F or G of this part, if the Board-regulated institution’s liquidity coverage ratio is below the minimum requirement in § 249.10 for any calculation date that is the last business day of the applicable calendar month, or if the Board has determined that the Board-regulated institution is otherwise materially noncompliant with the requirements of this part, the Board-regulated institution must promptly consult with the Board to determine whether the Board-regulated institution must provide to the Board a plan for achieving compliance with the minimum liquidity requirement in § 249.10 and all other requirements of this part.
(2) For the period during which a Board-regulated institution must calculate a liquidity coverage ratio each business day under subpart F of this part, if a Board-regulated institution’s liquidity coverage ratio is below the minimum requirement in § 249.10 for three consecutive business days, or if the Board has determined that the Board-regulated institution is otherwise materially noncompliant with the requirements of this part, the Board-regulated institution must promptly provide to the Board a plan for achieving compliance with the minimum liquidity requirement in § 249.10 and all other requirements of this part.
(3) The plan must include, as applicable:
(i) An assessment of the Board-regulated institution’s liquidity position;
(ii) The actions the Board-regulated institution has taken and will take to achieve full compliance with this part, including:
(A) A plan for adjusting the Board-regulated institution’s risk profile, risk management, and funding sources in order to achieve full compliance with this part; and
(B) A plan for remediating any operational or management issues that contributed to noncompliance with this part;
(iii) An estimated time frame for achieving full compliance with this part; and
(iv) A commitment to report to the Board no less than weekly on progress to achieve compliance in accordance with the plan until full compliance with this part is achieved.
(c) Supervisory and enforcement actions. The Board may, at its discretion, take additional supervisory or enforcement actions to address noncompliance with the minimum liquidity standard and other requirements of this part.
Subpart F – Transitions
§ 249.50 Transitions.
(a) No transitions for certain Board-regulated institutions. A Board-regulated institution that is subject to the minimum liquidity standards and other requirements of this part immediately prior to December 31, 2019 must comply with the requirements of this part as of December 31, 2019.
(b) Transitions for certain U.S. intermediate holding companies. A U.S. intermediate holding company that initially becomes subject to this part on December 31, 2019 does not need to comply with the minimum liquidity standard of § 249.10 or with the public disclosure requirements of § 249.90 until December 31, 2020, at which time the U.S. intermediate holding company must comply with the minimum liquidity standard of § 249.10 each business day (or, in the case of a Category IV Board-regulated institution, on the last business day of the applicable calendar month) in accordance with this part, and with the public disclosure requirements of § 249.90.
(c) Initial application. (1) A Board-regulated institution that initially becomes subject to the minimum liquidity standard and other requirements of this part under § 249.1(b)(1)(i) or (ii) after December 31, 2019, must comply with the requirements of this part beginning on the first day of the third calendar quarter after which the Board-regulated institution becomes subject to this part, except that a Board-regulated institution that is not a Category IV Board-regulated institution must:
(i) For the first two calendar quarters after the Board-regulated institution begins complying with the minimum liquidity standard and other requirements of this part, calculate and maintain a liquidity coverage ratio monthly, on each calculation date that is the last business day of the applicable calendar month; and
(ii) Beginning the first day of the fifth calendar quarter after the Board-regulated institution becomes subject to the minimum liquidity standard and other requirements of this part and continuing thereafter, calculate and maintain a liquidity coverage ratio on each calculation date.
(2) A Board-regulated institution that becomes subject to the minimum liquidity standard and other requirements of this part under § 249.1(b)(1)(iii) must comply with the requirements of this part subject to a transition period specified by the Board.
(d) Transition into a different outflow adjustment percentage. (1) A Board-regulated institution whose outflow adjustment percentage changes is subject to transition periods as set forth in § 249.30(d).
(2) A Board-regulated institution that is no longer subject to the minimum liquidity standard and other requirements of this part pursuant to § 249.1(b)(1)(i) or (ii) based on the size of total consolidated assets, cross-jurisdictional activity, total nonbank assets, weighted short-term wholesale funding, or off-balance sheet exposure calculated in accordance with the Call Report, instructions to the FR Y-9LP or the FR Y-15 or equivalent reporting form, as applicable, for each of the four most recent calendar quarters may cease compliance with this part as of the first day of the first quarter after it is no longer subject to § 249.1(b).
(e) Reservation of authority. The Board may extend or accelerate any compliance date of this part if the Board determines that such extension or acceleration is appropriate. In determining whether an extension or acceleration is appropriate, the Board will consider the effect of the modification on financial stability, the period of time for which the modification would be necessary to facilitate compliance with this part, and the actions the Board-regulated institution is taking to come into compliance with this part.
Subparts G-I [Reserved]
Subpart J – Disclosures
§ 249.90 Timing, method and retention of disclosures.
(a) Applicability. A covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company that is subject to § 249.1 must disclose publicly all the information required under this subpart.
(b) Timing of disclosure. (1) A covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company subject to this subpart must provide timely public disclosures each calendar quarter of all the information required under this subpart.
(2) A covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company that is subject to this subpart must provide the disclosures required by this subpart beginning with the first calendar quarter that includes the date that is 18 months after the covered depository institution holding company or U.S. intermediate holding company first became subject to this subpart.
(c) Disclosure method. A covered depository institution holding company or covered nonbank company subject to this subpart must disclose publicly, in a direct and prominent manner, the information required under this subpart on its public internet site or in its public financial or other public regulatory reports.
(d) Availability. The disclosures provided under this subpart must remain publicly available for at least five years after the initial disclosure date.
§ 249.91 Disclosure requirements.
(a) General. A covered depository institution holding company or covered nonbank company subject to this subpart must disclose publicly the information required by paragraph (b) of this section in the format provided in the following table.
Table 1 to § 249.91(
| XX/XX/XXXX to YY/YY/YYYY (In millions of U.S. dollars) | Average unweighted amount | Average weighted amount |
|---|---|---|
| 1. Total eligible high-quality liquid assets (HQLA), of which: | ||
| 2. Eligible level 1 liquid assets | ||
| 3. Eligible level 2A liquid assets | ||
| 4. Eligible level 2B liquid assets | ||
| 5. Deposit outflow from retail customers and counterparties, of which: | ||
| 6. Stable retail deposit outflow | ||
| 7. Other retail funding | ||
| 8. Brokered deposit outflow | ||
| 9. Unsecured wholesale funding outflow, of which: | ||
| 10. Operational deposit outflow | ||
| 11. Non-operational funding outflow | ||
| 12. Unsecured debt outflow | ||
| 13. Secured wholesale funding and asset exchange outflow | ||
| 14. Additional outflow requirements, of which: | ||
| 15. Outflow related to derivative exposures and other collateral requirements | ||
| 16. Outflow related to credit and liquidity facilities including unconsolidated structured transactions and mortgage commitments | ||
| 17. Other contractual funding obligation outflow | ||
| 18. Other contingent funding obligations outflow | ||
| 19. Total Cash Outflow | ||
| 20. Secured lending and asset exchange cash inflow | ||
| 21. Retail cash inflow | ||
| 22. Unsecured wholesale cash inflow | ||
| 23. Other cash inflows, of which: | ||
| 24. Net derivative cash inflow | ||
| 25. Securities cash inflow | ||
| 26. Broker-dealer segregated account inflow | ||
| 27. Other cash inflow | ||
| 28. Total Cash Inflow |
| Average amount 1 | ||
|---|---|---|
| 29. HQLA Amount | ||
| 30. Total Net Cash Outflow Amount Excluding The Maturity Mismatch Add-On | ||
| 31. Maturity Mismatch Add-On | ||
| 32. Total Unadusted Net Cash Outflow Amount | ||
| 33. Outflow Adjustment Percentage | ||
| 34. Total Adjusted Net Cash Outflow Amount | ||
| 35. Liquidity Coverage Ratio (%) |
1 The amounts reported in this column may not equal the calculation of those amounts using component amounts reported in rows 1-28 due to technical factors such as the application of the level 2 liquid asset caps and the total inflow cap.
(b) Calculation of disclosed average amounts – (1) General. (i) A covered depository institution holding company or covered nonbank company subject to this subpart must calculate its disclosed average amounts:
(A) On a consolidated basis and presented in millions of U.S. dollars or as a percentage, as applicable; and
(B) With the exception of amounts disclosed pursuant to paragraphs (c)(1), (5), (9), (14), (19), (23), and (28) of this section, as simple averages of daily amounts over the calendar quarter.
(ii) A covered depository institution holding company or covered nonbank company subject to this subpart must disclose the beginning date and end date for each calendar quarter.
(2) Calculation of average unweighted amounts. (i) A covered depository institution holding company or covered nonbank company subject to this subpart must calculate the average unweighted amount of HQLA as the average amount of eligible HQLA that meet the requirements specified in §§ 249.20 and 249.22 and is calculated prior to applying the haircuts required under § 249.21(b) to the amounts of eligible HQLA.
(ii) A covered depository institution holding company or covered nonbank company subject to this subpart must calculate the average unweighted amount of cash outflows and cash inflows before applying the outflow and inflow rates specified in §§ 249.32 and 249.33, respectively.
(3) Calculation of average weighted amounts. (i) A covered depository institution holding company or covered nonbank company subject to this subpart must calculate the average weighted amount of HQLA after applying the haircuts required under § 249.21(b) to the amounts of eligible HQLA.
(ii) A covered depository institution holding company or covered nonbank company subject to this subpart must calculate the average weighted amount of cash outflows and cash inflows after applying the outflow and inflow rates specified in §§ 249.32 and 249.33, respectively.
(c) Quantitative disclosures. A covered depository institution holding company or covered nonbank company subject to this subpart must disclose all the information required under Table 1 to § 249.91(a) – Disclosure Template, including:
(1) The sum of the average unweighted amounts and average weighted amounts calculated under paragraphs (c)(2) through (4) of this section (row 1);
(2) The average unweighted amount and average weighted amount of level 1 liquid assets that are eligible HQLA under § 249.21(b)(1) (row 2);
(3) The average unweighted amount and average weighted amount of level 2A liquid assets that are eligible HQLA under § 249.21(b)(2) (row 3);
(4) The average unweighted amount and average weighted amount of level 2B liquid assets that are eligible HQLA under § 249.21(b)(3) (row 4);
(5) The sum of the average unweighted amounts and average weighted amounts of cash outflows calculated under paragraphs (c)(6) through (8) of this section (row 5);
(6) The average unweighted amount and average weighted amount of cash outflows under § 249.32(a)(1) (row 6);
(7) The average unweighted amount and average weighted amount of cash outflows under § 249.32(a)(2) through (5) (row 7);
(8) The average unweighted amount and average weighted amount of cash outflows under § 249.32(g) (row 8);
(9) The sum of the average unweighted amounts and average weighted amounts of cash outflows calculated under paragraphs (c)(10) through (12) of this section (row 9);
(10) The average unweighted amount and average weighted amount of cash outflows under § 249.32(h)(3) and (4) (row 10);
(11) The average unweighted amount and average weighted amount of cash outflows under § 249.32(h)(1), (2), and (5), excluding (h)(2)(ii) (row 11);
(12) The average unweighted amount and average weighted amount of cash outflows under § 249.32(h)(2)(ii) (row 12);
(13) The average unweighted amount and average weighted amount of cash outflows under § 249.32(j) and (k) (row 13);
(14) The sum of the average unweighted amounts and average weighted amounts of cash outflows calculated under paragraphs (c)(15) and (16) of this section (row 14);
(15) The average unweighted amount and average weighted amount of cash outflows under § 249.32(c) and (f) (row 15);
(16) The average unweighted amount and average weighted amount of cash outflows under § 249.32(b), (d), and (e) (row 16);
(17) The average unweighted amount and average weighted amount of cash outflows under § 249.32(l) (row 17);
(18) The average unweighted amount and average weighted amount of cash outflows under § 249.32(i) (row 18);
(19) The sum of average unweighted amounts and average weighted amounts of cash outflows calculated under paragraphs (c)(5), (9), (13), (14), (17), and (18) of this section (row 19);
(20) The average unweighted amount and average weighted amount of cash inflows under § 249.33(f) (row 20);
(21) The average unweighted amount and average weighted amount of cash inflows under § 249.33(c) (row 21);
(22) The average unweighted amount and average weighted amount of cash inflows under § 249.33(d) (row 22);
(23) The sum of average unweighted amounts and average weighted amounts of cash inflows calculated under paragraphs (c)(24) through (27) of this section (row 23);
(24) The average unweighted amount and average weighted amount of cash inflows under § 249.33(b) (row 24);
(25) The average unweighted amount and average weighted amount of cash inflows under § 249.33(e) (row 25);
(26) The average unweighted amount and average weighted amount of cash inflows under § 249.33(g) (row 26);
(27) The average unweighted amount and average weighted amount of cash inflows under § 249.33(h) (row 27);
(28) The sum of average unweighted amounts and average weighted amounts of cash inflows reported under paragraphs (c)(20) through (23) of this section (row 28);
(29) The average amount of the HQLA amounts as calculated under § 249.21(a) (row 29);
(30) The average amount of the total net cash outflow amounts excluding the maturity mismatch add-on as calculated under § 249.30(a)(1) and (2) (row 30);
(31) The average amount of the maturity mismatch add-ons as calculated under § 249.30(b) (row 31);
(32) The average amount of the total net cash outflow amount as calculated under § 249.30 prior to the application of the applicable outflow adjustment percentage described in Table 1 to § 249.30(c) (row 32);
(33) The applicable outflow adjustment percentage described in Table 1 to § 249.30(c) (row 33);
(34) The average amount of the total net cash outflow as calculated under § 249.30 (row 34); and
(35) The average of the liquidity coverage ratios as calculated under § 249.10(b) (row 35).
(d) Qualitative disclosures. (1) A covered depository institution holding company or covered nonbank company subject to this subpart must provide a qualitative discussion of the factors that have a significant effect on its liquidity coverage ratio, which may include the following:
(i) The main drivers of the liquidity coverage ratio;
(ii) Changes in the liquidity coverage ratio over time and causes of such changes;
(iii) The composition of eligible HQLA;
(iv) Concentration of funding sources;
(v) Derivative exposures and potential collateral calls;
(vi) Currency mismatch in the liquidity coverage ratio; or
(vii) The centralized liquidity management function of the covered depository institution holding company or covered nonbank company and its interaction with other functional areas of the covered depository institution holding company or covered nonbank company.
(2) If a covered depository institution holding company or covered nonbank company subject to this subpart believes that the qualitative discussion required in paragraph (d)(1) of this section would prejudice seriously its position by resulting in public disclosure of specific commercial or financial information that is either proprietary or confidential in nature, the covered depository institution holding company or covered nonbank company is not required to include those specific items in its qualitative discussion, but must provide more general information about the items that had a significant effect on its liquidity coverage ratio, together with the fact that, and the reason why, more specific information was not discussed.
Subpart K – Net Stable Funding Ratio
§ 249.100 Net stable funding ratio.
(a) Minimum net stable funding ratio requirement. A Board-regulated institution must maintain a net stable funding ratio that is equal to or greater than 1.0 on an ongoing basis in accordance with this subpart.
(b) Calculation of the net stable funding ratio. For purposes of this part, a Board-regulated institution’s net stable funding ratio equals:
(1) The Board-regulated institution’s available stable funding (ASF) amount, calculated pursuant to § 249.103, as of the calculation date; divided by
(2) The Board-regulated institution’s required stable funding (RSF) amount, calculated pursuant to § 249.105, as of the calculation date.
§ 249.101 Determining maturity.
For purposes of calculating its net stable funding ratio, including its ASF amount and RSF amount, under subparts K through N, a Board-regulated institution shall assume each of the following:
(a) With respect to any NSFR liability, the NSFR liability matures according to § 249.31(a)(1) of this part without regard to whether the NSFR liability is subject to § 249.32;
(b) With respect to an asset, the asset matures according to § 249.31(a)(2) of this part without regard to whether the asset is subject to § 249.33 of this part;
(c) With respect to an NSFR liability or asset that is perpetual, the NSFR liability or asset matures one year or more after the calculation date;
(d) With respect to an NSFR liability or asset that has an open maturity, the NSFR liability or asset matures on the first calendar day after the calculation date, except that in the case of a deferred tax liability, the NSFR liability matures on the first calendar day after the calculation date on which the deferred tax liability could be realized; and
(e) With respect to any principal payment of an NSFR liability or asset, such as an amortizing loan, that is due prior to the maturity of the NSFR liability or asset, the payment matures on the date on which it is contractually due.
§ 249.102 Rules of construction.
(a) Balance-sheet metric. Unless otherwise provided in this subpart, an NSFR regulatory capital element, NSFR liability, or asset that is not included on a Board-regulated institution’s balance sheet is not assigned an RSF factor or ASF factor, as applicable; and an NSFR regulatory capital element, NSFR liability, or asset that is included on a Board-regulated institution’s balance sheet is assigned an RSF factor or ASF factor, as applicable.
(b) Netting of certain transactions. Where a Board-regulated institution has secured lending transactions, secured funding transactions, or asset exchanges with the same counterparty and has offset the gross value of receivables due from the counterparty under the transactions by the gross value of payables under the transactions due to the counterparty, the receivables or payables associated with the offsetting transactions that are not included on the Board-regulated institution’s balance sheet are treated as if they were included on the Board-regulated institution’s balance sheet with carrying values, unless the criteria in 12 CFR 217.10(c)(2)(v)(A) through (C) are met.
(c) Treatment of Securities Received in an Asset Exchange by a Securities Lender. Where a Board-regulated institution receives a security in an asset exchange, acts as a securities lender, includes the carrying value of the received security on its balance sheet, and has not rehypothecated the security received:
(1) The security received by the Board-regulated institution is not assigned an RSF factor; and
(2) The obligation to return the security received by the Board-regulated institution is not assigned an ASF factor.
§ 249.103 Calculation of available stable funding amount.
A Board-regulated institution’s ASF amount equals the sum of the carrying values of the Board-regulated institution’s NSFR regulatory capital elements and NSFR liabilities, in each case multiplied by the ASF factor applicable in § 249.104 or § 249.107(c) and consolidated in accordance with § 249.109.
§ 249.104 ASF factors.
(a) NSFR regulatory capital elements and NSFR liabilities assigned a 100 percent ASF factor. An NSFR regulatory capital element or NSFR liability of a Board-regulated institution is assigned a 100 percent ASF factor if it is one of the following:
(1) An NSFR regulatory capital element; or
(2) An NSFR liability that has a maturity of one year or more from the calculation date, is not described in paragraph (d)(9) of this section, and is not a retail deposit or brokered deposit provided by a retail customer or counterparty.
(b) NSFR liabilities assigned a 95 percent ASF factor. An NSFR liability of a Board-regulated institution is assigned a 95 percent ASF factor if it is one of the following:
(1) A stable retail deposit (regardless of maturity or collateralization) held at the Board-regulated institution; or
(2) A sweep deposit that:
(i) Is deposited in accordance with a contract between the retail customer or counterparty and the Board-regulated institution, a controlled subsidiary of the Board-regulated institution, or a company that is a controlled subsidiary of the same top-tier company of which the Board-regulated institution is a controlled subsidiary;
(ii) Is entirely covered by deposit insurance; and
(iii) The Board-regulated institution demonstrates to the satisfaction of the Board that a withdrawal of such deposit is highly unlikely to occur during a liquidity stress event.
(c) NSFR liabilities assigned a 90 percent ASF factor. An NSFR liability of a Board-regulated institution is assigned a 90 percent ASF factor if it is funding provided by a retail customer or counterparty that is:
(1) A retail deposit (regardless of maturity or collateralization) other than a stable retail deposit or brokered deposit;
(2) A brokered reciprocal deposit where the entire amount is covered by deposit insurance;
(3) A sweep deposit that is deposited in accordance with a contract between the retail customer or counterparty and the Board-regulated institution, a controlled subsidiary of the Board-regulated institution, or a company that is a controlled subsidiary of the same top-tier company of which the Board-regulated institution is a controlled subsidiary, where the sweep deposit does not meet the requirements of paragraph (b)(2) of this section; or
(4) A brokered deposit that is not a brokered reciprocal deposit or a sweep deposit, that is not held in a transactional account, and that matures one year or more from the calculation date.
(d) NSFR liabilities assigned a 50 percent ASF factor. An NSFR liability of a Board-regulated institution is assigned a 50 percent ASF factor if it is one of the following:
(1) Unsecured wholesale funding that:
(i) Is not provided by a financial sector entity, a consolidated subsidiary of a financial sector entity, or a central bank;
(ii) Matures less than one year from the calculation date; and
(iii) Is not a security issued by the Board-regulated institution or an operational deposit placed at the Board-regulated institution;
(2) A secured funding transaction with the following characteristics:
(i) The counterparty is not a financial sector entity, a consolidated subsidiary of a financial sector entity, or a central bank;
(ii) The secured funding transaction matures less than one year from the calculation date; and
(iii) The secured funding transaction is not a collateralized deposit that is an operational deposit placed at the Board-regulated institution;
(3) Unsecured wholesale funding that:
(i) Is provided by a financial sector entity, a consolidated subsidiary of a financial sector entity, or a central bank;
(ii) Matures six months or more, but less than one year, from the calculation date; and
(iii) Is not a security issued by the Board-regulated institution or an operational deposit;
(4) A secured funding transaction with the following characteristics:
(i) The counterparty is a financial sector entity, a consolidated subsidiary of a financial sector entity, or a central bank;
(ii) The secured funding transaction matures six months or more, but less than one year, from the calculation date; and
(iii) The secured funding transaction is not a collateralized deposit that is an operational deposit;
(5) A security issued by the Board-regulated institution that matures six months or more, but less than one year, from the calculation date;
(6) An operational deposit placed at the Board-regulated institution;
(7) A brokered deposit provided by a retail customer or counterparty that is not described in paragraphs (c) or (e)(2) of this section;
(8) A sweep deposit provided by a retail customer or counterparty that is not described in paragraphs (b) or (c) of this section;
(9) An NSFR liability owed to a retail customer or counterparty that is not a deposit and is not a security issued by the Board-regulated institution; or
(10) Any other NSFR liability that matures six months or more, but less than one year, from the calculation date and is not described in paragraphs (a) through (c) or (d)(1) through (d)(9) of this section.
(e) NSFR liabilities assigned a zero percent ASF factor. An NSFR liability of a Board-regulated institution is assigned a zero percent ASF factor if it is one of the following:
(1) A trade date payable that results from a purchase by the Board-regulated institution of a financial instrument, foreign currency, or commodity that is contractually required to settle within the lesser of the market standard settlement period for the particular transaction and five business days from the date of the sale;
(2) A brokered deposit provided by a retail customer or counterparty that is not a brokered reciprocal deposit or sweep deposit, is not held in a transactional account, and matures less than six months from the calculation date;
(3) A security issued by the Board-regulated institution that matures less than six months from the calculation date;
(4) An NSFR liability with the following characteristics:
(i) The counterparty is a financial sector entity, a consolidated subsidiary of a financial sector entity, or a central bank;
(ii) The NSFR liability matures less than six months from the calculation date or has an open maturity; and
(iii) The NSFR liability is not a security issued by the Board-regulated institution or an operational deposit placed at the Board-regulated institution; or
(5) Any other NSFR liability that matures less than six months from the calculation date and is not described in paragraphs (a) through (d) or (e)(1) through (4) of this section.
§ 249.105 Calculation of required stable funding amount.
(a) Required stable funding amount. A Board-regulated institution’s RSF amount equals the Board-regulated institution’s required stable funding adjustment percentage as determined under paragraph (b) of this section multiplied by the sum of:
(1) The carrying values of a Board-regulated institution’s assets (other than amounts included in the calculation of the derivatives RSF amount pursuant to § 249.107(b)) and the undrawn amounts of a Board-regulated institution’s credit and liquidity facilities, in each case multiplied by the RSF factors applicable in § 249.106; and
(2) The Board-regulated institution’s derivatives RSF amount calculated pursuant to § 249.107(b).
(b) Required stable funding adjustment percentage. A Board-regulated institution’s required stable funding adjustment percentage is determined pursuant to table 1 to this paragraph (b).
Table 1 to Paragraph (
| Required stable funding adjustment percentage | Percent |
|---|---|
| Global systemically important BHC or GSIB depository institution | 100 |
| Category II Board-regulated institution | 100 |
| Category III Board-regulated institution with $75 billion or more in average weighted short-term wholesale funding and Category III Board-regulated institution that is a consolidated subsidiary of such a Board-regulated institution | 100 |
| Category III Board-regulated institution with less than $75 billion in average weighted short-term wholesale funding and any Category III Board-regulated institution that is a consolidated subsidiary of such a Category III Board-regulated institution | 85 |
| Category IV Board-regulated institution with $50 billion or more in average weighted short-term wholesale funding | 70 |
(c) Transition into a different required stable funding adjustment percentage. (1) A Board-regulated institution whose required stable funding adjustment percentage increases from a lower to a higher required stable funding adjustment percentage may continue to use its previous lower required stable funding adjustment percentage until the first day of the third calendar quarter after the required stable funding adjustment percentage increases.
(2) A Board-regulated institution whose required stable funding adjustment percentage decreases from a higher to a lower required stable funding adjustment percentage must continue to use its previous higher required stable funding adjustment percentage until the first day of the first calendar quarter after the required stable funding adjustment percentage decreases.
§ 249.106 RSF factors.
(a) Unencumbered assets and commitments. All assets and undrawn amounts under credit and liquidity facilities, unless otherwise provided in § 249.107(b) relating to derivative transactions or paragraphs (b) through (d) of this section, are assigned RSF factors as follows:
(1) Unencumbered assets assigned a zero percent RSF factor. An asset of a Board-regulated institution is assigned a zero percent RSF factor if it is one of the following:
(i) Currency and coin;
(ii) A cash item in the process of collection;
(iii) A Reserve Bank balance or other claim on a Reserve Bank that matures less than six months from the calculation date;
(iv) A claim on a foreign central bank that matures less than six months from the calculation date;
(v) A trade date receivable due to the Board-regulated institution resulting from the Board-regulated institution’s sale of a financial instrument, foreign currency, or commodity that is required to settle no later than the market standard, without extension, for the particular transaction, and that has yet to settle but is not more than five business days past the scheduled settlement date;
(vi) Any other level 1 liquid asset not described in paragraphs (a)(1)(i) through (a)(1)(v) of this section; or
(vii) A secured lending transaction with the following characteristics:
(A) The secured lending transaction matures less than six months from the calculation date;
(B) The secured lending transaction is secured by level 1 liquid assets;
(C) The borrower is a financial sector entity or a consolidated subsidiary thereof; and
(D) The Board-regulated institution retains the right to rehypothecate the collateral provided by the counterparty for the duration of the secured lending transaction.
(2) Unencumbered assets and commitments assigned a 5 percent RSF factor. An undrawn amount of a committed credit facility or committed liquidity facility extended by a Board-regulated institution is assigned a 5 percent RSF factor. For the purposes of this paragraph (a)(2), the undrawn amount of a committed credit facility or committed liquidity facility is the entire unused amount of the facility that could be drawn upon within one year of the calculation date under the governing agreement.
(3) Unencumbered assets assigned a 15 percent RSF factor. An asset of a Board-regulated institution is assigned a 15 percent RSF factor if it is one of the following:
(i) A level 2A liquid asset; or
(ii) A secured lending transaction or unsecured wholesale lending with the following characteristics:
(A) The asset matures less than six months from the calculation date;
(B) The borrower is a financial sector entity or a consolidated subsidiary thereof; and
(C) The asset is not described in paragraph (a)(1)(vii) of this section and is not an operational deposit described in paragraph (a)(4)(iii) of this section.
(4) Unencumbered assets assigned a 50 percent RSF factor. An asset of a Board-regulated institution is assigned a 50 percent RSF factor if it is one of the following:
(i) A level 2B liquid asset;
(ii) A secured lending transaction or unsecured wholesale lending with the following characteristics:
(A) The asset matures six months or more, but less than one year, from the calculation date;
(B) The borrower is a financial sector entity, a consolidated subsidiary thereof, or a central bank; and
(C) The asset is not an operational deposit described in paragraph (a)(4)(iii) of this section;
(iii) An operational deposit placed by the Board-regulated institution at a financial sector entity or a consolidated subsidiary thereof; or
(iv) An asset that is not described in paragraphs (a)(1) through (a)(3) or (a)(4)(i) through (a)(4)(iii) of this section that matures less than one year from the calculation date, including:
(A) A secured lending transaction or unsecured wholesale lending where the borrower is a wholesale customer or counterparty that is not a financial sector entity, a consolidated subsidiary thereof, or a central bank; or
(B) Lending to a retail customer or counterparty.
(5) Unencumbered assets assigned a 65 percent RSF factor. An asset of a Board-regulated institution is assigned a 65 percent RSF factor if it is one of the following:
(i) A retail mortgage that matures one year or more from the calculation date and is assigned a risk weight of no greater than 50 percent under subpart D of Regulation Q (12 CFR part 217); or
(ii) A secured lending transaction, unsecured wholesale lending, or lending to a retail customer or counterparty with the following characteristics:
(A) The asset is not described in paragraphs (a)(1) through (a)(5)(i) of this section;
(B) The borrower is not a financial sector entity or a consolidated subsidiary thereof;
(C) The asset matures one year or more from the calculation date; and
(D) The asset is assigned a risk weight of no greater than 20 percent under subpart D of Regulation Q (12 CFR part 217).
(6) Unencumbered assets assigned an 85 percent RSF factor. An asset of a Board-regulated institution is assigned an 85 percent RSF factor if it is one of the following:
(i) A retail mortgage that matures one year or more from the calculation date and is assigned a risk weight of greater than 50 percent under subpart D of Regulation Q (12 CFR part 217);
(ii) A secured lending transaction, unsecured wholesale lending, or lending to a retail customer or counterparty with the following characteristics:
(A) The asset is not described in paragraphs (a)(1) through (a)(6)(i) of this section;
(B) The borrower is not a financial sector entity or a consolidated subsidiary thereof;
(C) The asset matures one year or more from the calculation date; and
(D) The asset is assigned a risk weight of greater than 20 percent under subpart D of Regulation Q (12 CFR part 217);
(iii) A publicly traded common equity share that is not HQLA;
(iv) A security, other than a publicly traded common equity share, that matures one year or more from the calculation date and is not HQLA; or
(v) A commodity for which derivative transactions are traded on a U.S. board of trade or trading facility designated as a contract market under sections 5 and 6 of the Commodity Exchange Act (7 U.S.C. 7 and 8) or on a U.S. swap execution facility registered under section 5h of the Commodity Exchange Act (7 U.S.C. 7b-3) or on another exchange, whether located in the United States or in a jurisdiction outside of the United States.
(7) Unencumbered assets assigned a 100 percent RSF factor. An asset of a Board-regulated institution is assigned a 100 percent RSF factor if it is not described in paragraphs (a)(1) through (a)(6) of this section, including a secured lending transaction or unsecured wholesale lending where the borrower is a financial sector entity or a consolidated subsidiary thereof and that matures one year or more from the calculation date.
(b) Nonperforming assets. An RSF factor of 100 percent is assigned to any asset that is past due by more than 90 days or nonaccrual.
(c) Encumbered assets. An encumbered asset, unless otherwise provided in § 249.107(b) relating to derivative transactions, is assigned an RSF factor as follows:
(1)(i) Encumbered assets with less than six months remaining in the encumbrance period. For an encumbered asset with less than six months remaining in the encumbrance period, the same RSF factor is assigned to the asset as would be assigned if the asset were not encumbered.
(ii) Encumbered assets with six months or more, but less than one year, remaining in the encumbrance period. For an encumbered asset with six months or more, but less than one year, remaining in the encumbrance period:
(A) If the asset would be assigned an RSF factor of 50 percent or less under paragraphs (a)(1) through (a)(4) of this section if the asset were not encumbered, an RSF factor of 50 percent is assigned to the asset.
(B) If the asset would be assigned an RSF factor of greater than 50 percent under paragraphs (a)(5) through (a)(7) of this section if the asset were not encumbered, the same RSF factor is assigned to the asset as would be assigned if it were not encumbered.
(iii) Encumbered assets with one year or more remaining in the encumbrance period. For an encumbered asset with one year or more remaining in the encumbrance period, an RSF factor of 100 percent is assigned to the asset.
(2) Assets encumbered for period longer than remaining maturity. If an asset is encumbered for an encumbrance period longer than the asset’s maturity, the asset is assigned an RSF factor under paragraph (c)(1) of this section based on the length of the encumbrance period.
(3) Segregated account assets. An asset held in a segregated account maintained pursuant to statutory or regulatory requirements for the protection of customer assets is not considered encumbered for purposes of this paragraph solely because such asset is held in the segregated account.
(d) Off-balance sheet rehypothecated assets. When an NSFR liability of a Board-regulated institution is secured by an off-balance sheet asset or results from the Board-regulated institution selling an off-balance sheet asset (for instance, in the case of a short sale), other than an off-balance sheet asset received by the Board-regulated institution as variation margin under a derivative transaction:
(1) If the Board-regulated institution received the off-balance sheet asset under a lending transaction, an RSF factor is assigned to the lending transaction as if it were encumbered for the longer of:
(i) The remaining maturity of the NSFR liability; and
(ii) Any other encumbrance period applicable to the lending transaction;
(2) If the Board-regulated institution received the off-balance sheet asset under an asset exchange, an RSF factor is assigned to the asset provided by the Board-regulated institution in the asset exchange as if the provided asset were encumbered for the longer of:
(i) The remaining maturity of the NSFR liability; and
(ii) Any other encumbrance period applicable to the provided asset; or
(3) If the Board-regulated institution did not receive the off-balance sheet asset under a lending transaction or asset exchange, an RSF factor is assigned to the on-balance sheet asset resulting from the rehypothecation of the off-balance sheet asset as if the on-balance sheet asset were encumbered for the longer of:
(i) The remaining maturity of the NSFR liability; and
(ii) Any other encumbrance period applicable to the transaction through which the off-balance sheet asset was received.
§ 249.107 Calculation of NSFR derivatives amounts.
(a) General requirement. A Board-regulated institution must calculate its derivatives RSF amount and certain components of its ASF amount relating to the Board-regulated institution’s derivative transactions (which includes cleared derivative transactions of a customer with respect to which the Board-regulated institution is acting as agent for the customer that are included on the Board-regulated institution’s balance sheet under GAAP) in accordance with this section.
(b) Calculation of required stable funding amount relating to derivative transactions. A Board-regulated institution’s derivatives RSF amount equals the sum of:
(1) Current derivative transaction values. The Board-regulated institution’s NSFR derivatives asset amount, as calculated under paragraph (d)(1) of this section, multiplied by an RSF factor of 100 percent;
(2) Variation margin provided. The carrying value of variation margin provided by the Board-regulated institution under each derivative transaction not subject to a qualifying master netting agreement and each QMNA netting set, to the extent the variation margin reduces the Board-regulated institution’s derivatives liability value under the derivative transaction or QMNA netting set, as calculated under paragraph (f)(2) of this section, multiplied by an RSF factor of zero percent;
(3) Excess variation margin provided. The carrying value of variation margin provided by the Board-regulated institution under each derivative transaction not subject to a qualifying master netting agreement and each QMNA netting set in excess of the amount described in paragraph (b)(2) of this section for each derivative transaction or QMNA netting set, multiplied by the RSF factor assigned to each asset comprising the variation margin pursuant to § 249.106;
(4) Variation margin received. The carrying value of variation margin received by the Board-regulated institution, multiplied by the RSF factor assigned to each asset comprising the variation margin pursuant to § 249.106;
(5) Potential valuation changes. (i) An amount equal to 5 percent of the sum of the gross derivative values of the Board-regulated institution that are liabilities, as calculated under paragraph (b)(5)(ii) of this section, for each of the Board-regulated institution’s derivative transactions not subject to a qualifying master netting agreement and each of its QMNA netting sets, multiplied by an RSF factor of 100 percent;
(ii) For purposes of paragraph (5)(i) of this section, the gross derivative value of a derivative transaction not subject to a qualifying master netting agreement or of a QMNA netting set is equal to the value to the Board-regulated institution, calculated as if no variation margin had been exchanged and no settlement payments had been made based on changes in the value of the derivative transaction or QMNA netting set.
(6) Contributions to central counterparty mutualized loss sharing arrangements. The fair value of a Board-regulated institution’s contribution to a central counterparty’s mutualized loss sharing arrangement (regardless of whether the contribution is included on the Board-regulated institution’s balance sheet), multiplied by an RSF factor of 85 percent; and
(7) Initial margin provided. The fair value of initial margin provided by the Board-regulated institution for derivative transactions (regardless of whether the initial margin is included on the Board-regulated institution’s balance sheet), which does not include initial margin provided by the Board-regulated institution for cleared derivative transactions with respect to which the Board-regulated institution is acting as agent for a customer and the Board-regulated institution does not guarantee the obligations of the customer’s counterparty to the customer under the derivative transaction (such initial margin would be assigned an RSF factor pursuant to § 249.106 to the extent the initial margin is included on the Board-regulated institution’s balance sheet), multiplied by an RSF factor equal to the higher of 85 percent or the RSF factor assigned to each asset comprising the initial margin pursuant to § 249.106.
(c) Calculation of available stable funding amount relating to derivative transactions. The following amounts of a Board-regulated institution are assigned a zero percent ASF factor:
(1) The Board-regulated institution’s NSFR derivatives liability amount, as calculated under paragraph (d)(2) of this section; and
(2) The carrying value of NSFR liabilities in the form of an obligation to return initial margin or variation margin received by the Board-regulated institution.
(d) Calculation of NSFR derivatives asset or liability amount. (1) A Board-regulated institution’s NSFR derivatives asset amount is the greater of:
(i) Zero; and
(ii) The Board-regulated institution’s total derivatives asset amount, as calculated under paragraph (e)(1) of this section, less the Board-regulated institution’s total derivatives liability amount, as calculated under paragraph (e)(2) of this section.
(2) A Board-regulated institution’s NSFR derivatives liability amount is the greater of:
(i) Zero; and
(ii) The Board-regulated institution’s total derivatives liability amount, as calculated under paragraph (e)(2) of this section, less the Board-regulated institution’s total derivatives asset amount, as calculated under paragraph (e)(1) of this section.
(e) Calculation of total derivatives asset and liability amounts. (1) A Board-regulated institution’s total derivatives asset amount is the sum of the Board-regulated institution’s derivatives asset values, as calculated under paragraph (f)(1) of this section, for each derivative transaction not subject to a qualifying master netting agreement and each QMNA netting set.
(2) A Board-regulated institution’s total derivatives liability amount is the sum of the Board-regulated institution’s derivatives liability values, as calculated under paragraph (f)(2) of this section, for each derivative transaction not subject to a qualifying master netting agreement and each QMNA netting set.
(f) Calculation of derivatives asset and liability values. For each derivative transaction not subject to a qualifying master netting agreement and each QMNA netting set:
(1) The derivatives asset value is equal to the asset value to the Board-regulated institution, after taking into account:
(i) Any variation margin received by the Board-regulated institution that is in the form of cash and meets the following conditions:
(A) The variation margin is not segregated;
(B) The variation margin is received in connection with a derivative transaction that is governed by a QMNA or other contract between the counterparties to the derivative transaction, which stipulates that the counterparties agree to settle any payment obligations on a net basis, taking into account any variation margin received or provided;
(C) The variation margin is calculated and transferred on a daily basis based on mark-to-fair value of the derivative contract; and
(D) The variation margin is in a currency specified as an acceptable currency to settle obligations in the relevant governing contract; and
(ii) Any variation margin received by the Board-regulated institution that is in the form of level 1 liquid assets and meets the conditions of paragraph (f)(1)(i) of this section provided the Board-regulated institution retains the right to rehypothecate the asset for the duration of time that the asset is posted as variation margin to the Board-regulated institution; or
(2) The derivatives liability value is equal to the liability value of the Board-regulated institution, after taking into account any variation margin provided by the Board-regulated institution.
(a) Treatment of Covered Federal Reserve Facility Funding. Notwithstanding any other section of this part and except as provided in paragraph (b) of this section, available stable funding amounts and required stable funding amounts related to Covered Federal Reserve Facility Funding and the assets securing Covered Federal Reserve Facility Funding are excluded from the calculation of a Board-regulated institution’s net stable funding ratio calculated under § 249.100(b).
(b) Exception. To the extent the Covered Federal Reserve Facility Funding is secured by securities, debt obligations, or other instruments issued by the Board-regulated institution or one of its consolidated subsidiaries, the Covered Federal Reserve Facility Funding and assets securing the Covered Federal Reserve Facility Funding are not subject to paragraph (a) of this section and the available stable funding amount and required stable funding amount must be included in the Board-regulated institution’s net stable funding ratio calculated under § 249.100(b).
§ 249.109 Rules for consolidation.
(a) Consolidated subsidiary available stable funding amount. For available stable funding of a legal entity that is a consolidated subsidiary of a Board-regulated institution, including a consolidated subsidiary organized under the laws of a foreign jurisdiction, the Board-regulated institution may include the available stable funding of the consolidated subsidiary in its ASF amount up to:
(1) The RSF amount of the consolidated subsidiary, as calculated by the Board-regulated institution for the Board-regulated institution’s net stable funding ratio under this part; plus
(2) Any amount in excess of the RSF amount of the consolidated subsidiary, as calculated by the Board-regulated institution for the Board-regulated institution’s net stable funding ratio under this part, to the extent the consolidated subsidiary may transfer assets to the top-tier Board-regulated institution, taking into account statutory, regulatory, contractual, or supervisory restrictions, such as sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 12 U.S.C. 371c-1) and Regulation W (12 CFR part 223).
(b) Required consolidation procedures. To the extent a Board-regulated institution includes an ASF amount in excess of the RSF amount of the consolidated subsidiary, the Board-regulated institution must implement and maintain written procedures to identify and monitor applicable statutory, regulatory, contractual, supervisory, or other restrictions on transferring assets from any of its consolidated subsidiaries. These procedures must document which types of transactions the Board-regulated institution could use to transfer assets from a consolidated subsidiary to the Board-regulated institution and how these types of transactions comply with applicable statutory, regulatory, contractual, supervisory, or other restrictions.
Subpart L – Net Stable Funding Shortfall
§ 249.110 NSFR shortfall: Supervisory framework.
(a) Notification requirements. A Board-regulated institution must notify the Board no later than 10 business days, or such other period as the Board may otherwise require by written notice, following the date that any event has occurred that would cause or has caused the Board-regulated institution’s net stable funding ratio to be less than 1.0 as required under § 249.100.
(b) Liquidity Plan. (1) A Board-regulated institution must within 10 business days, or such other period as the Board may otherwise require by written notice, provide to the Board a plan for achieving a net stable funding ratio equal to or greater than 1.0 as required under § 249.100 if:
(i) The Board-regulated institution has or should have provided notice, pursuant to § 249.110(a), that the Board-regulated institution’s net stable funding ratio is, or will become, less than 1.0 as required under § 249.100;
(ii) The Board-regulated institution’s reports or disclosures to the Board indicate that the Board-regulated institution’s net stable funding ratio is less than 1.0 as required under § 249.100; or
(iii) The Board notifies the Board-regulated institution in writing that a plan is required and provides a reason for requiring such a plan.
(2) The plan must include, as applicable:
(i) An assessment of the Board-regulated institution’s liquidity profile;
(ii) The actions the Board-regulated institution has taken and will take to achieve a net stable funding ratio equal to or greater than 1.0 as required under § 249.100, including:
(A) A plan for adjusting the Board-regulated institution’s liquidity profile;
(B) A plan for remediating any operational or management issues that contributed to noncompliance with subpart K of this part; and
(iii) An estimated time frame for achieving full compliance with § 249.100.
(3) The Board-regulated institution must report to the Board at least monthly, or such other frequency as required by the Board, on progress to achieve full compliance with § 249.100.
(c) Supervisory and enforcement actions. The Board may, at its discretion, take additional supervisory or enforcement actions to address noncompliance with the minimum net stable funding ratio and other requirements of subparts K through N of this part (see also § 249.2(c)).
Subpart M – Transitions
§ 249.120 Transitions.
(a) Initial application. (1) A Board-regulated institution that initially becomes subject to the minimum net stable funding requirement under § 249.1(b)(1)(i) or (ii) after July 1, 2021, must comply with the requirements of subparts K through N of this part beginning on the first day of the third calendar quarter after which the Board-regulated institution becomes subject to this part.
(2) A Board-regulated institution that becomes subject to the minimum net stable funding requirement under § 249.1(b)(1)(iii) must comply with the requirements of subparts K through N of this part subject to a transition period specified by the Board.
(b) Transition to a different required stable funding adjustment percentage. (1) A Board-regulated institution whose required stable funding adjustment percentage changes is subject to the transition periods as set forth in § 249.105(c).
(2) A Board-regulated institution that is no longer subject to the minimum stable funding requirement of this part pursuant to § 249.1(b)(1)(i) or (ii) based on the size of total consolidated assets, cross-jurisdictional activity, total nonbank assets, weighted short-term wholesale funding, or off-balance sheet exposure calculated in accordance with the Call Report, or instructions to the FR Y-9LP, the FR Y-15, or equivalent reporting form, as applicable, for each of the four most recent calendar quarters may cease compliance with the requirements of subparts K through N of this part as of the first day of the first calendar quarter after it is no longer subject to § 249.1(b).
(c) Reservation of authority. The Board may extend or accelerate any compliance date of this part if the Board determines such extension or acceleration is appropriate. In determining whether an extension or acceleration is appropriate, the Board will consider the effect of the modification on financial stability, the period of time for which the modification would be necessary to facilitate compliance with the requirements of subparts K through N of this part, and the actions the Board-regulated institution is taking to come into compliance with the requirements of subparts K through N of this part.
Subpart N – NSFR Public Disclosure
§ 249.130 Timing, method, and retention of disclosures.
(a) Applicability. A covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company that is subject to the minimum stable funding requirement in § 249.100 of this part must publicly disclose the information required under this subpart.
(b) Timing of disclosure. (1) A covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company that is subject to the minimum stable funding requirement in § 249.100 of this part must provide timely public disclosures every second and fourth calendar quarter of all of the information required under this subpart for each of the two immediately preceding calendar quarters.
(2) A covered depository institution holding company, U.S. intermediate holding company, or covered nonbank holding company that is subject to this subpart must provide the disclosures required by this subpart beginning with the first calendar quarter that includes the date that is 18 months after the covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company first became subject to the minimum stable funding requirement in § 249.100 of this part.
(c) Disclosure method. A covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company must publicly disclose, in a direct and prominent manner, the information required under this subpart on its public internet site or in its public financial or other public regulatory reports.
(d) Availability. The disclosures provided under this subpart must remain publicly available for at least five years after the initial disclosure date.
§ 249.131 Disclosure requirements.
(a) General. A covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company must publicly disclose the information required by this subpart in the format provided in Table 1 to this paragraph:
(b) Calculation of disclosed average amounts – (1) General. (i) A covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company must calculate its disclosed amounts:
(A) On a consolidated basis and presented in millions of U.S. dollars or as a percentage, as applicable; and
(B) As simple averages of daily amounts for each calendar quarter.
(ii) A covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company must disclose the beginning date and end date for each calendar quarter.
(2) Calculation of unweighted amounts. (i) For each component of a covered depository institution holding company’s, U.S. intermediate holding company’s, or covered nonbank company’s ASF amount calculation, other than the NSFR derivatives liability amount and total derivatives liability amount, the “unweighted amount” means the sum of the carrying values of the covered depository institution holding company’s, U.S. intermediate holding company’s, or covered nonbank company’s NSFR regulatory capital elements and NSFR liabilities, as applicable, determined before applying the appropriate ASF factors, and subdivided into the following maturity categories, as applicable: Open maturity; less than six months after the calculation date; six months or more, but less than one year, after the calculation date; one year or more after the calculation date; and perpetual.
(ii) For each component of a covered depository institution holding company’s, U.S. intermediate holding company’s, or covered nonbank company’s RSF amount calculation, other than amounts included in paragraphs (c)(2)(xvi) through (xix) of this section, the “unweighted amount” means the sum of the carrying values of the covered depository institution holding company’s, U.S. intermediate holding company’s, or covered nonbank company’s assets and undrawn amounts of committed credit facilities and committed liquidity facilities extended by the covered depository institution holding company, or U.S. intermediate holding company, or covered nonbank company, as applicable, determined before applying the appropriate RSF factors, and subdivided by maturity into the following maturity categories, as applicable: Open maturity; less than six months after the calculation date; six months or more, but less than one year, after the calculation date; one year or more after the calculation date; and perpetual.
(3) Calculation of weighted amounts. (i) For each component of a covered depository institution holding company’s, U.S. intermediate holding company’s, or covered nonbank company’s ASF amount calculation, other than the NSFR derivatives liability amount and total derivatives liability amount, the “weighted amount” means the sum of the carrying values of the covered depository institution holding company’s, U.S. intermediate holding company’s, or covered nonbank company’s NSFR regulatory capital elements and NSFR liabilities, as applicable, multiplied by the appropriate ASF factors.
(ii) For each component of a covered depository institution holding company’s, U.S. intermediate holding company’s, or covered nonbank company’s RSF amount calculation, other than amounts included in paragraphs (c)(2)(xvi) through (xix) of this section, the “weighted amount” means the sum of the carrying values of the covered depository institution holding company’s, U.S. intermediate holding company’s, or covered nonbank company’s assets and undrawn amounts of committed credit facilities and committed liquidity facilities extended by the covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company, multiplied by the appropriate RSF factors.
(c) Quantitative disclosures. A covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company must disclose all of the information required under Table 1 to paragraph (a) of this section including:
(1) Disclosures of ASF amount calculations:
(i) The sum of the average weighted amounts and, for each applicable maturity category, the sum of the average unweighted amounts of paragraphs (c)(1)(ii) and (iii) of this section (row 1);
(ii) The average weighted amount and, for each applicable maturity category, the average unweighted amount of NSFR regulatory capital elements described in § 249.104(a)(1) (row 2);
(iii) The average weighted amount and, for each applicable maturity category, the average unweighted amount of securities described in §§ 249.104(a)(2), 249.104(d)(5), and 249.104(e)(3) (row 3);
(iv) The sum of the average weighted amounts and, for each applicable maturity category, the sum of the average unweighted amounts of paragraphs (c)(1)(v) through (viii) of this section (row 4);
(v) The average weighted amount and, for each applicable maturity category, the average unweighted amount of stable retail deposits and sweep deposits held at the covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company described in § 249.104(b) (row 5);
(vi) The average weighted amount and, for each applicable maturity category, the average unweighted amount of retail deposits other than stable retail deposits or brokered deposits, described in § 249.104(c)(1) (row 6);
(vii) The average weighted amount and, for each applicable maturity category, the average unweighted amount of sweep deposits, brokered reciprocal deposits, and brokered deposits provided by a retail customer or counterparty described in §§ 249.104(c)(2), 249.104(c)(3), 249.104(c)(4), 249.104(d)(7), 249.104(d)(8) and 249.104(e)(2) (row 7);
(viii) The average weighted amount and, for each applicable maturity category, the average unweighted amount of other funding provided by a retail customer or counterparty described in § 249.104(d)(9) (row 8);
(ix) The sum of the average weighted amounts and, for each applicable maturity category, the sum of the average unweighted amounts of paragraphs (c)(1)(x) and (xi) of this section (row 9);
(x) The average weighted amount and, for each applicable maturity category, the average unweighted amount of operational deposits placed at the covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company described in § 249.104(d)(6) (row 10);
(xi) The average weighted amount and, for each applicable maturity category, the average unweighted amount of other wholesale funding described in §§ 249.104(a)(2), 249.104(d)(1), 249.104(d)(2), 249.104(d)(3), 249.104(d)(4), 249.104(d)(10), and 249.104(e)(4) (row 11);
(xii) In the “unweighted” cell, the average amount of the NSFR derivatives liability amount described in § 249.107(d)(2) (row 12);
(xiii) In the “unweighted” cell, the average amount of the total derivatives liability amount described in § 249.107(e)(2) (row 13);
(xiv) The average weighted amount and, for each applicable maturity category, the average unweighted amount of all other liabilities not included in amounts disclosed under paragraphs (c)(1)(i) through (xiii) of this section (row 14);
(xv) The average amount of the ASF amount described in § 249.103 (row 15);
(2) Disclosures of RSF amount calculations, including to reflect any encumbrances under §§ 249.106(c) and 249.106(d):
(i) The sum of the average weighted amounts and the sum of the average unweighted amounts of paragraphs (c)(2)(ii) through (iv) of this section (row 16);
(ii) The average weighted amount and, for each applicable maturity category, the average unweighted amount of level 1 liquid assets described in §§ 249.106(a)(1) (row 17);
(iii) The average weighted amount and, for each applicable maturity category, the average unweighted amount of level 2A liquid assets described in § 249.106(a)(3)(i) (row 18);
(iv) The average weighted amount and, for each applicable maturity category, the average unweighted amount of level 2B liquid assets described in § 249.106(a)(4)(i) (row 19);
(v) The average weighted amount and, for each applicable maturity category, the average unweighted amount of assets described in § 249.106(a)(1), other than level 1 liquid assets included in amounts disclosed under paragraph (c)(2)(ii) of this section or secured lending transactions included in amounts disclosed under paragraph (c)(2)(viii) of this section (row 20);
(vi) The average weighted amount and, for each applicable maturity category, the average unweighted amount of operational deposits placed at financial sector entities or consolidated subsidiaries thereof described in § 249.106(a)(4)(iii) (row 21);
(vii) The sum of the average weighted amounts and, for each applicable maturity category, the sum of the average unweighted amounts of paragraphs (c)(2)(viii), (ix), (x), (xii), and (xiv) of this section (row 22);
(viii) The average weighted amount and, for each applicable maturity category, the average unweighted amount of secured lending transactions where the borrower is a financial sector entity or a consolidated subsidiary of a financial sector entity and the secured lending transaction is secured by level 1 liquid assets, described in §§ 249.106(a)(1)(vii), 249.106(a)(3)(ii), 249.106(a)(4)(ii), and 249.106(a)(7) (row 23);
(ix) The average weighted amount and, for each applicable maturity category, the average unweighted amount of secured lending transactions that are secured by assets other than level 1 liquid assets and unsecured wholesale lending, in each case where the borrower is a financial sector entity or a consolidated subsidiary of a financial sector entity, described in §§ 249.106(a)(3)(ii), 249.106(a)(4)(ii), and 249.106(a)(7) (row 24);
(x) The average weighted amount and, for each applicable maturity category, the average unweighted amount of secured lending transactions and unsecured wholesale lending to wholesale customers or counterparties that are not financial sector entities or consolidated subsidiaries thereof, and lending to retail customers and counterparties other than retail mortgages, described in §§ 249.106(a)(4)(iv), 249.106(a)(5)(ii), and 249.106(a)(6)(ii) (row 25);
(xi) The average weighted amount and, for each applicable maturity category, the average unweighted amount of secured lending transactions, unsecured wholesale lending, and lending to retail customers or counterparties that are assigned a risk weight of no greater than 20 percent under subpart D of Regulation Q (12 CFR part 217) described in §§ 249.106(a)(4)(ii), 249.106(a)(4)(iv), and 249.106(a)(5)(ii) (row 26);
(xii) The average weighted amount and, for each applicable maturity category, the average unweighted amount of retail mortgages described in §§ 249.106(a)(4)(iv), 249.106(a)(5)(i), and 249.106(a)(6)(i) (row 27);
(xiii) The average weighted amount and, for each applicable maturity category, the average unweighted amount of retail mortgages assigned a risk weight of no greater than 50 percent under subpart D of Regulation Q (12 CFR part 217) described in §§ 249.106(a)(4)(iv) and 249.106(a)(5)(i) (row 28);
(xiv) The average weighted amount and, for each applicable maturity category, the average unweighted amount of publicly traded common equity shares and other securities that are not HQLA and are not nonperforming assets described in §§ 249.106(a)(6)(iii), and 249.106(a)(6)(iv) (row 29);
(xv) The average weighted amount and average unweighted amount of commodities described in §§ 249.106(a)(6)(v) and 249.106(a)(7) (row 30);
(xvi) The average unweighted amount and average weighted amount of the sum of (A) assets contributed by the covered depository institution holding company to a central counterparty’s mutualized loss-sharing arrangement described in § 249.107(b)(6) (in which case the “unweighted amount” shall equal the fair value and the “weighted amount” shall equal the unweighted amount multiplied by 85 percent) and (B) assets provided as initial margin by the covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company for derivative transactions described in § 249.107(b)(7) (in which case the “unweighted amount” shall equal the fair value and the “weighted amount” shall equal the unweighted amount multiplied by the higher of 85 percent or the RSF factor assigned to the asset pursuant to § 249.106) (row 31);
(xvii) In the “unweighted” cell, the covered depository institution holding company’s, U.S. intermediate holding company’s, or covered nonbank company’s average amount of the NSFR derivatives asset amount under § 249.107(d)(1) and in the “weighted” cell, the covered depository institution holding company’s, U.S. intermediate holding company’s, or covered nonbank company’s average amount of the NSFR derivatives asset amount under § 249.107(d)(1) multiplied by 100 percent (row 32);
(xviii) In the “unweighted” cell, the covered depository institution holding company’s, U.S. intermediate holding company’s, or covered nonbank company’s average amount of the total derivatives asset amount described in § 249.107(e)(1) (row 33);
(xix) (A) In the “unweighted” cell, the average amount of the sum of the gross derivative liability values of the covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company that are liabilities for each of its derivative transactions not subject to a qualifying master netting agreement and each of its QMNA netting sets, described in § 249.107(b)(5), and (B) in the “weighted” cell, such sum multiplied by 5 percent, as described in § 249.107(b)(5) (row 34);
(xx) The average weighted amount and, for each applicable maturity category, the average unweighted amount of all other asset amounts not included in amounts disclosed under paragraphs (c)(2)(i) through (xix) of this section, including nonperforming assets (row 35);
(xxi) The average weighted and unweighted amount of undrawn credit and liquidity facilities described in § 249.106(a)(2) (row 36);
(xxii) The average amount of the RSF amount as calculated in § 249.105(a) prior to the application of the applicable required stable funding adjustment percentage in § 249.105(b) (row 37);
(xxiii) The applicable required stable funding adjustment percentage described in Table 1 to § 249.105(b) (row 38);
(xxiv) The average amount of the RSF amount as calculated under § 249.105 (row 39);
(3) The average of the net stable funding ratios as calculated under § 249.100(b) (row 40);
(d) Qualitative disclosures. (1) A covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company must provide a qualitative discussion of the factors that have a significant effect on its net stable funding ratio, which may include the following:
(i) The main drivers of the net stable funding ratio;
(ii) Changes in the net stable funding ratio results over time and the causes of such changes (for example, changes in strategies and circumstances);
(iii) Concentrations of funding sources and changes in funding structure; or
(iv) Concentrations of available and required stable funding within a covered company’s corporate structure (for example, across legal entities).
(2) If a covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company subject to this subpart believes that the qualitative discussion required in paragraph (d)(1) of this section would prejudice seriously its position by resulting in public disclosure of specific commercial or financial information that is either proprietary or confidential in nature, the covered depository institution holding company, U.S. intermediate holding company, or covered nonbank company is not required to include those specific items in its qualitative discussion, but must provide more general information about the items that had a significant effect on its net stable funding ratio, together with the fact that, and the reason why, more specific information was not discussed.
PART 250 – MISCELLANEOUS INTERPRETATIONS
Interpretations
§ 250.141 Member bank purchase of stock of “operations subsidiaries.”
(a) The Board of Governors has reexamined its position that the so-called “stock-purchase prohibition” of section 5136 of the Revised Statutes (12 U.S.C. 24), which is made applicable to member State banks by the 20th paragraph of section 9 of the Federal Reserve Act (12 U.S.C. 335), forbids the purchase by a member bank “for its own account of any shares of stock of any corporation” (the statutory language), except as specifically permitted by provisions of Federal law or as comprised within the concept of “such incidental powers as shall be necessary to carry on the business of banking”, referred to in the first sentence of paragraph “Seventh” of R.S. 5136.
(b) In 1966 the Board expressed the view that said incidental powers do not permit member banks to purchase stock of “operations subsidiaries” – that is, organizations designed to serve, in effect, as separately-incorporated departments of the bank, performing, at locations at which the bank is authorized to engage in business, functions that the bank is empowered to perform directly. (See 1966 Federal Reserve Bulletin 1151.)
(c) The Board now considers that the incidental powers clause permits a bank to organize its operations in the manner that it believes best facilitates the performance thereof. One method of organization is through departments; another is through separate incorporation of particular operations. In other words, a wholly owned subsidiary corporation engaged in activities that the bank itself may perform is simply a convenient alternative organizational arrangement.
(d) Reexamination of the apparent purposes and legislative history of the stock-purchase prohibition referred to above has led the Board to conclude that such prohibition should not be interpreted to preclude a member bank from adopting such an organizational arrangement unless its use would be inconsistent with other Federal law, either statutory or judicial.
(e) In view of the relationship between the operation of certain subsidiaries and the branch banking laws, the Board has also reexamined its rulings on what constitutes “money lent” for the purposes of section 5155 of the Revised Statutes (12 U.S.C. 36), which provides that “The termbranch * * * shall be held to include any branch bank, branch office, branch agency, additional office, or any branch place of business * * * at which deposits are received, or checks paid, or money lent.”
(f) The Board noted in its 1967 interpretation that offices that are open to the public and staffed by employees of the bank who regularly engage in soliciting borrowers, negotiating terms, and processing applications for loans (so-called loan production offices) constitute branches. (1967 Federal Reserve Bulletin 1334.) The Board also noted that later in that year it considered the question whether a bank holding company may acquire the stock of a so-called mortgage company on the basis that the company would be engaged in “furnishing services to or performing services for such bank holding company or its banking subsidiaries” (the so-called servicing exemption of section 4(c)(1)(C) of the Bank Holding Company Act; 12 U.S.C. 1843). In concluding affirmatively, the Board stated that “the appropriate test for determining whether the company may be considered as within the servicing exemption is whether the company will perform as principal any banking activities – such as receiving deposits, paying checks, extending credit, conducting a trust department, and the like. In other words, if the mortgage company is to act merely as an adjunct to a bank for the purpose of facilitating the bank’s operations, the company may appropriately be considered as within the scope of the servicing exemption.” (1967 Federal Reserve Bulletin 1911; 12 CFR 225.122.)
(g) The Board believes that the purposes of the branch banking laws and the servicing exemption are related. Generally, what constitutes a branch does not constitute a servicing organization and, vice versa, an office that only performs servicing functions should not be considered a branch. (See 1958 Federal Reserve Bulletin 431, last paragraph; 12 CFR 225.104(e).) When viewed together, the above-cited interpretations on loan production offices and mortgage companies represent a departure from this principle. In reconsidering the laws involved, the Board has concluded that a test similar to that adopted with respect to the servicing exemption under the Bank Holding Company Act is appropriate for use in determining whether or not what constitutes money [is] lent at a particular office, for the purpose of the Federal branch banking laws.
(h) Accordingly, the Board considers that the following activities, individually or collectively, do not constitute the lending of money within the meaning of section 5155 of the revised statutes: Soliciting loans on behalf of a bank (or a branch thereof), assembling credit information, making property inspections and appraisals, securing title information, preparing applications for loans (including making recommendations with respect to action thereon), soliciting investors to purchase loans from the bank, seeking to have such investors contract with the bank for the servicing of such loans, and other similar agent-type activities. When loans are approved and funds disbursed solely at the main office or a branch of the bank, an office at which only preliminary and servicing steps are taken is not a place where money [is] lent. Because preliminary and servicing steps of the kinds described do not constitute the performance of significant banking functions of the type that Congress contemplated should be performed only at governmentally approved offices, such office is accordingly not a branch.
(i) To summarize the foregoing, the Board has concluded that, insofar as Federal law is concerned, a member bank may purchase for its own account shares of a corporation to perform, at locations at which the bank is authorized to engage in business, functions that the bank is empowered to perform directly. Also, a member bank may establish and operate, at any location in the United States, a loan production office of the type described herein. Such offices may be established and operated by the bank either directly, or indirectly through a wholly-owned subsidiary corporation.
(j) This interpretation supersedes both the Board’s 1966 ruling on operations subsidiaries and its 1967 ruling on loan production offices, referred to above.
§ 250.142 Meaning of “obligor or maker” in determining limitation on securities investments by member State banks.
(a) From time to time the New York State Dormitory Authority offers issues of bonds with respect to each of which a different educational institution enters into an agreement to make rental payments to the Authority sufficient to cover interest and principal thereon when due. The Board of Governors of the Federal Reserve System has been asked whether a member State bank may invest up to 10 percent of its capital and surplus in each such issue.
(b) Paragraph Seventh of section 5136 of the U.S. Revised Statutes (12 U.S.C. 24) provides that “In no event shall the total amount of the investment securities of any one obligor or maker, held by [a national bank] for its own account, exceed at any time 10 per centum of its capital stock * * * and surplus fund”. That limitation is made applicable to member State banks by the 20th paragraph of section 9 of the Federal Reserve Act (12 U.S.C. 335).
(c) The Board considers that, within the meaning of these provisions of law, obligor does not include any person that acts solely as a conduit for transmission of funds received from another source, irrespective of a promise by such person to pay principal or interest on the obligation. While an obligor does not cease to be such merely because a third person has agreed to pay the obligor amounts sufficient to cover principal and interest on the obligations when due, a person that promises to pay an obligation, but as a practical matter has no resources with which to assume payment of the obligation except the amounts received from such third person, is not an obligor within the meaning of section 5136.
(d) Review of the New York Dormitory Authority Act (N.Y. Public Authorities Law sections 1675-1690), the Authority’s interpretation thereof, and materials with respect to the Authority’s “Revenue Bonds, Mills College of Education Issue, Series A” indicates that the Authority is not an obligor on those and similar bonds. Although the Authority promises to make all payments of principal and interest, a bank that invests in such bonds cannot be reasonably considered as doing so in reliance on the promise and responsibility of the Authority. Despite the Authority’s obligation to make payments on the bonds, if the particular college fails to perform its agreement to make rental payments to the Authority sufficient to cover all payments of bond principal and interest when due, as a practical matter the sole source of funds for payments to the bondholder is the particular college. The Authority has general borrowing power but no resources from which to assure repayment of any borrowing except from the particular colleges, and rentals received from one college may not be used to service bonds issued for another.
(e) Accordingly, the Board has concluded that each college for which the Authority issues obligations is the sole obligor thereon. A member State bank may therefore invest an amount up to 10 percent of its capital and surplus in the bonds of a particular college that are eligible investments under the Investment Securities Regulation of the Comptroller of the Currency (12 CFR Part 1), whether issued directly or indirectly through the Dormitory Authority.
§ 250.143 Member bank purchase of stock of foreign operations subsidiaries.
(a) In a previous interpretation, the Board determined that a State member bank would not violate the “stock-purchase prohibition” of section 5136 of the Revised Statutes (12 U.S.C. 24 ¶ 7) by purchasing and holding the shares of a corporation which performs “at locations at which the bank is authorized to engage in business, functions that the bank is empowered to perform directly”.
(b) In the above interpretation the Board viewed the creation of a wholly-owned subsidiary which engaged in activities that the bank itself could perform directly as an alternative organizational arrangement that would be permissible for member banks unless “its use would be inconsistent with other Federal law, either statutory or judicial”.
(c) In the Board’s judgment, the use by member banks of operations subsidiaries outside the United States would be clearly inconsistent with the statutory scheme of the Federal Reserve Act governing the foreign investments and operations of member banks. It is clear that Congress has given member banks the authority to conduct operations and make investments outside the United States only through gradually adopting a series of specific statutory amendments to the Federal Reserve Act, each of which has been carefully drawn to give the Board approval, supervisory, and regulatory authority over those operations and investments.
(d) As part of the original Federal Reserve Act, national banks were, with the Board’s permission, given the power to establish foreign branches.
(e) To summarize, the Board has concluded that a member bank may only organize and operate operations subsidiaries at locations in the United States. Investments by member banks in foreign subsidiaries must be made either with the Board’s permission under section 25 of the Federal Reserve Act or, with the Board’s consent, through an Edge Corporation subsidiary under section 25(a) of the Federal Reserve Act or through an Agreement Corporation subsidiary under section 25 of the Federal Reserve Act. In addition, it should be noted that bank holding companies may acquire the shares of certain foreign subsidiaries with the Board’s approval under section 4(c)(13) of the Bank Holding Company Act. These statutory sections taken together already give member banks a great deal of organizational flexibility in conducting their operations abroad.
§ 250.160 Federal funds transactions.
(a) It is the position of the Board of Governors of the Federal Reserve System that, for purposes of provisions of law administered by the Board, a transaction in Federal funds involves a loan on the part of the selling bank and a borrowing on the part of the purchasing bank.
(b) [Reserved]
§ 250.163 Inapplicability of amount limitations to “ineligible acceptances.”
(a) Since 1923, the Board has been of the view that “the acceptance power of State member banks is not necessarily confined to the provisions of section 13 (of the Federal Reserve Act), inasmuch as the laws of many States confer broader acceptance powers upon their State banks, and certain State member banks may, therefore, legally make acceptances of kinds which are not eligible for rediscount, but which may be eligible for purchase by Federal reserve banks under section 14.” 1923 FR bulletin 316, 317.
(b) In 1963, the Comptroller of the Currency ruled that “[n]ational banks are not limited in the character of acceptances which they may make in financing credit transactions, and bankers’ acceptances may be used for such purpose, since the making of acceptances is an essential part of banking authorized by 12 U.S.C. 24.” Comptroller’s manual 7.7420. Therefore, national banks are authorized by the Comptroller to make acceptances under 12 U.S.C. 24, although the acceptances are not the type described in section 13 of the Federal Reserve Act.
(c) A review of the legislative history surrounding the enactment of the acceptance provisions of section 13, reveals that Congress believed in 1913, that it was granting to national banks a power which they would not otherwise possess and had not previously possessed. See remarks of Congressmen Phelan, Helvering, Saunders, and Glass, 51 Cong. Rec. 4676, 4798, 4885, and 5064 (September 10, 12, 13, and 17 of 1913). Nevertheless, the courts have long recognized the evolutionary nature of banking and of the scope of the “incidental powers” clause of 12 U.S.C. 24. See Merchants Bank v. State Bank, 77 U.S. 604 (1870) (upholding the power of a national bank to certify a check under the “incidental powers” clause of 12 U.S.C. 24).
(d) It now appears that, based on the Board’s 1923 ruling, and the Comptroller’s 1963 ruling, both State member banks and national banks may make acceptances which are not of the type described in section 13 of the Federal Reserve Act. Yet, this appears to be a development that Congress did not contemplate when it drafted the acceptance provisions of section 13.
(e) The question is presented whether the amount limitations of section 13 should apply to acceptances made by a member bank that are not of the type described in section 13. (The amount limitations are of two kinds:
(1) A limitation on the amount that may be accepted for any one customer, and
(2) A limitation on the aggregate amount of acceptances that a member bank may make.)
(f) Section 13 authorizes acceptances of two types. The seventh paragraph of section 13 (12 U.S.C. 372) authorizes certain acceptances that arise out of specific transactions in goods. (These acceptances are sometimes referred to as “commercial acceptances.”) The 12th paragraph of section 13 authorizes member banks to make acceptances “for the purpose of furnishing dollar exchange as required by the usages of trade” in foreign transactions. (Such acceptances are referred to as “dollar exchange acceptances.”) In the 12th paragraph, there is a 10 percent limit on the amount of dollar exchange acceptances that may be accepted for any one customer (unless adequately secured) and a limitation on the aggregate amount of dollar exchange acceptances that a member bank may make. (The 12th paragraph, in imposing these limitations, refers to the acceptance of “such drafts or bills of exchange referred to (in) this paragraph.”) Similarly, the seventh paragraph imposes on commercial acceptances a parallel 10 percent per-customer limitation, and limitations on the aggregate amount of commercial acceptances. (In the case of the aggregate limitations, the seventh paragraph states that “no bank shall accept such bills to an amount” in excess of the aggregate limit; the reference to “such bills” makes clear that the limitation is only in respect of drafts or bills of exchange of the specific type described in the seventh paragraph.)
(g) Based on the language and parallel structure of the 7th and 12th paragraphs of section 13, and in the absence of a statement of congressional intent in the legislative history, the Board concludes that the per-customer and aggregate limitations of the 12th paragraph apply only to acceptances of the type described in that paragraph (dollar exchange acceptances), and the per-customer and aggregate limitations of the 7th paragraph (12 U.S.C. 372) apply only to acceptances of the type described in that paragraph.
§ 250.164 Bankers’ acceptances.
(a) Section 207 of the Bank Export Services Act (title II of Pub. L. 97-290) (“BESA”) raised the limits on the aggregate amount of eligible bankers’ acceptances (“BAs”) that may be created by an individual member bank from 50 per cent (or 100 per cent with the permission of the Board) of its paid up and unimpaired capital stock and surplus (“capital”) to 150 per cent (or 200 per cent with the permission of the Board) of its capital. Section 207 also prohibits a member bank from creating eligible BAs for any one person in the aggregate in excess of 10 per cent of the institution’s capital. This section of the BESA applies the same limits applicable to member banks to U.S. branches and agencies of foreign banks that are subject to reserve requirements under section 7 of the International Banking Act of 1978 (12 U.S.C. 3105). The Board is clarifying the proper meaning of the seventh paragraph of section 13 of the Federal Reserve Act, as amended by the BESA.
(b)(1) This section of the BESA provides that any portion of an eligible BA created by an institution subject to the BA limitations contained therein (“covered bank”) that is conveyed through a participation to another covered bank shall not be included in the calculation of the creating bank’s BA limits. The amount of the participation is to be applied to the calculation of the BA limits applicable to the covered bank receiving the participation. Although a covered bank that has reached its 150 or 200 percent limit can continue to create eligible acceptances by conveying participations to other covered banks, Congress has in effect imposed an aggregate limit on the eligible acceptances that may be created by all covered banks equal to the sum of 150 or 200 percent of the capital of all covered banks.
(2) The Board has clarified that under the statute an eligible BA created by a covered bank that is conveyed through a participation to an institution that is not subject to the limitations of this section of the BESA continues to be included in the calculation of the limits applicable to the creating covered bank. This will ensure that the total amount of eligible BAs that may be created by covered banks does not exceed the limitations established by Congress. In addition, this ensures that participations in acceptances are not used as a device for the avoidance of reserve requirements. Finally, this promotes the Congressional intent, with respect to covered banks, that foreign and domestic banks be on an equal footing and under the same legal requirements.
(3) In addition, the amount of a participation received by a covered bank from an institution not covered by the limitations of the Act is to be included in the calculation of the limits applicable to the covered bank receiving the participation. This result is based upon the language of the statute which includes within a covered bank’s limits on eligible BAs outstanding the amount of participations received by the covered bank. This provision reflects Congressional intent that a covered bank not be obligated on eligible bankers’ acceptances, and participations therein, for an amount in excess of 150 or 200 percent of the institution’s capital.
(c) The statute also provides that eligible acceptances growing out of domestic transactions are not to exceed 50 percent of the aggregate of all eligible acceptances authorized for covered banks. The Board has clarified that this 50 percent limitation is applicable to the maximum permissible amount of eligible BAs (150 or 200 percent of capital), regardless of the bank’s amount of eligible acceptances outstanding. The statutory language prior to the BESA amendment made clear that covered banks could issue eligible acceptances growing out of domestic transactions up to 50 percent of the amount of the total permissible eligible acceptances the bank could issue. The legislative history of the BESA indicates no intent to change this domestic acceptance limitation.
(d) The statute also provides that for the purpose of the limitations applicable to U.S. branches and agencies of foreign banks, a branch’s or agency’s capital is to be calculated as the dollar equivalent of the capital stock and surplus of the parent foreign bank as determined by the Board. The Board has clarified that for purposes of calculating the BA limits applicable to U.S. branches and agencies of foreign banks, the identity of the parent foreign bank is generally the same as for reserve requirement purposes; that is, the bank entity that owns the branch or agency most directly. The Board has also clarified that the procedures currently used for purposes of reporting to the Board on the Annual Report of Foreign Banking Organizations, Form FR Y-7, are also to be used in the calculation of the acceptance limits applicable to U.S. branches and agencies of foreign banks. (The FR Y-7 generally requires financial statements prepared in accordance with local accounting practices and an explanation of the accounting terminology and the major features of the accounting standards used in the preparation of the financial statements.) Conversions to the dollar equivalent of the worldwide capital of the foreign bank should be made periodically, but in no event less frequently than quarterly. In this regard, the Board recognizes the need to be flexible in dealing with the effect of foreign exchange rate fluctuations on the calculation of the worldwide capital of the parent foreign bank. Each foreign bank is to be responsible for coordinating the BA activity of its U.S. branches and agencies (including the aggregation of such activity) and establishing procedures that ensure that examiners will be able readily to determine compliance with the BESA limits.
§ 250.165 Bankers’ acceptances: definition of participations.
(a)(1) Section 207 of the Bank Export Services Act (Title II of Pub. L. 97-290) (“BESA”) raised the limits on the aggregate amount of eligible bankers’ acceptances (“BAs”) that may be created by a member bank from 50 percent (or 100 percent with the permission of the Board) of its paid up and unimpaired capital stock and surplus (“capital”) to 150 percent (or 200 percent with the permission of the Board) of its capital. Section 207 also prohibits a member bank from creating eligible BAs for any one person in the aggregate in excess of 10 percent of the institution’s capital. Eligible BAs growing out of domestic transactions are not to exceed 50 percent of the aggregate of all eligible acceptances authorized for a member bank. This section of the BESA applies the same limits applicable to member banks to U.S. branches and agencies of foreign banks that are subject to reserve requirements under section 7 of the International Banking Act of 1978 (12 U.S.C. 3105).
(2) This section of the BESA also provides that any portion of an eligible BA created by a covered bank (“senior bank”) that is conveyed through a “participation agreement” to another covered bank (“junior bank”) shall not be included in the calculation of the senior bank’s bankers’ acceptance limits established by section 207 of BESA.
(b) The legislative history of section 207 of the BESA indicates that Congress intended that the junior bank be obligated to the senior bank in the event that the account party defaults on its obligation to pay, but that the junior bank need not also be obligated to pay the holder of the acceptance at the time the BA is presented for payment. H. Rep. No. 97-629, 97th Cong., 2nd Sess. 15 (1982); 128 Cong. Rec. H 4647 (daily ed. July 27, 1982) (remarks by Rep. Barnard): and 128 Cong. Rec. H 8462 (daily ed. October 1, 1982) (remarks by Rep. Barnard). The legislative history also indicates that Congress intended that eligible BAs in which participations had been conveyed not be required to indicate the name(s) (or interest(s)) of the junior bank(s) on the acceptance in order for the BA to be excluded from the BESA limitations applicable to the senior bank. 128 Cong. Rec. S 12237 (daily ed. September 24, 1982) (remarks of Senators Heinz and Garn): and 128 Cong. Rec. H 4647 (daily ed. July 27, 1982) (remarks of Rep. Barnard).
(c)(1) In view of Congressional intent with regard to what constitutes a participation in an eligible BA, the Board has determined that, for purposes of the BESA limits, a participation must satisfy the following two minimum requirements:
(i) A written agreement entered into between the junior and senior bank under which the junior bank acquires the senior bank’s claim against the account party to the extent of the amount of the participation that is enforceable in the event that the account party fails to perform in accordance with the terms of the acceptance; and
(ii) The agreement between the junior and senior bank provides that the senior bank obtains a claim against the junior bank to the extent of the amount of the participation that is enforceable in the event the account party fails to perform in accordance with the terms of the acceptance.
(2) Consistent with Congressional intent, the minimum requirements do not require the junior bank to be obligated to pay the holder of the acceptance at the time the BA is presented for payment. Similarly, the minimum requirements do not require the name(s) or interest(s) of the junior bank(s) to appear on the face of the acceptance.
(3) An eligible BA that is conveyed through a participation that does not satisfy these minimum requirements would continue to be included in the BA limits applicable to the senior bank. Further, an eligible BA conveyed to a covered bank through a participation that provided for additional rights and obligations among the parties would be excluded from the BESA limitations of the senior bank provided the minimum requirements were satisfied.
(4) A participation structured pursuant to these minimum requirements would be as follows: Upon the conveyance of the participation, the senior bank retains its entire obligation to pay the holder of the BA at maturity. The senior bank has a claim against the junior bank to the extent of the amount of the participation that is enforceable in the event the account party fails to perform in accordance with the terms of the acceptance. Similarly, the junior bank has a corresponding claim against the account party to the extent of the amount of the participation that is enforceable in the event the account party fails to perform in accordance with the terms of the acceptance.
(d)(1) The Board is not requiring the senior bank and the account party specifically to agree that the senior bank’s rights are assignable because the Board believes such rights to be assignable even in the absence of an explicit agreement.
(2) The junior and senior banks may contract among themselves as to which party(ies) have the responsibility for administering the arrangement, enforcing claims, or exercising remedies.
(e) The Board recognizes that both the junior bank’s claim on the account party and the senior bank’s claim on the junior bank involve risk. Therefore, it is essential that these risks be assessed by the banks involved in accordance with prudent and sound banking practices. The examiners will in the normal course of the examination process review the risk assessment procedures instituted by the banks. The junior bank should review the creditworthiness of each account party when the junior bank acquires a participation and the senior bank should review on an ongoing basis the creditworthiness of the junior bank. Junior bank agreement to rely exclusively upon the credit judgment of the senior bank and purchase on an ongoing basis from the senior bank all participations in BAs regardless of the identity of the account party is not appropriate in view of the risks involved. However, in those cases involving a participation between a parent bank and its Edge affiliate where the credit review for both entities is performed by the parent bank, the Edge Corporation should maintain documentation indicating that it concurs with the parent bank’s analysis and that the acceptance participation is appropriate for inclusion in the Edge Corporation’s portfolio.
(f) Similarly, the Board has determined that it is appropriate to include the risks incurred by the senior bank in assessing the senior bank’s capital and the risks incurred by the junior bank in assessing the junior bank’s capital.
(g) In view of this clarification of the issues relating to participations in BAs, the Board encourages the private sector to develop standardized forms for BAs and participations therein that clearly delineate the rights and responsibilities of the relevant parties.
§ 250.166 Treatment of mandatory convertible debt and subordinated notes of state member banks and bank holding companies as “capital”.
(a) General. Under the Board’s risk-based capital guidelines, state member banks and bank holding companies may include in Tier 2 capital subordinated debt and mandatory convertible debt that meets certain criteria. The purpose of this interpretation is to clarify these criteria. This interpretation should be read with those guidelines, particularly with paragraphs II.c. through II.e. of appendix A of 12 CFR part 208 if the issuer is a state member bank and with paragraphs II.A.2.c. and II.A.2.d. of appendix A of 12 CFR part 225 if the issuer is a bank holding company.
(b) Criteria for subordinated debt included in capital – (1) Characteristics. To be included in Tier 2 capital under the Board’s risk-based capital guidelines for state member banks and bank holding companies, subordinated debt must be subordinated in right of payment to the claims of the issuer’s general creditors
(2) Acceleration clauses. (i) In order to be included in Tier 2 capital, the appendices provide that subordinated debt instruments must have an original weighted average maturity of at least five years. For this purpose, maturity is defined as the earliest possible date on which the holder can put the instrument back to the issuing banking organization. Since acceleration clauses permit the holder to put the debt back upon the occurrence of certain events, which could happen at any time after the instrument is issued, subordinated debt that includes provisions permitting acceleration upon events other than bankruptcy or reorganization under Chapters 7 (Liquidation) and 11 (Reorganization) of the Bankruptcy Code, in the case of a bank holding company, or insolvency – i.e., the appointment of a receiver – in the case of a state member bank, does not qualify for inclusion in Tier 2 capital.
(ii) Further, subordinated debt whose terms provide for acceleration upon the occurrence of events other than bankruptcy or the appointment of a receiver does not qualify as Tier 2 capital. For example, the terms of some subordinated debt issues would permit debtholders to accelerate repayment if the issuer failed to pay principal or interest on the subordinated debt issue when due (or within a certain timeframe after the due date), failed to make mandatory sinking fund deposits, defaulted on any other debt, failed to honor covenants, or if an institution affiliated with the issuer entered into bankruptcy or receivership. Some banking organizations have also issued, or proposed to issue, subordinated debt that would allow debtholders to accelerate repayment if, for example, the banking organization failed to maintain certain prescribed minimum capital ratios or rates of return, or if the amount of nonperforming assets or charge-offs of the banking organization exceeded a certain level.
(iii) These and other similar acceleration clauses raise significant supervisory concerns because repayment of the debt could be accelerated at a time when an organization may be experiencing financial difficulties. Acceleration of the debt could restrict the ability of the organization to resolve its problems in the normal course of business and could cause the organization involuntarily to enter into bankruptcy or receivership. Furthermore, since such acceleration clauses could allow the holders of subordinated debt to be paid ahead of general creditors or depositors, their inclusion in a debt issue throws into question whether the debt is, in fact, subordinated.
(iv) Subordinated debt issues whose terms state that the debtholders may accelerate the repayment of principal only in the event of bankruptcy or receivership of the issuer do not permit the holders of the debt to be paid before general creditors or depositors and do not raise supervisory concerns because the acceleration does not occur until the institution has failed. Accordingly, debt issues that permit acceleration of principal only in the event of bankruptcy (liquidation or reorganization) in the case of bank holding companies and receivership in the case of banks may generally be classified as capital.
(3) Provisions inconsistent with safe and sound banking practices. (i) The risk-based capital guidelines state that instruments included in capital may not contain or be covered by any covenants, terms, or restrictions that are inconsistent with safe and sound banking practice. As a general matter, capital instruments should not contain terms that could adversely affect liquidity or unduly restrict management’s flexibility to run the organization, particularly in times of financial difficulty, or that could limit the regulator’s ability to resolve problem bank situations. For example, some subordinated debt includes covenants that would not allow the banking organization to make additional secured or senior borrowings. Other covenants would prohibit a banking organization from disposing of a major subsidiary or undergoing a change in control. Such covenants could restrict the banking organization’s ability to raise funds to meet its liquidity needs. In addition, such terms or conditions limit the ability of bank supervisors to resolve problem bank situations through a change in control.
(ii) Certain other provisions found in subordinated debt may provide protection to investors in subordinated debt without adversely affecting the overall benefits of the instrument to the organization. For example, some instruments include covenants that may require the banking organization to:
(A) Maintain an office or agency where securities may be presented,
(B) Hold payments on the securities in trust,
(C) Preserve the rights and franchises of the company,
(D) Pay taxes and assessments before they become delinquent,
(E) Provide an annual statement of compliance on whether the company has observed all conditions of the debt agreement, or
(F) Maintain its properties in good condition. Such covenants, as long as they do not unduly restrict the activity of the banking organization, generally would be acceptable in qualifying subordinated debt, provided that failure to meet them does not give the holders of the debt the right to accelerate the debt.
(4) Credit sensitive features. Credit sensitive subordinated debt (including mandatory convertible securities) where payments are tied to the financial condition of the borrower generally do not qualify for inclusion in capital. Interest rate payments may be linked to the financial condition of an institution through various ways, such as through an auction rate mechanism, a preset schedule that either mandates interest rate increases as the credit rating of the institution declines or automatically increases them over the passage of time,
(c) Criteria for mandatory convertible debt included in capital. Mandatory convertible debt included in capital must meet all the criteria cited above for subordinated debt with the exception of the minimum maturity requirement.
(d) Previously issued subordinated debt. Subordinated debt including mandatory convertible debt that has been issued prior to the date of this interpretation and that contains provisions permitting acceleration for reasons other than bankruptcy or receivership of the issuing institution; includes other questionable terms or conditions; or that is credit sensitive will not automatically be excluded from capital. Rather, such debt will be considered on a case-by-case basis to determine whether it qualifies as Tier 2 capital. As a general matter, subordinated debt issued prior to the release of this interpretation and containing such provisions or features may qualify as Tier 2 capital so long as these terms:
(1) have been commonly used by banking organizations,
(2) do not provide an unreasonably high degree of protection to the holder in cases not involving bankruptcy or receivership, and
(3) do not effectively allow the holder to stand ahead of the general creditors of the issuing institution in cases of bankruptcy or receivership.
Subordinated debt containing provisions that permit the holders of the debt to accelerate payment of principal when the banking organization begins to experience difficulties, for example, when it fails to meet certain financial ratios, such as capital ratios or rates of return, does not meet these three criteria. Consequently, subordinated debt issued prior to the release of this interpretation containing such provisions may not be included within Tier 2 capital.
(e) Limitations on the amount of subordinated debt in capital – (1) Basic limitation. The amount of subordinated debt an institution may include in Tier 2 capital is limited to 50 percent of the amount of the institution’s Tier 1 capital. The amount of a subordinated debt issue that may be included in Tier 2 capital is discounted as it approaches maturity; one-fifth of the original amount of the instrument, less any redemptions, is excluded each year from Tier 2 capital during the last five years prior to maturity. If the instrument has a serial redemption feature such that, for example, half matures in seven years and half matures in ten years, the issuing organization should begin discounting the seven-year portion after two years and the ten-year portion after five years.
(2) Treatment of debt with dedicated proceeds. If a banking organization has issued common or preferred stock and dedicated the proceeds to the redemption of a mandatory convertible debt security, that portion of the security covered by the amount of the proceeds so dedicated is considered to be ordinary subordinated debt for capital purposes, provided the proceeds are not placed in a sinking fund, trust fund, or similar segregated account or are not used in the interim for some other purpose. Thus, dedicated portions of mandatory convertible debt securities are subject, like other subordinated debt, to the 50 percent sublimit within Tier 2 capital, as well as to discounting in the last five years of life. Undedicated portions of mandatory convertible debt may be included in Tier 2 capital without any sublimit and are not subject to discounting.
(3) Treatment of debt with segregated funds. In some cases, the provisions in mandatory convertible debt issues may require the issuing banking organization to set up a sinking fund, trust fund, or similar segregated account to hold the proceeds from the sale of equity securities dedicated to pay off the principal of the mandatory convertible debt at maturity. The portion of mandatory convertibles covered by the amount of proceeds deposited in such a segregated fund is considered secured and, thus, may not be included in capital at all, let alone be treated as subordinated debt that is subject to the 50 percent sublimit within Tier 2 capital. The maintenance of such separate segregated funds for the redemption of mandatory convertible debt exceeds the requirements of appendix B to Regulation Y. Accordingly, if a banking organization, with the agreement of its debtholders, seeks Federal Reserve approval to eliminate such a fund, approval normally would be given unless supervisory concerns warrant otherwise.
(f) Redemption of subordinated debt prior to maturity – (1) By state member banks. State member banks must obtain approval from the appropriate Reserve Bank prior to redeeming before maturity subordinated debt or mandatory convertible debt included in capital.
(2) By bank holding companies. While bank holding companies are not formally required to obtain approval prior to redeeming subordinated debt, the risk-based capital guidelines state that bank holding companies should consult with the Federal Reserve before redeeming any capital instruments prior to stated maturity. This also applies to any redemption of mandatory convertible debt with proceeds of an equity issuance that were dedicated to the redemption of that debt. Accordingly, a bank holding company should consult with its Reserve Bank prior to redeeming subordinated debt or dedicated portions of mandatory convertible debt included in capital. A Reserve Bank generally will not acquiesce to such a redemption unless it is satisfied that the capital position of the bank holding company would be adequate after the proposed redemption.
(3) Special concerns involving mandatory convertible debt. Consistent with appendix B to Regulation Y, bank holding companies wishing to redeem before maturity undedicated portions of mandatory convertible debt included in capital are required to receive prior Federal Reserve approval, unless the redemption is effected with the proceeds from the sale or common or perpetual preferred stock. An organization planning to effect such a redemption with the proceeds from the sale of common or perpetual preferred stock is advised to consult informally with its Reserve Bank in order to avoid the possibility of taking an action that could result in weakening its capital position. A Reserve Bank will not approve the redemption of mandatory convertible securities, or acquiesce in such a redemption effected with the sale of common or perpetual preferred stock, unless it is satisfied that the capital position of the bank holding company will be satisfactory after the redemption.
§ 250.180 Reports of changes in control of management.
(a) Under a statute enacted September 12, 1964 (Pub. L. 88-593; 78 Stat. 940) all insured banks are required to report promptly (1) changes in the outstanding voting stock of the bank which will result in control or in a change in control of the bank and (2) any instances where the bank makes a loan or loans, secured, or to be secured, by 25 percent or more of the outstanding voting stock of an insured bank.
(b) Reports concerning changes in control of a State member bank are to be made by the president or other chief executive officer of the bank, and shall be submitted to the Federal Reserve Bank of its district.
(c) Reports concerning loans by an insured bank on the stock of a State member bank are to be made by the president or other chief executive officer of the lending bank, and shall be submitted to the Federal Reserve Bank of the State member bank on the stock of which the loan was made.
(d) Paragraphs 3 and 4 of this legislation specify the information required in the reports which, in cases involving State member banks, should be addressed to the Vice President in Charge of Examinations of the appropriate Federal Reserve Bank.
§ 250.181 Reports of change in control of bank management incident to a merger.
(a) A State member bank has inquired whether Pub. L. 88-593 (78 Stat. 940) requires reports of change in control of bank management in situations where the change occurs as an incident in a merger.
(b) Under the Bank Merger Act of 1960 (12 U.S.C. 1828(c)), no bank with Federal deposit insurance may merge or consolidate with, or acquire the assets of, or assume the liability to pay deposits in, any other insured bank without prior approval of the appropriate Federal bank supervisory agency. Where the bank resulting from any such transaction is a State member bank, the Board of Governors is the agency that must pass on the transaction. In the course of consideration of such an application, the Board would, of necessity, acquire knowledge of any change in control of management that might result. Information concerning any such change in control of management is supplied with each merger application and, in the circumstances, it is the view of the Board that the receipt of such information in connection with a merger application constitutes compliance with Pub. L. 88-593. However, once a merger has been approved and completely effectuated, the resulting bank would thereafter be subject to the reporting requirements of Pub. L. 88-593.
§ 250.182 Terms defining competitive effects of proposed mergers.
Under the Bank Merger Act (12 U.S.C. 1828(c)), a Federal Banking agency receiving a merger application must request the views of the other two banking agencies and the Department of Justice on the competitive factors involved. Standard descriptive terms are used by the Board, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency. The terms and their definitions are as follows:
(a) The term monopoly means that the proposed transaction must be disapproved in accordance with 12 U.S.C. 1828(c)(5)(A).
(b) The term substantially adverse means that the proposed transaction would have anticompetitive effects which preclude approval unless the anticompetitive effects are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served as specified in 12 U.S.C. 1828(c)(5)(B).
(c) The term adverse means that proposed transaction would have anticompetitive effects which would be material to the decision but which would not preclude approval.
(d) The term no significant effect means that the anticompetitive effects of the proposed transaction, if any, would not be material to the decision.
§ 250.200 Investment in bank premises by holding company banks.
(a) The Board of Governors has been asked whether, in determining under section 24A of the Federal Reserve Act (12 U.S.C. 371d) how much may be invested in bank premises without prior Board approval, a State member bank, which is owned by a registered bank holding company, is required to include indebtedness of a corporation, wholly owned by the holding company, that is engaged in holding premises of banks in the holding company system.
(b) Section 24A provides, in part, as follows:
Hereafter * * * no State member bank, without the approval of the Board of Governors of the Federal Reserve System, shall (1) invest in bank premises, or in the stock, bonds, debentures, or other such obligations of any corporation holding the premises of such bank or (2) make loans to or upon the security of the stock of any such corporation, if the aggregate of all such investments and loans, together with the amount of any indebtedness incurred by any such corporation which is an affiliate of the bank, as defined in section 2 of the Banking Act of 1933, as amended [12 U.S.C. 221a], will exceed the amount of the capital stock of such banks.
(c) A corporation that is owned by a holding company is an “affiliate of each of the holding company’s majority-owned banks as that term is defined in said section 2. Therefore, under the explicit provisions of section 24A, each State member bank, any part of whose premises is owned by such an affiliate, must include the affiliate’s total indebtedness in determining whether a proposed premises investment by the bank would cause the aggregate figure to exceed the amount of the bank’s capital stock, so that the Board’s prior approval would be required. Where the affiliate holds the premises of a number of the holding company’s banks, the amount of the affiliate’s indebtedness may be so large that Board approval is required for every proposed investment in bank premises by each majority-owned State member bank, to which the entire indebtedness of the affiliate is required to be attributed. The Board believes that, in these circumstances, individual approvals are not essential to effectuate the purpose of section 24A, which is to safeguard the soundness and liquidity of member banks, and that the protection sought by Congress can be achieved by a suitably circumscribed general approval.
(d) Accordingly the Board hereby grants general approval for any investment or loan (as described in section 24A) by any State member bank, the majority of the stock of which is owned by a registered bank holding company, if the proposed investment or loan will not cause either (1) all such investments and loans by the member bank (together with the indebtedness of any bank premises subsidiary thereof) to exceed 100 percent of the bank’s capital stock, or (2) the aggregate of such investments and loans by all of the holding company’s subsidiary banks (together with the indebtedness of any bank premises affiliates thereof) to exceed 100 percent of the aggregate capital stock of said banks.
(a) The Board recently considered whether section 20 of the Banking Act of 1933 (12 U.S.C. 377) would prohibit a member bank, while acting as trustee of a tax exempt employee benefit trust or trusts, from, under the following circumstances, acquiring a majority of the shares of an open-end investment company (“Fund”) registered under the Investment Company Act of 1940, or more than 50 percent of the number of Fund’s shares voted at the preceding election of directors of the Fund.
(b) The bank has acted as trustee, since December 1963, pursuant to a trust agreement with a county medical society to administer its group retirement program, under which individual members of the society could participate in accordance with the provisions of the Self-Employed Individuals Tax Retirement Act of 1962 (commonly referred to as “H.R. 10”).
(c) Under the trust agreement as presently constituted, each employer, who is a participating member of the medical society, directs the bank to invest his contributions to the retirement plan in such proportions as he may elect in insurance or annuity contracts or in a diversified portfolio of securities and other property. The diversified portfolio held by the bank is invested and administered by the bank solely at the direction of a committee of the medical society.
(d) It has now been proposed that the trust agreement be amended to provide that all investments constituting the trust fund, apart from insurance and annuity contracts, will be made exclusively in shares of a single open-end investment company to be named in the trust agreement and that the assets constituting the diversified portfolio now held by the bank, as trustee, will be exchanged for the Fund’s shares. The bank will, in addition to holding the shares of the Fund, allocate income and dividends to the accounts of the various participants in the retirement program, invest and reinvest income and dividends, and perform other ministerial functions.
(e) In addition, it is proposed to amend the trust agreement so that voting of the shares held by the bank as trustee will be controlled exclusively by the participants. Under the proposed amendment, the bank will sign all proxies prior to mailing them to the participants,
it being intended that the Participant(s) shall vote the proxies notwithstanding the fact that the Trustee is the owner of the shares * * *.
(f) The bank believes that amendments are now under consideration that will also require investment of the assets of these plans exclusively in the Fund’s shares. Accordingly, the bank may eventually own the Fund’s shares in several separate trust accounts and in an aggregate amount equal to a majority of the Fund’s shares.
(g) Section 20 of the Banking Act of 1933 provides in relevant part that
no member bank shall be affiliated in any manner described in section 2(b) hereof with any corporation * * * engaged principally in the issue, flotation, underwriting, public sale, or distribution at wholesale or retail or through syndicate participation of stocks * * * or other securities: * * *.
(h) Section 2(b) defines the term affiliate to include
any corporation, business trust, association or other similar organization (1) Of which a member bank, directly or indirectly, owns or controls either a majority of the voting shares or more than 50 per centum of the number of shares voted for the election of its directors, trustees, or other persons exercising similar functions at the preceding election, or controls in any manner the election of a majority of its directors, trustees, or other persons exercising similar functions; * * *.
(i) The Board has previously taken the position, in an interpretation involving the term affiliate under the Banking Act of 1933, that it would not require a member bank to obtain and publish a report of a corporation the majority of the stock of which is held by the member bank as executor or trustee, provided that the member bank holds such stock subject to control by a court or by a beneficiary or other principal and that the member bank may not lawfully exercise control of such stock independently of any order or direction of a court, beneficiary or other principal. 1933 Federal Reserve Bulletin 651. The rationale of that interpretation – which was reaffirmed by the Board in 1957 – would appear to be equally applicable to the facts in the present case. In the circumstances, and on the basis of the Board’s understanding that the bank will not vote any of Fund’s shares or control in any manner the election of any of its directors, trustees, or other persons exercising similar functions, the Board has concluded that the situation in question would not fall within the purpose or coverage of section 20 of the Banking Act of 1933 and, therefore, would not involve a violation of the statute.
§ 250.221 Issuance and sale of short-term debt obligations by bank holding companies.
(a) The opinion of the Board of Governors of the Federal Reserve System has been requested recently with respect to the proposed sale of “thrift notes” by a bank holding company for the purpose of supplying capital to its wholly-owned nonbanking subsidiaries.
(b) The thrift notes would bear the name of the holding company, which in the case presented, was substantially similar to the name of its affiliated banks. It was proposed that they be issued in denominations of $50 to $100 and initially be of 12-month or less maturities. There would be no maximum amount of the issue. Interest rates would be variable according to money market conditions but would presumably be at rates somewhat above those permitted by Regulation Q ceilings. There would be no guarantee or indemnity of the notes by any of the banks in the holding company system and, if required to do so, the holding company would place on the face of the notes a negative representation that the purchase price was not a deposit, nor an indirect obligation of banks in the holding company system, nor covered by deposit insurance.
(c) The notes would be generally available for sale to members of the public, but only at offices of the holding company and its nonbanking subsidiaries. Although offices of the holding company may be in the same building or quarters as its banking offices, they would be physically separated from the banking offices. Sales would be made only by officers or employees of the holding company and its nonbanking subsidiaries. Initially, the notes would only be offered in the State in which the holding company was principally doing business, thereby complying with the exemption provided by section 3(a)(11) of the Securities Act of 1933 (15 U.S.C. 77c) for “intra-state” offerings. If it was decided to offer the notes on an interstate basis, steps would be taken to register the notes under the Securities Act of 1933. Funds from the sale of the notes would be used only to supply the financial needs of the nonbanking subsidiaries of the holding company. These nonbank subsidiaries are, at present, a small loan company, a mortgage banking company and a factoring company. In no instance would the proceeds from the sale of the notes be used in the bank subsidiaries of the holding company nor to maintain the availability of funds in its bank subsidiaries.
(d) The sale of the thrift notes, in the specific manner proposed, is an activity described in section 20 of the Banking Act of 1933 (12 U.S.C. 377), that is, “the issue, flotation, underwriting, public sale or distribution * * * of * * * notes, or other securities”. Briefly stated, this statute prohibits a member bank to be affiliated with a company “engaged principally” in such activity. Since the continued issuance and sale of such securities would be necessary to permit maintenance of the holding company’s activities without substantial contraction and would be an integral part of its operations, the Board concluded that the issuance and sale of such notes would constitute a principal activity of a holding company within the spirit and purpose of the statute. (For prior Board decisions in this connection, see 1934 Federal Reserve Bulletin 485, 12 CFR 218.104, 12 CFR 218.105 and 12 CFR 218.101.)
(e) In reaching this conclusion, the Board distinguished the proposed activity from the sale of short-term notes commonly known as commercial paper, which is a recognized form of financing for bank holding companies. For purposes of this interpretation, commercial paper may be defined as notes, with maturities not exceeding nine months, the proceeds of which are to be used for current transactions, which are usually sold to sophisticated institutional investors, rather than to members of the general public, in minimum denominations of $10,000 (although sometimes they may be sold in minimum denominations of $5,000). Commercial paper is exempt from registration under the Securities Act of 1933 by reason of the exemption provided by section 3(a)(3) thereof (15 U.S.C. 77c). That exemption is inapplicable where the securities are sold to the general public (17 CFR 231.4412). The reasons for such exemption, taken together with the abuses that gave rise to the passage of the Banking Act of 1933 (“the Glass-Steagall Act”), have led the Board to conclude that the issuance of commercial paper by a bank holding company is not an activity intended to be included within the scope of section 20.
§ 250.260 Miscellaneous interpretations; gold coin and bullion.
The Board has received numerous inquiries from member banks relating to the repeal of the ban on ownership of gold by United States citizens. Listed below are questions and answers which affect member banks and relate to the responsibilities of the Federal Reserve System.
(a) May gold in the form of coins or bullion be counted as vault cash in order to satisfy reserve requirements? No. Section 19(c) of the Federal Reserve Act requires that reserve balances be satisfied either by a balance maintained at the Federal Reserve Bank or by vault cash, consisting of United States currency and coin. Gold in bullion form is not United States currency. Since the bullion value of United States gold coins far exceeds their face value, member banks would not in practice distribute them over the counter at face value to satisfy customer demands.
(b) Will the Federal Reserve Banks perform services for member banks with respect to gold, such as safekeeping or assaying? No.
(c) Will a Federal Reserve Bank accept gold as collateral for an advance to a member bank under section 10(b) of the Federal Reserve Act? No.
Interpretations of Section 32 of the Glass-Steagall Act
§ 250.400 Service of open-end investment company.
An open-end investment company is defined in section 5(a)(1) of the Investment Company Act of 1940 as a company “which is offering for sale or has outstanding any redeemable security of which it is the issuer.” Section 2(a)(31) of said act provides that a redeemable security means “any security, other than short-term paper, under the terms of which the holder, upon its presentation to the issuer or to a person designated by the issuer, is entitled (whether absolutely or only out of surplus) to receive approximately his proportionate share of the issuer’s current net assets, or the cash equivalent thereof.”
§ 250.401 Director serving member bank and closed-end investment company being organized.
(a) The Board has previously expressed the opinion (§ 218.101) that section 32 of the Banking Act of 1933 (12 U.S.C. 78) is applicable to a director of a member bank serving as a director of an open-end investment company, because the more or less continued process of redemption of the stock issued by such company makes the issuance and sale of its stock essential to the maintenance of the company’s size and to the continuance of operations, with the result that the issuance and sale of its stock constitutes one of the primary activities of such a company. The Board also stated that if the company had ceased to issue or offer any of its stock for sale, the company would not be engaged in the issuance or distribution of its stock and therefore the prohibitions of section 32 would not be applicable. Subsequently, the Board expressed the opinion that section 32 would not be applicable in the case of a closed-end investment company.
(b) The Board has recently stated that it believed that a closed-end company which was in process of organization and was actively engaged in issuing and selling its shares was in the same position relative to section 32 as an open-end company, and that the section would be applicable while this activity continued.
§ 250.402 Service as officer, director, or employee of licensee corporation under the Small Business Investment Act of 1958.
(a) The Board of Governors has been requested to express an opinion whether § 218.1 would prohibit an officer, director, or employee of a member bank from serving at the same time as an officer, director, or employee of a Licensee corporation under the Small Business Investment Act of 1958 (15 U.S.C. 661 et seq.). It is understood that a Licensee would be authorized to engage only in the activities set forth in the statute, namely, to provide capital and long-term loan funds to small business concerns.
(b) In the opinion of the Board, a corporation engaged exclusively in the enumerated activities would not be “primarily engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicate participation, of stocks, bonds, or other similar securities.” Accordingly, the prohibition of § 218.1 would not apply to serving as an officer, director, or employee of either a small business investment company organized under the Small Business Investment Act of 1958, or an investment company chartered under the laws of a State solely for the purpose of operating under the Small Business Investment Act of 1958.
§ 250.403 Service of member bank and real estate investment company.
(a) The Board recently considered two inquiries regarding the question whether proposed real estate investment companies would be subject to the provisions of sections 20 and 32 of the Banking Act of 1933 (12 U.S.C. 377 and 78). These sections relate to affiliations between member banks and companies engaged principally in the issue, flotation, underwriting, public sale or distribution of stocks, bonds, or similar securities, and interlocking directorates between member banks and companies primarily so engaged. In both instances the companies, after their organization, would engage only in the business of financing real estate development or investing in real estate interests, and not in the type of business described in the statute. However, each of the companies, in the process of its organization, would issue its own stock. In one instance, it appeared that the stock would be issued over a period of from 30 to 60 days; in the other instance it was stated that the stock would be sold by a firm of underwriters and that distribution was expected to be completed in not more than a few days.
(b) On the basis of the facts stated, the Board concluded that the companies involved would not be subject to sections 20 and 32 of the Banking Act of 1933, since they would not be principally or primarily engaged in the business of issuing or distributing securities but would only be issuing their own stock for a period ordinarily required for corporate organization. The Board stated, however, that if either of the companies should subsequently issue additional shares frequently and in substantial amounts relative to the size of the company’s capital structure, it would be necessary for the Board to reconsider the matter.
(c) Apart from the legal question, the Board noted that an arrangement of the kind proposed could involve some dangers to an affiliated bank because the relationship might tend to impair the independent judgment that should be exercised by the bank in appraising its credits and might cause the company to be so identified in the minds of the public with the bank that any financial reverses suffered by the company might affect the confidence of the public in the bank.
(d) Because of the foregoing conclusion that the companies would not be subject to sections 20 and 32, it seems advisable to clarify § 218.102, in which the Board took the position that a closed-end investment company which was in process of organization and was actively engaged in issuing and selling its shares was subject to section 32 as long as this activity continued. That interpretation should be regarded as applicable only where the circumstances are such as to indicate that the issuance of the company’s stock is a primary or principal activity of the company. For example, such circumstances might exist where the initial stock of a company is actively issued over a period of time longer than that ordinarily required for corporate organization, or where, subsequent to organization, the company issues its own stock frequently and in substantial amounts relative to the total amount of shares outstanding.
§ 250.404 Serving as director of member bank and corporation selling own stock.
(a) The Board recently considered the question whether section 32 of the Banking Act of 1933 (12 U.S.C. 78) would be applicable to the service of a director of a corporation which planned to acquire or organize, as proceeds from the sale of stock became available, subsidiaries to operate in a wide variety of fields, including manufacturing, foreign trade, leasing of heavy equipment, and real estate development. The corporation had a paid-in capital of about $60,000 and planned to sell additional shares at a price totaling $10 million, with the proviso that if less than $3 million worth were sold by March 1962, the funds subscribed would be refunded. It thus appeared to be contemplated that the sale of stock would take at least a year, and there appeared to be no reason for believing that, if the venture proved successful, additional shares would not be offered so that the corporation could continue to expand.
(b) The Board concluded that section 32 would be applicable, stating that although § 218.102, as clarified by § 218.104, related to closed-end investment companies, the rationale of that interpretation is applicable to corporations generally.
§ 250.405 No exception granted a special or limited partner.
(a) The Board has been asked on several occasions whether section 32 of the Banking Act of 1933 (12 U.S.C. 78) is applicable to a director, officer, or employee of a member bank who is a special or limited partner in a firm primarily engaged in the business described in that section.
(b) Since the Board cannot issue an individual permit, it can exempt a limited or special partner only by amending part 218 (Regulation R). After the statute was amended in 1935 so as to make it applicable to a partner, the Board carefully considered the desirability of making such an exception. On several subsequent occasions it has reconsidered the question. In each instance the Board has decided that in view of a limited partner’s interest in the underwriting and distributing business, it should not make the exception.
§ 250.406 Serving member bank and investment advisor with mutual fund affiliation.
(a) The opinion of the Board of Governors of the Federal Reserve System has been requested with respect to service as vice president of a corporation engaged in supplying investment advice and management services to mutual funds and others (“Manager”) and as director of a member bank.
(b) Section 32 of the Banking Act of 1933 (12 U.S.C. 78), forbids any officer, director, or employee of any corporation “primarily engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicate participation, of stocks, bonds, or other similar securities * * *” to serve at the same time as an officer, director, or employee of a member bank.
(c) Manager has for several years served a number of different open-end or mutual funds, as well as individuals, institutions, and other clients, as an investment advisor and manager. However, it appears that Manager has a close relationship with two of the mutual funds which it serves. A wholly owned subsidiary of Manager (“Distributors”), serves as distributor for the two mutual funds and has no other function. In addition, the chairman and treasurer of Manager, as well as the president, assistant treasurer, and a director of Manager, are officers and directors of Distributors and trustees of both funds. It appears also that a director of Manager is president and director of Distributors, while the clerk of Manager is also clerk of Distributors. Manager, Distributors and both funds are listed at the same address in the local telephone directory.
(d) While the greater part of the total annual income of Manager during the past five years has derived from “individuals, institutions, and other clients”, it appears that a substantial portion has been attributable to the involvement with the two funds in question. During each of the last four years, that portion has exceeded a third of the total income of Manager, and in 1962 it reached nearly 40 percent.
(e) The Board has consistently held that an open-end or mutual fund is engaged in the activities described in section 32, so long as it is issuing its securities for sale, since it is apparent that the more or less continued process of redemption of the stock issued by such a company would restrict and contract its activities if it did not continue to issue the stock. Clearly, a corporation that is engaged in underwriting or selling open-end shares, is so engaged.
(f) In connection with incorporated manager-advisors to open-end or mutual funds, the Board has expressed the view in a number of cases that where the corporation served a number of different clients, and the corporate structure was not interlocked with that of mutual fund and underwriter in such a way that it could be regarded as being controlled by or substantially one with them, it should not be held to be “primarily engaged” in section 32 activities. On the other hand, where a manager-advisor was created for the sole purpose of serving a particular fund, and its activities were limited to that function, the Board has regarded the group as a single entity for purposes of section 32.
(g) In the present case, the selling organization is a wholly-owned subsidiary of the advisor-manager, hence subject to the parent’s control. Stock of the subsidiary will be voted according to decisions by the parent’s board of directors, and presumably will be voted for a board of directors of the subsidiary which is responsive to policy lines laid down by the parent. Financial interests of the parent are obviously best served by an aggressive selling policy, and, in fact, both the share and the absolute amount of the parent’s income provided by the two funds have shown a steady increase over recent years. The fact that dividends from Distributors have represented a relatively small proportion of the income of Manager, and that there were, indeed, no dividends in 1961 or 1962, does not support a contrary argument, in view of the steady increase in total income of Manager from the funds and Distributors taken as a whole.
(h) In view of all these facts, the Board has concluded that the separate corporate entities of Manager and Distributors should be disregarded and Distributors viewed as essentially a selling arm of Manager. As a result of this conclusion, section 32 would forbid interlocking service as an officer of Manager and a director of a member bank.
§ 250.407 Interlocking relationship involving securities affiliate of brokerage firm.
(a) The Board of Governors was asked recently whether section 32 of the Banking Act of 1933 (“section 32”), 12 U.S.C. 78, prohibits the interlocking service of X as a director of a member bank of the Federal Reserve System and as a partner in a New York City brokerage firm (“Partnership”) having a corporation affiliate (“Corporation”) engaged in business of the kinds described in section 32 (“section 32 business”).
(b) Section 32, subject to an exception not applicable here, provides that
No officer, director, or employee of any corporation or unincorporated association, no partner or employee of any partnership, and no individual, primarily engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicate participation, of stocks, bonds, or other similar securities, shall serve the same time as an officer, director, or employee of any member bank * * *.
(c) From the information submitted it appears that Partnership, a member firm of the New York Stock Exchange, is the successor of two prior partnerships, in one of which X had been a partner. This prior partnership had been found not to be “primarily engaged” in section 32 business. The other prior partnership, however, had been so engaged. By arrangement between the two prior firms, Corporation was formed chiefly for the purpose of carrying on the section 32 business of the prior firm that had been “primarily engaged” in that business, which business was transferred to Corporation. The two prior firms were then merged and the stock of Corporation was acquired by all the partners of Partnership, other than X, in proportion to the respective partnership interests of the stockholding partners. The information submitted indicated also that two of the three directors and “some” of the principal officers of Corporation are partners in Partnership, although X is not a director or officer of Corporation.
(d) It is understood that the practice of forming corporate affiliates of brokerage firms, in order that the affiliate may carry on the securities business (such as section 32 business) with limited liability and other advantages, has become rather widespread in recent years. Accordingly, other cases may arise where a partner in such a firm may desire to serve at the same time as director of a member bank.
(e) On the basis of the information presented the Board concluded that X in his capacity as an “individual”, was not engaged in section 32 business. However, as that information showed Corporation to be “primarily engaged” in section 32 business, the Board stated that a finding that Partnership and Corporation were one entity for the purposes of the statute would mean that X would be forbidden to serve both the member bank and Partnership, if the one entity were so engaged.
(f) Paragraph .15 of Rule 321 of the New York Stock Exchange governing the formation and conduct of affiliated companies of member organizations states that:
Since Rule 314 provides that each member and allied member in a member organization must have a fixed interest in its entire business, it follows that the fixed interest of each member and allied member must extend to the member organization’s corporate affiliate. When any of the corporate affiliate’s participating stock is owned by the members and allied members in the member organization, such holdings must at all times be distributed among such members and allied members in approximately the same proportions as their respective interests in the profits of the member organization. When a member or allied member’s interest in the member organization is changed, a corresponding change must be made in his participating interest in the affiliate.
(g) Although it was understood that X had received special permission from the Exchange not to own any of the stock of Corporation, it appeared to the Board that Rule 321.15 would apply to the remaining partners. Moreover, other paragraphs of the rule forbid transfers of the stock, except under certain circumstances to limited classes of persons, such as employees of the organization or estates of decedent partners, without permission of the Exchange.
(h) The information supplied to the Board clearly indicated that Corporation was formed in order to provide Partnership with an “underwriting arm”. Under Rule 321 of the Exchange, the partners (other than X) are required to own stock in Corporation because of their partnership interest, would be required to surrender that stock on leaving the partnership, and incoming partners would be required to acquire such stock. Furthermore, Rule 321 speaks of a corporate affiliate, such as Corporation, as a part of the “entire business” of a member organization.
(i) On the basis of the foregoing, the Board concluded that Partnership and Corporation must be regarded as a single entity or enterprise for purposes of section 32.
(j) The remaining question was whether the enterprise, as a whole, should be regarded as “primarily engaged” in section 32 business. The Information presented stated that the total dollar volume of section 32 business of Corporation during the first eleven months of its operation was $89 million. The gross income from section 32 business was less than half a million, and represented about 7.9 percent of the income of Partnership. The Board was advised that the relatively low amount of income from section 32 business of Corporation as due to special costs, and to the condition of the market for municipal and State bonds during the past year, a field in which Corporation specializes. Corporation is listed in a standard directory of securities dealers, and holds itself out as having separate departments to deal with the principal underwriting areas in which it functions.
(k) In view of the above information, the Board concluded that the enterprise consisting of Partnership and Corporation was “primarily engaged” in section 32 business. Accordingly, the Board stated that the partners in Partnership, including X, were forbidden by that section and by this part 218 (Reg. R), issued pursuant to the statute, to serve as officers, directors, or employees of any member banks.
§ 250.408 Short-term negotiable notes of banks not securities under section 32, Banking Act of 1933.
(a) The Board of Governors has been asked whether short-term unsecured negotiable notes of the kinds issued by some of the large banks in this country as a means of obtaining funds are “other similar securities” within the meaning of section 32, Banking Act of 1933 (12 U.S.C. 78) and this part.
(b) Section 32 forbids certain interlocking relationships between banks which are members of the Federal Reserve System and individuals or organizations “primarily engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicate participation, of stocks, bonds, or other similar securities * * *.” Therefore, if such notes are securities similar to stocks or bonds, any dealing therein would be an activity covered in section 32 and would have to be taken into consideration in determining whether the individual or organization involved was “primarily engaged” in such activities.
(c) The Board has concluded that such short-term notes of the kind described above are not “other similar securities” within the meaning of section 32 and this part.
§ 250.409 Investment for own account affects applicability of section 32.
(a) The Board of Governors has been presented with the question whether a certain firm is primarily engaged in the activities described in section 32 of the Banking Act of 1933. If the firm is so engaged, then the prohibitions of section 32 forbids a limited partner to serve as employee of a member bank.
(b) The firm describes the bulk of its business, producing roughly 60 percent of its income, as “investing for its own account.” However, it has a seat on the local stock exchange, and acts as specialist and odd-lot dealer on the floor of the exchange, an activity responsible for some 30 percent of its volume and profits. The firm’s “off-post trading,” apart from the investment account, gives rise to about 5 percent of its total volume and 10 percent of its profits. Gross volume has risen from $4 to $10 million over the past 3 years, but underwriting has accounted for no more than one-half of 1 percent of that amount.
(c) Section 32 provides that
No officer, director, or employee of any corporation or unincorporated association, no partner, or employee of any partnership, and no individual, primarily engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale, or retail, or through syndicate participation, of stocks, bonds, or other similar securities, shall serve the same time (sic) as an officer, director, or employee of any member bank * * *
(d) In interpreting this language, the Board has consistently held that underwriting, acting as a dealer, or generally speaking, selling, or distributing securities as a principal, is covered by the section, while acting as broker or agent is not.
(e) In one type of situation, however, although a firm was engaged in selling securities as principal, on its own behalf, the Board held that section 32 did not apply. In these cases, the firm alleged that it bought and sold securities purely for investment purposes. Typically, those cases involved personal holding companies or small family investment companies. Securities had been purchased only for members of a restricted family group, and had been held for relatively long periods of time.
(f) The question now before the Board is whether a similar exception can apply in the case of the investment account of a professional dealer. In order to answer this question, it is necessary to analyze, in the light of applicable principles under the statute, the three main types of activity in which the firm has been engaged, (1) acting as specialist and odd-lot dealer, (2) off-post trading as an ordinary dealer, and (3) investing for its own account.
(g) On several occasions, the Board has held that, to the extent the trading of a specialist or odd-lot dealer is limited to that required for him to perform his function on the floor of the exchange, he is acting essentially in an agency capacity. In a letter of September 13, 1934, the Board held that the business of a specialist was not of the kind described in the (unamended) section on the understanding that
* * * in acting as specialists on the New York Curb Exchange, it is necessary for the firm to buy and sell odd lots and * * * in order to protect its position after such transactions have been made, the firm sells or buys shares in lots of 100 or multiples thereof in order to reduce its position in the stock in question to the smallest amount possible by this method. It appears therefore that, in connection with these transactions, the firm is neither trading in the stock in question or taking a position in it except to the extent made necessary by the fact that it deals in odd lots and cannot complete the transactions by purchases and sales on the floor of the exchange except to the nearest 100 share amount.
(h) While subsequent amendments to section 32 to some extent changed the definition of the kinds of securities business that would be covered by the section, the amendments were designed so far as is relevant to the present question, to embody existing interpretations of the Board. Accordingly, to the extent that the firm’s business is described by the above letter of the Board, it should not be considered to be of a kind described in section 32.
(i) Turning to the firm’s off-post trading, the Board is inclined to agree with the view that this is sufficient to make the case a borderline one under the statute. In the circumstances, the Board might prefer to postpone making a determination until figures for 1965 could be reviewed, particularly in the light of the recent increase in total volume, if it were not for the third category, the firm’s own investment account.
(j) While this question has not been squarely presented to it in the past, the Board is of the opinion that when a firm is doing any significant amount of business as a dealer or underwriter, then investments for the firm’s own account should be taken into consideration in determining whether the firm is “primarily engaged” in the activities described in section 32. The division into dealing for one’s own account, and dealing with customers, is a highly subjective one, and although a particular firm or individual may be quite scrupulous in separating the two, the opportunity necessarily exists for the kind of abuse at which the statute is directed. The Act is designed to prevent situations from arising in which a bank director, officer, or employee could influence the bank or its customers to invest in securities in which his firm has an interest, regardless of whether he, as an individual, is likely to do so. In the present case, when these activities are added to the firm’s “off-post trading”, the firm clearly falls within the statutory definition.
(k) For the reasons just discussed, the Board concludes that the firm must be considered to be primarily engaged in activities described in section 32, and that the prohibitions of the section forbid a limited partner in that firm to serve as employee of a member bank.
§ 250.410 Interlocking relationships between bank and its commingled investment account.
(a) The Board of Governors was asked recently whether the establishment of a proposed “Commingled Investment Account” (“Account”) by a national bank would involve a violation of section 32 of the Banking Act of 1933 in view of the interlocking relationships that would exist between the bank and Account.
(b) From the information submitted, it was understood that Account would comprise a commingled fund, to be operated under the effective control of the bank, for the collective investment of sums of money that might otherwise be handled individually by the bank as managing agent. It was understood further that the Comptroller of the Currency had taken the position that Account would be an eligible operation for a national bank under his Regulation 9, “Fiduciary Powers of National Banks and Collective Investment Funds” (part 9 of this title). The bank had advised the Board that the Securities and Exchange Commission was of the view that Account would be a “registered investment company” within the meaning of the Investment Company Act of 1940, and that participating interests in Account would be “securities” subject to the registration requirements of the Securities Act of 1933.
(c) The information submitted showed also that the minimum individual participation that would be permitted in Account would be $10,000, while the maximum acceptable individual investment would be half a million dollars; that there would be no “load” or payment by customers for the privilege of investing in Account; and that:
The availability of the Commingled Account would not be given publicity by the Bank except in connection with the promotion of its fiduciary services in general and the Bank would not advertise or publicize the Commingled Account as such. Participations in the Commingled Account are to be made available only on the premises of the Bank (including its branches), or to persons who are already customers of the Bank in other connections, or in response to unsolicited requests.
(d) Such information indicated further that participations would be received by the bank as agent, under a broad authorization signed by the customer, substantially equivalent to the power of attorney under which customers currently deposit their funds for individual investment, and that the participations would not be received “in trust.”
(e) The Board understood that Account would be required to comply with certain requirements of the Federal securities laws not applicable to an ordinary common trust fund operated by a bank. In particular, supervision of Account would be in the hands of a committee to be initially appointed by the bank, but subsequently elected by participants having a majority of the units of participation in Account. At least one member of the committee would be entirely independent of the bank, but the remaining members would be officers in the trust department of the bank.
(f) The committee would make a management agreement with the bank under which the bank would be responsible for managing Account’s investments, have custody of its assets, and maintain its books and records. The management agreement would be renewed annually if approved by the committee, including a “majority” of the independent members, or by a vote of participants having a majority of the units of participation. The agreement would be terminable on 60 days’ notice by the committee, by such a majority of the participants, or by the bank, and would terminate automatically if assigned by the bank.
(g) It was understood also that the bank would receive as annual compensation for its services one-half of one percent of Account’s average net assets. Account would also pay for its own independent professional services, including legal, auditing, and accounting services, as well as the cost of maintaining its registration and qualification under the Federal securities laws.
(h) Initially, the assets of Account would be divided into units of participation of an arbitrary value, and each customer would be credited with a number of units proportionate to his investment. Subsequently, the assets of Account would be valued at regular intervals, and divided by the number of units outstanding. New investors would receive units at their current value, determined in this way, according to the amount invested. Each customer would receive a receipt evidencing the number of units to which he was entitled. The receipts themselves would be nontransferable, but it would be possible for a customer to arrange with Account for the transfer of his units to someone else. A customer could terminate his participation at any time and withdraw the current value of his units.
(i) Section 32 of the Banking Act of 1933 provides in relevant part that:
No officer, director, or employee of any corporation or unincorporated association, no partner or employee of any partnership, and no individual, primarily engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicate participation, of stocks, bonds, or other similar securities, shall serve [at] the same time as an officer, director, or employee of any member bank * * *.
(j) The Board concluded, based on its understanding of the proposal and on the general principles that have been developed in respect to the application of section 32, that the bank and Account would constitute a single entity for the purposes of section 32, at least so long as the operation of Account conformed to the representations made by the bank and outlined herein. Accordingly, the Board said that section 32 would not forbid officers of the bank to serve on Account’s committee, since Account would be regarded as nothing more than an arm or department of the bank.
(k) In conclusion, the Board called attention to section 21 of the Banking Act of 1933 which, briefly, forbids a securities firm or organization to engage in the business of receiving deposits, subject to certain exceptions. However, since section 21 is a criminal statute, the Board has followed the policy of not expressing views as to its meaning. (1934 Federal Reserve Bulletin 41, 543.) The Board, therefore, expressed no position with respect to whether the section might be held applicable to the establishment and operation of the proposed “Commingled Investment Account.”
§ 250.411 Interlocking relationships between member bank and variable annuity insurance company.
(a) The Board has recently been asked to consider whether section 32 of the Banking Act of 1933 (12 U.S.C. 78) and this part prohibit interlocking service between member banks and (1) the board of managers of an accumulation fund, registered under the Investment Company Act of 1940 (15 U.S.C. 80), that sells variable annuities and (2) the board of directors of the insurance company, of which the accumulation fund is a “separate account,” but as to which the insurance company is the sponsor, investment advisor, underwriter, and distributor. Briefly, a variable annuity is one providing for annuity payment varying in accordance with the changing values of a portfolio of securities.
(b) Section 32 provides in relevant part that:
No officer, director, or employee of any corporation or unincorporated association, no partner or employee of any partnership, and no individual, primarily engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicate participation, of stocks, bonds, or other similar securities, shall serve [at] the same time as an officer, director, or employee of any member bank * * *.
(c) For many years, the Board’s position has been that an open-end investment company (or mutual fund) is “primarily engaged in the issue * * * public sale, or distribution * * * of securities” since the issuance and sale of its stock is essential to the maintenance of the company’s size and to the continuance of its operations without substantial contraction, and that section 32 of the Banking Act of 1933 prohibits an officer, director, or employee of any such company from serving at the same time as an officer, director, or employee of any member bank. (1951 Federal Reserve Bulletin 645; § 218.101.)
(d) For reasons similar to those stated by the U.S. Supreme Court in Securities and Exchange Commission v. Variable Annuity Life Insurance Company of America, 359 U.S. 65 (1959), the Board concluded that there is no meaningful basis for distinguishing a variable annuity interest from a mutual fund share for section 32 purposes and that, therefore, variable annuity interests should also be regarded as “other similar securities” within the prohibition of the statute and regulation.
(e) The Board concluded also that, since the accumulation fund, like a mutual fund, must continually issue and sell its investment units in order to avoid the inevitable contraction of its activities as it makes annuity payments or redeems variable annuity units, the accumulation fund is “primarily engaged” for section 32 purposes. The Board further concluded that the insurance company was likewise “primarily engaged” for the purposes of the statute since it had no significant revenue producing operations other than as underwriter and distributor of the accumulation fund’s units and investment advisor to the fund.
(f) Although it was clear, therefore, that section 32 prohibits any officers, directors, and employees of member banks from serving in any such capacity with the insurance company or accumulation fund, the Board also considered whether members of the board of managers of the accumulation fund are “officers, directors, or employees” within such prohibition. The functions of the board of managers, who are elected by the variable annuity contract owners, are, with the approval of the variable annuity contract owners, to select annually an independent public accountant, execute annually an agreement providing for investment advisory services, and recommend any changes in the fundamental investment policy of the accumulation fund. In addition, the Board of managers has sole authority to execute an agreement providing for sales and administrative services and to authorize all investments of the assets of the accumulation fund in accordance with its fundamental investment policy. In the opinion of the Board of Governors, the board of managers of the accumulation fund performs functions essentially the same as those performed by classes of persons as to whom the prohibition of section 32 was specifically directed and, accordingly, are within the prohibitions of the statute.
§ 250.412 Interlocking relationships between member bank and insurance company-mutual fund complex.
(a) The Board has been asked whether section 32 of the Banking Act of 1933 and this part prohibited interlocking service between member banks and (1) the advisory board of a newly organized open-end investment company (mutual fund), (2) the fund’s incorporated investment manager-advisor, (3) the insurance company sponsoring and apparently controlling the fund.
(b) X Fund, Inc. (“Fund”), the mutual fund, was closely related to X Life Insurance Company (“Insurance Company”), as well as to the incorporated manager and investment advisor to Fund (“Advisors”), and the corporation serving as underwriter for Fund (“Underwriters”). The same persons served as principal officers and directors of Insurance Company, Fund, Advisors, and Underwriters. In addition, several directors of member banks served as directors of Insurance Company and of Advisors and as members of the Advisory Board of Fund, and additional directors of member banks had been named only as members of the Advisory Board. All outstanding shares of Advisors and of Underwriters were apparently owned by Insurance Company.
(c) Section 32 provides in relevant part that:
No officer, director, or employee of any corporation * * * primarily engaged in the issue, flotation, underwriting, public sale, or distribution at wholesale or retail, or through syndicate participation, of stocks, bonds, or other similar securities, shall serve [at] the same time as an officer, director, or employee of any member bank * * *.
(d) The Board of Governors reaffirmed its earlier position that an open-end investment company is “primarily engaged” in activities described in section 32 “even though the shares are sold to the public through independent organizations with the result that the investment company does not derive any direct profit from the sales.” (1951 Federal Reserve Bulletin 654, § 218.101.) Accordingly, the Board concluded that Fund must be regarded as so engaged, even though its shares were underwritten and distributed by Underwriters.
(e) As directors of the member banks involved in the inquiry were not officers, directors, or employees of either Fund or Underwriters, the relevant questions were whether – (1) Advisors, and (2) Insurance Company, should be regarded as being functionally and structurally so closely allied with Fund that they should be treated as one with it in determining the applicability of section 32. An additional question was whether members of the Advisory Board are “officers, directors, or employees” of Fund within the prohibition of the statute.
(f) Interlocking service with Advisory Board: The function of the Advisory Board was merely to make suggestions and to counsel with Fund’s Board of Directors in regard to investment policy. The Advisory Board had no authority to make binding recommendations in any area, and it did not serve in any sense as a check on the authority of the Board of Directors. Indeed, the Fund’s bylaws provided that the Advisory Board “shall have no power or authority to make any contract or incur any liability whatever or to take any action binding upon the Corporation, the Officers, the Board of Directors or the Stockholders.” Members of the Advisory Board were appointed by the Board of Directors of Fund, which could remove any member of the Advisory Board at any time. None of the principal officers of Fund or of Underwriters were members of the Advisory Board; and the compensation of its members was expected to be nominal.
(g) The Board of Governors concluded that members of the Advisory Board need not be regarded as “officers, directors, or employees” of Fund or of Underwriters for purposes of section 32, and that the statute, therefore, did not prohibit officers, directors, or employees of member banks from serving as members of the Advisory Board.
(h) Interlocking service with Advisors: The principal officers and several of the directors of Advisors were identical with both those of Fund and of Underwriters. Entire management and investment responsibility for Fund had been placed, by contract, with Advisors, subject only to a review authority in the Board of Directors of Fund. Advisors also supplied office space for the conduct of Fund’s affairs, and compensated members of the Advisory Board who are also officers or directors of Advisors. Moreover, it appeared that Advisors was created for the sole purpose of servicing Fund, and its activities were to be limited to that function.
(i) In the view of the Board of Governors, the structural and functional identity of Fund and Advisors was such that they were to be regarded as a single entity for purposes of section 32, and, accordingly, officers, directors, and employees of member banks were prohibited by section 32 from serving in any such capacity with such entity.
(j) Interlocking service with Insurance Company: It was clear that Insurance Company was not as yet “primarily engaged” in business of a kind described in section 32 with respect to the shares of the newly created Fund sponsored by Insurance Company, since the issue and sale of such shares had not yet commenced. Nor did it appear that Insurance Company would be so engaged in the preliminary stages of Fund’s existence, when the disproportion between the insurance business of Insurance Company and the sale of Fund shares would be very great. However, it was also clear that if Fund was successfully launched, its activities would rather quickly reach a stage where a serious question would arise as to the applicability of the section 32 prohibition.
(k) An estimate supplied to the Board indicated that 100,000 shares of Fund might be sold annually to produce, based on then current values, annual gross sales receipts of over $1 million. Insurance Company’s total gross income for its last fiscal year was almost $10 million. On this basis, about one-tenth of the annual gross income of the Insurance Company-Fund complex (more than one-tenth, if income from investments of Insurance Company was eliminated) would be derived from sales of Fund shares. Although total sales of shares of Fund during the first year might not approximate expectations, it was assumed that if the estimate or projection was correct, the annual rate of sale might well rise to that level before the end of the first year of operation.
(l) It appeared that net income of Insurance Company from Fund’s operations would be minimal for the foreseeable future. However, it was understood that Insurance Company’s chief reason for launching Fund was to provide salesmen for Insurance Company (who were to be the only sellers of shares of Fund, and most of whom, Insurance Company hoped, would qualify to sell those shares), with a “package” of mutual fund shares and life insurance policies that would provide increased competitive strength in a highly competitive field.
(m) The Board concluded that Insurance Company would be “primarily engaged” in issuing or distributing shares of Fund within the meaning of section 32 by not later than the time of realization of the aforementioned estimated annual rate of sale, and possibly before. As indicated in Board of Governors v. Agnew, 329 U.S. 441 at 446, the prohibition of the statute applies if the section 32 business involved is a “substantial” activity of the company.
(n) This, the Board observed, was not to suggest that officers, directors, or employees of Insurance Company who are also directors of member banks would be likely, as individuals, to use their positions with the banks to further sales of Fund’s shares. However, as the Supreme Court pointed out in the Agnew case, section 32 is a “preventive or prophylactic measure.” The fact that the individuals involved “have been scrupulous in their relationships” to the banks in question “is immaterial.”
§ 250.413 “Bank-eligible” securities activities.
Section 32 of the Glass-Steagall Act (12 U.S.C. 78) prohibits any officer, director, or employee of any corporation or unincorporated association, any partner or employee of any partnership, and any individual, primarily engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicate participation, of stocks, bonds, or other similar securities, from serving at the same time as an officer, director, or employee of any member bank of the Federal Reserve System. The Board is of the opinion that to the extent that a company, other entity or person is engaged in securities activities that are expressly authorized for a state member bank under section 16 of the Glass-Steagall Act (12 U.S.C. 24(7), 335), the company, other entity or individual is not engaged in the types of activities described in section 32. In addition, a securities broker who is engaged solely in executing orders for the purchase and sale of securities on behalf of others in the open market is not engaged in the business referred to in section 32.
PART 251 – CONCENTRATION LIMIT (REGULATION XX)
(a) Authority. This part is issued by the Board of Governors of the Federal Reserve System under sections 5 and 14 of the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1844 and 1852); section 8 of the Federal Deposit Insurance Act, as amended (12 U.S.C. 1818); the International Banking Act of 1978, as amended (12 U.S.C. 3101 et seq.); and the recommendations of the Financial Stability Oversight Council (76
(b) Purpose. This subpart implements section 14 of the Bank Holding Company Act, which generally prohibits a financial company from merging or consolidating with, acquiring all or substantially all of the assets of, or otherwise acquiring control of, another company if the resulting company’s consolidated liabilities would exceed 10 percent of the aggregate consolidated liabilities of all financial companies.
(c) Other authorities. Nothing in this part limits the authority of the Board under any other provision of law or regulation to prohibit or limit a financial company from merging or consolidating with, acquiring all or substantially all of the assets of, or otherwise acquiring control of, another company.
§ 251.2 Definitions.
Unless otherwise specified, for the purposes of this part:
(a) Applicable accounting standards means, with respect to a company, U.S. generally accepted accounting principles (GAAP), or such other accounting standard or method of estimation that the Board determines is appropriate pursuant to § 251.3(e).
(b) Applicable risk-based capital rules means consolidated risk-based capital rules established by an appropriate Federal banking agency that are applicable to a financial company.
(c) Appropriate Federal banking agency has the same meaning as in section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)).
(d) Control has the same meaning as in § 225.2(e) of the Board’s Regulation Y (12 CFR 225.2(e)).
(e) Council means the Financial Stability Oversight Council established by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
(f) Covered acquisition means a transaction in which a company directly or indirectly merges or consolidates with, acquires all or substantially all of the assets of, or otherwise acquires control of another company. A covered acquisition does not include an acquisition of ownership or control of a company:
(1) In the ordinary course of collecting a debt previously contracted in good faith if the acquired securities or assets are divested within the time period permitted by the appropriate Federal banking agency (including extensions) or, if the financial company does not have an appropriate Federal banking agency, five years;
(2) In a fiduciary capacity in good faith under applicable fiduciary law if the acquired securities or assets are held in the ordinary course of business and not acquired for the benefit of the company or its shareholders, employees, or subsidiaries;
(3) In connection with bona fide underwriting or market-making activities;
(4) Solely in connection with a corporate reorganization and the companies involved are lawfully controlled and operated by the financial company both before and following the reorganization; and
(5) That is, or will be, an issuer of asset back securities (as defined in Section 3(a) of the Securities and Exchange Act of 1934) so long as the financial company that retains an ownership interest in the company complies with the credit risk retention requirements in the regulations issued pursuant to section 15G of the Securities and Exchange Act of 1934.
(g) Financial company includes:
(1) An insured depository institution;
(2) A bank holding company;
(3) A savings and loan holding company;
(4) A company that controls an insured depository institution;
(5) A nonbank financial company supervised by the Board, and
(6) A foreign bank or company that is treated as a bank holding company for purposes of the Bank Holding Company Act.
(h) Foreign financial company means a financial company that is incorporated or organized in a country other than the United States.
(i) Insured depository institution has the same meaning as in section 3(c)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)(2)).
(j) Nonbank financial company supervised by the Board means any nonbank financial company that the Council has determined under section 113 of the Dodd-Frank Act (12 U.S.C. 5323) shall be supervised by the Board and for which such determination is still in effect.
(k) State means any state, commonwealth, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, or the United States Virgin Islands.
(l) U.S. agency has the same meaning as the term “agency” in § 211.21(b) of the Board’s Regulation K (12 CFR 211.21(b)).
(m) Total regulatory capital has the same meaning as the term “total capital” as defined under the applicable risk-based capital rules.
(n) Total risk-based capital ratio means the “total capital ratio” as calculated under the applicable risk-based capital rules.
(o) Total risk-weighted assets means the measure of consolidated risk-weighted assets that a financial company uses to calculate its risk-based capital ratios under the applicable risk-based capital rules.
(p) U.S. branch has the same meaning as the term “branch” in § 211.21(e) of the Board’s Regulation K (12 CFR 211.21(e)).
(q) U.S. company means a company that is incorporated in or organized under the laws of the United States or any State.
(r) U.S. financial company means a financial company that is a U.S. company.
(s) U.S. subsidiary means any subsidiary, as defined in § 225.2(o) of Regulation Y (12 CFR 225.2(o)), that is a U.S. company.
§ 251.3 Concentration limit.
(a) In general. (1) Except as otherwise provided in § 251.4, a company may not consummate a covered acquisition if upon consummation of the transaction, the liabilities of the resulting company would exceed 10 percent of the financial sector liabilities, and the company is or would become a financial company.
(2) Financial sector liabilities. (i) Subject to paragraph (a)(2)(ii) of this section, as of July 1 of a given year, financial sector liabilities are equal to the average of the year-end financial sector liabilities figure for the preceding two calendar years. The measure of financial sector liabilities will be in effect until June 30 of the following calendar year.
(ii) For the period beginning July 1, 2015, and ending June 30, 2016, financial sector liabilities are equal to the year-end financial sector liabilities figure as of December 31, 2014.
(iii) The year-end financial sector liabilities figure equals the sum of the total consolidated liabilities of all top-tier U.S. financial companies (as calculated under paragraph (b) of this section) and the U.S. liabilities of all top-tier foreign financial companies (as calculated under paragraph (c) of this section) as of December 31 of that year.
(iv) On an annual basis and no later than July 1 of any calendar year, the Board will calculate and publish the financial sector liabilities for the preceding calendar year and the average of the financial sector liabilities for the preceding two calendar years.
(b) Calculating total consolidated liabilities. For purposes of paragraph (a) of this section:
(1) Covered acquisition by a U.S. company. For a covered acquisition in which a U.S. company would acquire a U.S. company or a foreign company, liabilities of the resulting U.S. financial company equal the consolidated liabilities of the resulting U.S. financial company, calculated on a pro forma basis in accordance with paragraph (c) of this section.
(2) Covered acquisition by a foreign company of another foreign company. For a covered acquisition in which a foreign company would acquire another foreign company, liabilities of the resulting foreign financial company equal the U.S. liabilities of the resulting financial company, calculated on a pro forma basis in accordance with paragraph (d) of this section.
(3) Covered acquisition by a foreign company of a U.S. company. For a covered acquisition in which a foreign company would acquire a U.S. company, liabilities of the resulting foreign financial company equal the sum of: (i) The U.S. liabilities of the foreign company immediately preceding the transaction (calculated in accordance with paragraph (d) of this section) and (ii) the consolidated liabilities of the U.S. company immediately preceding the transaction (calculated in accordance with paragraph (c) of this section), reduced by the amount corresponding to any balances and transactions that would be eliminated in consolidation upon consummation of the transaction.
(c) Liabilities of a U.S. company – (1) U.S. company subject to applicable risk-based capital rules. For a U.S. company subject to applicable-risk based capital rules, consolidated liabilities are equal to:
(i) Total risk-weighted assets of the company; plus
(ii) The amount of assets that are deducted from the company’s regulatory capital elements under the applicable risk-based capital rules, times a multiplier that is equal to the inverse of the company’s total risk-based capital ratio minus one; minus
(iii) Total regulatory capital of the company.
(2) U.S. company not subject to applicable risk-based capital rules. For a U.S. company that is not subject to applicable risk-based capital rules (other than a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter)), consolidated liabilities are equal to the total liabilities of such company on a consolidated basis, as determined under applicable accounting standards.
(3) Qualifying community banking organizations. For a U.S. company that is a qualifying community banking organization (as defined in § 217.12 of this chapter) that is subject to the community bank leverage ratio framework (as defined in § 217.12 of this chapter), consolidated liabilities are equal to:
(i) Average total consolidated assets (as used in § 217.12 of this chapter) of the company as last reported on the qualifying community banking organization’s applicable regulatory filing with the qualifying community banking organization’s appropriate Federal banking agency; minus
(ii) The company’s tier 1 capital (as defined in § 217.2 of this chapter and calculated in accordance with § 217.12(b) of this chapter).
(d) Liabilities of a foreign company – (1) Foreign banking organization. For a foreign banking organization, U.S. liabilities are equal to:
(i) The total consolidated assets of each U.S. branch or U.S. agency of the foreign banking organization, calculated in accordance with applicable accounting standards; plus
(ii) The total consolidated liabilities of each top-tier U.S. subsidiary that is subject to applicable risk-based capital rules (or reports information to the Board regarding its capital under risk-based capital rules applicable to bank holding companies), calculated as:
(A) Total consolidated risk-weighted assets of the subsidiary; plus
(B) The amount of assets that are deducted from the subsidiary’s regulatory capital elements under the applicable risk-based capital rules, times a multiplier that is equal to the inverse of the subsidiary’s total risk-based capital ratio minus one; minus
(C) Total consolidated regulatory capital of the subsidiary; plus
(iii) The total consolidated assets of each top-tier U.S. subsidiary that is not subject to applicable risk-based capital rules and does not report information regarding its capital under risk-based capital rules applicable to bank holding companies, calculated in accordance with applicable accounting standards.
(2) Foreign financial company that is not a foreign banking organization. For a foreign company that is not a foreign banking organization, U.S. liabilities are equal to:
(i) The total consolidated liabilities of each top-tier U.S. subsidiary that is subject to applicable risk-based capital rules (or reports information to the Board regarding its capital under risk-based capital rules applicable to bank holding companies), calculated as:
(A) Total consolidated risk-weighted assets of the subsidiary; plus
(B) The amount of assets that are deducted from the subsidiary’s regulatory capital elements under the applicable risk-based capital rules, times a multiplier that is equal to the inverse of the company’s total risk-based capital ratio minus one; minus
(C) Total regulatory capital of the subsidiary; plus
(ii) The total consolidated liabilities of each top-tier U.S. subsidiary that is not subject to applicable risk-based capital rules, calculated in accordance with applicable accounting standards.
(3) Intercompany balances and transactions – (i) Foreign banking organization. A foreign banking organization must reduce the amount of consolidated liabilities of its U.S. operations calculated pursuant to this paragraph (d) by amounts corresponding to intercompany balances and intercompany transactions between the foreign banking organization’s U.S. domiciled affiliates, branches or agencies to the extent such items are not eliminated in consolidation, and increase consolidated liabilities by net intercompany balances and intercompany transactions between a non-U.S. domiciled affiliate and a U.S. domiciled affiliate, branch, or agency of the foreign banking organization, to the extent such items are not reflected in the measure of liabilities.
(ii) Foreign financial company. A foreign company that is not a foreign banking organization may reduce the amount of consolidated liabilities of its U.S. operations calculated pursuant to this paragraph (d) by amounts corresponding to intercompany balances and intercompany transactions between the foreign organization’s U.S. domiciled affiliates to the extent such items are not already eliminated in consolidation; provided that it increases consolidated liabilities by net intercompany balances and intercompany transactions between a non-U.S. domiciled affiliate and a U.S. domiciled affiliate, to the extent such items are not already reflected in the measure of liabilities.
(e) Applicable accounting standard. If a company does not calculate its total consolidated assets or liabilities under GAAP for any regulatory purpose (including compliance with applicable securities laws), the company may submit a request to the Board that the company use an accounting standard or method of estimation other than GAAP to calculate its liabilities for purposes of this part. The Board may, in its discretion and subject to Board review and adjustment, permit the company to provide estimated total consolidated liabilities on an annual basis using this accounting standard or method of estimation.
§ 251.4 Exceptions to the concentration limit.
(a) General. With the prior written consent of the Board, the concentration limit under § 251.3 shall not apply to:
(1) A covered acquisition of an insured depository institution that is in default or in danger of default (as determined by the appropriate Federal banking agency of the insured depository institution, in consultation with the Board);
(2) A covered acquisition with respect to which assistance is provided by the Federal Deposit Insurance Corporation under section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823(c)); or
(3) A covered acquisition that would result in an increase in the liabilities of the financial company that does not exceed $2 billion, when aggregated with all other acquisitions by the financial company made pursuant to this paragraph (a)(3) during the twelve months preceding the projected date of the acquisition.
(b) Prior written consent – (1) General. Except as provided in paragraph (c) of this section, a financial company must request that the Board provide prior written consent before the financial company consummates a transaction described in paragraph (a) of this section.
(2) Contents of request. (i) A request for prior written consent under paragraph (a) of this section must contain:
(A) A description of the covered acquisition;
(B) The projected increase in the company’s liabilities resulting from the acquisition;
(C) If the request is made pursuant to paragraph (a)(3) of this section, the projected aggregate increase in the company’s liabilities from acquisitions during the twelve months preceding the projected date of the acquisition; and
(D) Any additional information requested by the Board.
(ii) A financial company may satisfy the requirements of this paragraph (b) if:
(A) The proposed transaction otherwise requires approval by, or prior notice to, the Board under the Change in Bank Control Act, Bank Holding Company Act, Home Owners’ Loan Act, International Banking Act, or any other applicable statute, and any regulation thereunder; and
(B) The financial company includes the information required in paragraph (b)(2) of this section in the notice or request for prior approval described in paragraph (b)(2)(ii)(A) of this section.
(3) Procedures for providing written consent. (i) The Board will act on a request for prior written consent filed under this paragraph (b) within 90 calendar days after the receipt of a complete request, unless that time period is extended by the Board. To the extent that a proposed transaction otherwise requires approval from, or prior notice to, the Board under another provision of law, the Board will act on that request for prior written consent concurrently with its action on the request for approval or notice.
(ii) In acting on a request under this paragraph (b), the Board will consider whether the consummation of the covered acquisition could pose a threat to financial stability.
(c) General consent. The Board grants prior written consent for a covered acquisition that would result in an increase in the liabilities of the financial company that does not exceed $100 million, when aggregated with all other covered acquisitions by the financial company made pursuant to this paragraph (c) during the twelve months preceding the date of the acquisition. A financial company that relies on prior written consent pursuant to this paragraph (c) must provide a notice to the Board within 10 days after consummating the covered acquisition that describes the covered acquisition, the increase in the company’s liabilities resulting from the acquisition, and the aggregate increase in the company’s liabilities from covered acquisitions during the twelve months preceding the date of the acquisition.
§ 251.5 No evasion.
A financial company may not organize or operate its business or structure any acquisition of or merger or consolidation with another company in such a manner that results in evasion of the concentration limit established by section 14 of the Bank Holding Company Act or this part.
§ 251.6 Reporting requirements.
By March 31 of each year:
(a) A U.S. financial company (other than a U.S. financial company that is required to file the Bank Consolidated Reports of Condition and Income (Call Report), the Consolidated Financial Statements for Holding Companies (FR Y-9C), the Parent Company Only Financial Statements for Small Holding Companies (FR Y-9SP), or the Parent Company Only Financial Statements for Large Holding Companies (FR Y-9LP), or is required to report consolidated total liabilities on the Quarterly Savings and Loan Holding Company Report (FR 2320)) must report to the Board its consolidated liabilities as of the previous calendar year-end in the manner and form prescribed by the Board; and
(b) A foreign financial company (other than a foreign financial company that is required to file a FR Y-7) must report to the Board its U.S. liabilities as of the previous calendar year-end in the manner and form prescribed by the Board.
PART 252 – ENHANCED PRUDENTIAL STANDARDS (REGULATION YY)
Subpart A – General Provisions
§ 252.1 Authority and purpose.
(a) Authority. This part is issued by the Board of Governors of the Federal Reserve System (the Board) under sections 162, 165, 167, and 168 of Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) (Pub. L. 111-203, 124 Stat. 1376, 1423-1432, 12 U.S.C. 5362, 5365, 5367, and 5368); section 9 of the Federal Reserve Act (12 U.S.C. 321-338a); section 5(b) of the Bank Holding Company Act (12 U.S.C. 1844(b)); sections 8 and 39 of the Federal Deposit Insurance Act (12 U.S.C. 1818(b) and 1831p-1); the International Banking Act (12 U.S.C. 3101et seq.); the Foreign Bank Supervision Enhancement Act (12 U.S.C. 3101 note); and 12 U.S.C. 3904, 3906-3909, and 4808.
(b) Purpose. This part implements certain provisions of section 165 of the Dodd-Frank Act (12 U.S.C. 5365), which require the Board to establish enhanced prudential standards for certain bank holding companies, foreign banking organizations, nonbank financial companies supervised by the Board, and certain other companies.
§ 252.2 Definitions.
Unless otherwise specified, the following definitions apply for purposes of this part:
Affiliate has the same meaning as in section 2(k) of the Bank Holding Company Act (12 U.S.C. 1841(k)) and 12 CFR 225.2(a).
Applicable accounting standards means GAAP, international financial reporting standards, or such other accounting standards that a company uses in the ordinary course of its business in preparing its consolidated financial statements.
Average combined U.S. assets means the average of combined U.S. assets for the four most recent calendar quarters or, if the banking organization has not reported combined U.S. assets for each of the four most recent calendar quarters, the combined U.S. assets for the most recent calendar quarter or average of the most recent calendar quarters, as applicable.
Average cross-jurisdictional activity means the average of cross-jurisdictional activity for the four most recent calendar quarters or, if the banking organization has not reported cross-jurisdictional activity for each of the four most recent calendar quarters, the cross-jurisdictional activity for the most recent calendar quarter or average of the most recent calendar quarters, as applicable.
Average off-balance sheet exposure means the average of off-balance sheet exposure for the four most recent calendar quarters or, if the banking organization has not reported total exposure and total consolidated assets or combined U.S. assets, as applicable, for each of the four most recent calendar quarters, the off-balance sheet exposure for the most recent calendar quarter or average of the most recent calendar quarters, as applicable.
Average total consolidated assets means the average of total consolidated assets for the four most recent calendar quarters or, if the banking organization has not reported total consolidated assets for each of the four most recent calendar quarters, the total consolidated assets for the most recent calendar quarter or average of the most recent calendar quarters, as applicable.
Average total nonbank assets means the average of total nonbank assets for the four most recent calendar quarters or, if the banking organization has not reported or calculated total nonbank assets for each of the four most recent calendar quarters, the total nonbank assets for the most recent calendar quarter or average of the most recent calendar quarters, as applicable.
Average U.S. non-branch assets means the average of U.S. non-branch assets for the four most recent calendar quarters or, if the banking organization has not reported the total consolidated assets of its top-tier U.S. subsidiaries for each of the four most recent calendar quarters, the U.S. non-branch assets for the most recent calendar quarter or average of the most recent calendar quarters, as applicable.
Average weighted short-term wholesale funding means the average of weighted short-term wholesale funding for each of the four most recent calendar quarters or, if the banking organization has not reported weighted short-term wholesale funding for each of the four most recent calendar quarters, the weighted short-term wholesale funding for the most recent calendar quarter or average of the most recent calendar quarters, as applicable.
Bank holding company has the same meaning as in section 2(a) of the Bank Holding Company Act (12 U.S.C. 1841(a)) and 12 CFR 225.2(c).
Banking organization means:
(1) A bank holding company that is a U.S. bank holding company;
(2) A U.S. intermediate holding company; or
(3) A foreign banking organization.
Board means the Board of Governors of the Federal Reserve System.
Category II bank holding company means a U.S. bank holding company identified as a Category II banking organization pursuant to § 252.5.
Category II foreign banking organization means a foreign banking organization identified as a Category II banking organization pursuant to § 252.5.
Category II U.S. intermediate holding company means a U.S. intermediate holding company identified as a Category II banking organization pursuant to § 252.5.
Category III bank holding company means a U.S. bank holding company identified as a Category III banking organization pursuant to § 252.5.
Category III foreign banking organization means a foreign banking organization identified as a Category III banking organization pursuant to § 252.5.
Category III U.S. intermediate holding company means a U.S. intermediate holding company identified as a Category III banking organization pursuant to § 252.5.
Category IV bank holding company means a U.S. bank holding company identified as a Category IV banking organization pursuant to § 252.5.
Category IV foreign banking organization means a foreign banking organization identified as a Category IV banking organization pursuant to § 252.5.
Category IV U.S. intermediate holding company means a U.S. intermediate holding company identified as a Category IV banking organization pursuant to § 252.5.
Combined U.S. assets means the sum of the consolidated assets of each top-tier U.S. subsidiary of the foreign banking organization (excluding any section 2(h)(2) company, if applicable) and the total assets of each U.S. branch and U.S. agency of the foreign banking organization, as reported by the foreign banking organization on the FR Y-15 or FR Y-7Q.
Combined U.S. operations means:
(1) The U.S. branches and agencies of the foreign banking organization; and
(2) The U.S. subsidiaries of the foreign banking organization (excluding any section 2(h)(2) company, if applicable) and subsidiaries of such U.S. subsidiaries.
Company means a corporation, partnership, limited liability company, depository institution, business trust, special purpose entity, association, or similar organization.
Control has the same meaning as in section 2(a) of the Bank Holding Company Act (12 U.S.C. 1841(a)), and the terms controlled and controlling shall be construed consistently with the term control.
Council means the Financial Stability Oversight Council established by section 111 of the Dodd-Frank Act (12 U.S.C. 5321).
Credit enhancement means a qualified financial contract of the type set forth in section 210(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), (v)(VI), or (vi)(VI) of Title II of the Dodd-Frank Act (12 U.S.C. 5390(c)(8)(D)(ii)(XII), (iii)(X), (iv)(V), (v)(VI), or (vi)(VI)) or a credit enhancement that the Federal Deposit Insurance Corporation determines by regulation is a qualified financial contract pursuant to section 210(c)(8)(D)(i) of Title II of the Act (12 U.S.C. 5390(c)(8)(D)(i)).
Cross-jurisdictional activity. The cross-jurisdictional activity of a banking organization is equal to the cross-jurisdictional activity of the banking organization as reported on the FR Y-15.
Depository institution has the same meaning as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
DPC branch subsidiary means any subsidiary of a U.S. branch or a U.S. agency acquired, or formed to hold assets acquired, in the ordinary course of business and for the sole purpose of securing or collecting debt previously contracted in good faith by that branch or agency.
Foreign banking organization has the same meaning as in 12 CFR 211.21(o), provided that if the top-tier foreign banking organization is incorporated in or organized under the laws of any State, the foreign banking organization shall not be treated as a foreign banking organization for purposes of this part.
FR Y-7 means the Annual Report of Foreign Banking Organizations reporting form.
FR Y-7Q means the Capital and Asset Report for Foreign Banking Organizations reporting form.
FR Y-9C means the Consolidated Financial Statements for Holding Companies reporting form.
FR Y-9LP means the Parent Company Only Financial Statements of Large Holding Companies.
FR Y-15 means the Systemic Risk Report.
Global methodology means the assessment methodology and the higher loss absorbency requirement for global systemically important banks issued by the Basel Committee on Banking Supervision, as updated from time to time.
Global systemically important banking organization means a global systemically important bank, as such term is defined in the global methodology.
Global systemically important BHC means a bank holding company identified as a global systemically important BHC pursuant to 12 CFR 217.402.
Global systemically important foreign banking organization means a top-tier foreign banking organization that is identified as a global systemically important foreign banking organization under § 252.147(b)(4) or § 252.153(b)(4) of this part.
GAAP means generally accepted accounting principles as used in the United States.
Home country, with respect to a foreign banking organization, means the country in which the foreign banking organization is chartered or incorporated.
Home country resolution authority, with respect to a foreign banking organization, means the governmental entity or entities that under the laws of the foreign banking organization’s home county has responsibility for the resolution of the top-tier foreign banking organization.
Home-country supervisor, with respect to a foreign banking organization, means the governmental entity or entities that under the laws of the foreign banking organization’s home county has responsibility for the supervision and regulation of the top-tier foreign banking organization.
Nonbank financial company supervised by the Board means a company that the Council has determined under section 113 of the Dodd-Frank Act (12 U.S.C. 5323) shall be supervised by the Board and for which such determination is still in effect.
Non-U.S. affiliate means any affiliate of a foreign banking organization that is incorporated or organized in a country other than the United States.
Off-balance sheet exposure. (1) The off-balance sheet exposure of a U.S. bank holding company or U.S. intermediate holding company is equal to:
(i) The total exposure of such banking organization, as reported by the banking organization on the FR Y-15; minus
(ii) The total consolidated assets of such banking organization for the same calendar quarter.
(2) The off-balance sheet exposure of a foreign banking organization is equal to:
(i) The total exposure of the combined U.S. operations of the foreign banking organization, as reported by the foreign banking organization on the FR Y-15; minus
(ii) The combined U.S. assets of the foreign banking organization for the same calendar quarter.
Publicly traded means an instrument that is traded on:
(1) Any exchange registered with the U.S. Securities and Exchange Commission as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f); or
(2) Any non-U.S.-based securities exchange that:
(i) Is registered with, or approved by, a non-U.S. national securities regulatory authority; and
(ii) Provides a liquid, two-way market for the instrument in question, meaning that there are enough independent bona fide offers to buy and sell so that a sales price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined promptly and a trade can be settled at such price within a reasonable time period conforming with trade custom.
(3) A company can rely on its determination that a particular non-U.S.-based securities exchange provides a liquid two-way market unless the Board determines that the exchange does not provide a liquid two-way market.
Section 2(h)(2) company has the same meaning as in section 2(h)(2) of the Bank Holding Company Act (12 U.S.C. 1841(h)(2)).
State means any state, commonwealth, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, or the United States Virgin Islands.
State member bank has the same meaning as in 12 CFR 208.2(g).
Subsidiary has the same meaning as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
Top-tier foreign banking organization, with respect to a foreign bank, means the top-tier foreign banking organization or, alternatively, a subsidiary of the top-tier foreign banking organization designated by the Board.
Total consolidated assets. (1) Total consolidated assets of a U.S. bank holding company or a U.S. intermediate holding company is equal to the total consolidated assets of such banking organization calculated based on the average of the balances as of the close of business for each day for the calendar quarter or an average of the balances as of the close of business on each Wednesday during the calendar quarter, as reported on the FR Y-9C.
(2) Total consolidated assets of a foreign banking organization is equal to the total consolidated assets of the foreign banking organization, as reported on the FR Y-7Q.
(3) Total consolidated assets of a state member bank is equal to the total consolidated assets as reported by a state member bank on its Consolidated Report of Condition and Income (Call Report).
Total nonbank assets. (1) Total nonbank assets of a U.S. bank holding company or U.S. intermediate holding company is equal to the total nonbank assets of such banking organization, as reported on the FR Y-9LP.
(2) Total nonbank assets of a foreign banking organization is equal to:
(i) The sum of the total nonbank assets of any U.S. intermediate holding company, if any, as reported on the FR Y-9LP; plus
(ii) The assets of the foreign banking organization’s nonbank U.S. subsidiaries excluding the U.S. intermediate holding company, if any; plus
(iii) The sum of the foreign banking organization’s equity investments in unconsolidated U.S. subsidiaries, excluding equity investments in any section 2(h)(2) company; minus
(iv) The assets of any section 2(h)(2) company.
U.S. agency has the same meaning as the term “agency” in § 211.21(b) of this chapter.
U.S. bank holding company means a bank holding company that is:
(1) Incorporated in or organized under the laws of the United States or any State; and
(2) Not a consolidated subsidiary of a bank holding company that is incorporated in or organized under the laws of the United States or any State.
U.S. branch has the same meaning as the term “branch” in § 211.21(e) of this chapter.
U.S. branches and agencies means the U.S. branches and U.S. agencies of a foreign banking organization.
U.S. government agency means an agency or instrumentality of the United States whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the United States.
U.S. government-sponsored enterprise means an entity originally established or chartered by the U.S. government to serve public purposes specified by the U.S. Congress, but whose obligations are not explicitly guaranteed by the full faith and credit of the United States.
U.S. intermediate holding company means a top-tier U.S. company that is required to be established pursuant to § 252.147 or § 252.153.
U.S. non-branch assets. U.S. non-branch assets are equal to the sum of the consolidated assets of each top-tier U.S. subsidiary of the foreign banking organization (excluding any section 2(h)(2) company and DPC branch subsidiary, if applicable) as reported on the FR Y-7Q. In calculating U.S. non-branch assets, a foreign banking organization must reduce its U.S. non-branch assets by the amount corresponding to balances and transactions between a top-tier U.S. subsidiary and any other top-tier U.S. subsidiary (excluding any 2(h)(2) company or DPC branch subsidiary) to the extent such items are not already eliminated in consolidation.
U.S. subsidiary means any subsidiary that is incorporated in or organized under the laws of the United States or any State, commonwealth, territory, or possession of the United States, the Commonwealth of Puerto Rico, the Commonwealth of the North Mariana Islands, American Samoa, Guam, or the United States Virgin Islands.
Weighted short-term wholesale funding is equal to the weighted short-term wholesale funding of a banking organization, as reported on the FR Y-15.
(a) In general. Nothing in this part limits the authority of the Board under any provision of law or regulation to impose on any company additional enhanced prudential standards, including, but not limited to, additional risk-based or leverage capital or liquidity requirements, leverage limits, limits on exposures to single counterparties, risk-management requirements, stress tests, or other requirements or restrictions the Board deems necessary to carry out the purposes of this part or Title I of the Dodd-Frank Act, or to take supervisory or enforcement action, including action to address unsafe and unsound practices or conditions, or violations of law or regulation.
(b) Modifications or extensions of this part. The Board may extend or accelerate any compliance date of this part if the Board determines that such extension or acceleration is appropriate. In determining whether an extension or acceleration is appropriate, the Board will consider the effect of the modification on financial stability, the period of time for which the modification would be necessary to facilitate compliance with this part, and the actions the company is taking to come into compliance with this part.
(c) Reservation of authority for certain foreign banking organizations. The Board may permit a foreign banking organization to comply with the requirements of this part through a subsidiary. In making this determination, the Board shall consider:
(1) The ownership structure of the foreign banking organization, including whether the foreign banking organization is owned or controlled by a foreign government;
(2) Whether the action would be consistent with the purposes of this part; and
(3) Any other factors that the Board determines are relevant.
§ 252.4 Nonbank financial companies supervised by the Board.
(a) U.S. nonbank financial companies supervised by the Board. The Board will establish enhanced prudential standards for a nonbank financial company supervised by the Board that is incorporated in or organized under the laws of the United States or any State (U.S. nonbank financial company) by rule or order. In establishing such standards, the Board will consider the factors set forth in sections 165(a)(2) and (b)(3) of the Dodd-Frank Act, including:
(1) The nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the U.S. nonbank financial company;
(2) The degree to which the U.S. nonbank financial company is already regulated by one or more primary financial regulatory agencies; and
(3) Any other risk-related factor that the Board determines is appropriate.
(b) Foreign nonbank financial companies supervised by the Board. The Board will establish enhanced prudential standards for a nonbank financial company supervised by the Board that is organized or incorporated in a country other than the United States (foreign nonbank financial company) by rule or order. In establishing such standards, the Board will consider the factors set forth in sections 165(a)(2), (b)(2), and (b)(3) of the Dodd-Frank Act, including:
(1) The nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the foreign nonbank financial company;
(2) The extent to which the foreign nonbank financial company is subject to prudential standards on a consolidated basis in its home country that are administered and enforced by a comparable foreign supervisory authority; and
(3) Any other risk-related factor that the Board determines is appropriate.
§ 252.5 Categorization of banking organizations.
(a) General. (1) A U.S. bank holding company with average total consolidated assets of $100 billion or more must determine its category among the four categories described in paragraphs (b) through (e) of this section at least quarterly.
(2) A U.S. intermediate holding company with average total consolidated assets of $100 billion or more must determine its category among the three categories described in paragraphs (c) through (e) of this section at least quarterly.
(3) A foreign banking organization with average total consolidated assets of $100 billion or more and average combined U.S. assets of $100 billion or more must determine its category among the three categories described in paragraphs (c) through (e) of this section at least quarterly.
(b) Global systemically important BHC. A banking organization is a global systemically important BHC if it is identified as a global systemically important BHC pursuant to 12 CFR 217.402.
(c) Category II. (1) A banking organization is a Category II banking organization if the banking organization:
(i) Has:
(A)(1) For a U.S. bank holding company or a U.S. intermediate holding company, $700 billion or more in average total consolidated assets;
(2) For a foreign banking organization, $700 billion or more in average combined U.S. assets; or
(B)(1) $75 billion or more in average cross-jurisdictional activity; and
(2)(i) For a U.S. bank holding company or a U.S. intermediate holding company, $100 billion or more in average total consolidated assets; or
(ii) For a foreign banking organization, $100 billion or more in average combined U.S. assets; and
(ii) Is not a global systemically important BHC.
(2) After meeting the criteria in paragraph (c)(1) of this section, a banking organization continues to be a Category II banking organization until the banking organization:
(i) Has:
(A)(1) For a U.S. bank holding company or a U.S. intermediate holding company, less than $700 billion in total consolidated assets for each of the four most recent calendar quarters; or
(2) For a foreign banking organization, less than $700 billion in combined U.S. assets for each of the four most recent calendar quarters; and
(B) Less than $75 billion in cross-jurisdictional activity for each of the four most recent calendar quarters;
(ii) Has:
(A) For a U.S. bank holding company or a U.S. intermediate holding company, less than $100 billion in total consolidated assets for each of the four most recent calendar quarters;
(B) For a foreign banking organization, less than $100 billion in combined U.S. assets for each of the four most recent calendar quarters; or
(iii) Meets the criteria in paragraph (b) to be a global systemically important BHC.
(d) Category III. (1) A banking organization is a Category III banking organization if the banking organization:
(i) Has:
(A)(1) For a U.S. bank holding company or a U.S. intermediate holding company, $250 billion or more in average total consolidated assets; or
(2) For a foreign banking organization, $250 billion or more in average combined U.S. assets; or
(B)(1)(i) For a U.S. bank holding company or a U.S. intermediate holding company, $100 billion or more in average total consolidated assets; or
(ii) For a foreign banking organization, $100 billion or more in average combined U.S. assets; and
(2) At least:
(i) $75 billion in average total nonbank assets;
(ii) $75 billion in average weighted short-term wholesale funding; or
(iii) $75 billion in average off-balance sheet exposure;
(ii) Is not a global systemically important BHC; and
(iii) Is not a Category II banking organization.
(2) After meeting the criteria in paragraph (d)(1) of this section, a banking organization continues to be a Category III banking organization until the banking organization:
(i) Has:
(A)(1) For a U.S. bank holding company or a U.S. intermediate holding company, less than $250 billion in total consolidated assets for each of the four most recent calendar quarters; or
(2) For a foreign banking organization, less than $250 billion in combined U.S. assets for each of the four most recent calendar quarters;
(B) Less than $75 billion in total nonbank assets for each of the four most recent calendar quarters;
(C) Less than $75 billion in weighted short-term wholesale funding for each of the four most recent calendar quarters; and
(D) Less than $75 billion in off-balance sheet exposure for each of the four most recent calendar quarters; or
(ii) Has:
(A) For a U.S. bank holding company or a U.S. intermediate holding company, less than $100 billion in total consolidated assets for each of the four most recent calendar quarters; or
(B) For a foreign banking organization, less than $100 billion in combined U.S. assets for each of the four most recent calendar quarters;
(iii) Meets the criteria in paragraph (b) of this section to be a global systemically important BHC; or
(iv) Meets the criteria in paragraph (c)(1) of this section to be a Category II banking organization.
(e) Category IV. (1) A banking organization is a Category IV banking organization if the banking organization:
(i) Is not global systemically important BHC;
(ii) Is not a Category II banking organization;
(iii) Is not a Category III banking organization; and
(iv) Has:
(A) For a U.S. bank holding company or a U.S. intermediate holding company, average total consolidated assets of $100 billion or more; or
(B) For a foreign banking organization, average combined U.S. assets of $100 billion or more.
(2) After meeting the criteria in paragraph (e)(1), a banking organization continues to be a Category IV banking organization until the banking organization:
(i) Has:
(A) For a U.S. bank holding company or a U.S. intermediate holding company, less than $100 billion in total consolidated assets for each of the four most recent calendar quarters;
(B) For a foreign banking organization, less than $100 billion in combined U.S. assets for each of the four most recent calendar quarters;
(ii) Meets the criteria in paragraph (b) of this section to be a global systemically important BHC;
(iii) Meets the criteria in paragraph (c)(1) of this section to be a Category II banking organization; or
(iv) Meets the criteria in paragraph (d)(1) of this section to be a Category III banking organization.
Subpart B – Company-Run Stress Test Requirements for State Member Banks With Total Consolidated Assets Over $250 Billion
§ 252.10 [Reserved]
§ 252.11 Authority and purpose.
(a) Authority. 12 U.S.C. 321-338a, 1818, 1831p-1, 3906-3909, 5365.
(b) Purpose. This subpart implements section 165(i)(2) of the Dodd-Frank Act (12 U.S.C. 5365(i)(2)), which requires state member banks with total consolidated assets of greater than $250 billion to conduct stress tests. This subpart also establishes definitions of stress tests and related terms, methodologies for conducting stress tests, and reporting and disclosure requirements.
§ 252.12 Definitions.
For purposes of this subpart, the following definitions apply:
Advanced approaches means the regulatory capital requirements at 12 CFR 217, subpart E, as applicable, and any successor regulation.
Asset threshold means average total consolidated assets of greater than $250 billion.
Baseline scenario means a set of conditions that affect the U.S. economy or the financial condition of a state member bank, and that reflect the consensus views of the economic and financial outlook.
Capital action has the same meaning as in 12 CFR 225.8(d)).
Covered company subsidiary means a state member bank that is a subsidiary of a covered company as defined in subpart F of this part.
Planning horizon means the period of at least nine consecutive quarters, beginning on the first day of a stress test cycle over which the relevant projections extend.
Pre-provision net revenue means the sum of net interest income and non-interest income less expenses before adjusting for loss provisions.
Provision for credit losses means:
(1) With respect to a state member bank that has adopted the current expected credit losses methodology under GAAP, the provision for credit losses, as would be reported by the state member bank on the Call Report in the current stress test cycle; and
(2) With respect to a state member bank that has not adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses as would be reported by the state member bank on the Call Report in the current stress test cycle.
Regulatory capital ratio means a capital ratio for which the Board has established minimum requirements for the state member bank by regulation or order, including, as applicable, the state member bank’s regulatory capital ratios calculated under 12 CFR part 217 and the deductions required under 12 CFR 248.12; except that the state member bank shall not use the advanced approaches to calculate its regulatory capital ratios.
Scenarios are those sets of conditions that affect the U.S. economy or the financial condition of a state member bank that the Board determines are appropriate for use in the company-run stress tests, including, but not limited to baseline and severely adverse scenarios.
Severely adverse scenario means a set of conditions that affect the U.S. economy or the financial condition of a state member bank and that overall are significantly more severe than those associated with the baseline scenario and may include trading or other additional components.
Stress test means a process to assess the potential impact of scenarios on the consolidated earnings, losses, and capital of a state member bank over the planning horizon, taking into account the current condition, risks, exposures, strategies, and activities.
Stress test cycle means the period beginning on January 1 of a calendar year and ending on December 31 of that year.
Subsidiary has the same meaning as in 12 CFR 225.2(o).
§ 252.13 Applicability.
(a) Scope – (1) Applicability. Except as provided in paragraph (b) of this section, this subpart applies to any state member bank with average total consolidated assets of greater than $250 billion.
(2) Ongoing applicability. A state member bank (including any successor company) that is subject to any requirement in this subpart shall remain subject to any such requirement unless and until its total consolidated assets fall below $250 billion for each of four consecutive quarters, effective on the as-of date of the fourth consecutive Call Report.
(b) Transition period. (1) A state member bank that exceeds the asset threshold for the first time on or before September 30 of a calendar year must comply with the requirements of this subpart beginning on January 1 of the second calendar year after the state member bank becomes subject to this subpart, unless that time is extended by the Board in writing.
(2) A state member bank that exceeds the asset threshold for the first time after September 30 of a calendar year must comply with the requirements of this subpart beginning on January 1 of the third year after the state member bank becomes subject to this subpart, unless that time is extended by the Board in writing.
§ 252.14 Stress test.
(a) In general. (1) A state member bank must conduct a stress test as required under this subpart.
(2) Frequency – (i) General. Except as provided in paragraph (a)(2)(ii) of this section, a state member bank must conduct a stress test according to the frequency in table 1 to § 252.14(a)(2)(i).
Table 1 to § 252.14(
| If the state member bank is a | Then the stress test must be conducted |
|---|---|
| Subsidiary of a global systemically important BHC | Annually, by April 5 of each calendar year, based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. |
| Subsidiary of a Category II bank holding company | Annually, by April 5 of each calendar year, based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. |
| Subsidiary of a Category II U.S. intermediate holding company | Annually, by April 5 of each calendar year, based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. |
| Not a subsidiary of a: (A) Global systemically important BHC; (B) Category II bank holding company; or (C) Category II U.S. intermediate holding company. | Biennially, by April 5 of each calendar year ending in an even number, based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. |
(ii) Change in frequency. The Board may require a state member bank to conduct a stress test on a more or less frequent basis than would be required under paragraph (a)(2)(i) of this section based on the company’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy.
(3) Notice and response – (i) Notification of change in frequency. If the Board requires a state member bank to change the frequency of the stress test under paragraph (a)(2)(ii) of this section, the Board will notify the state member bank in writing and provide a discussion of the basis for its determination.
(ii) Request for reconsideration and Board response. Within 14 calendar days of receipt of a notification under paragraph (a)(3)(i) of this section, a state member bank may request in writing that the Board reconsider the requirement to conduct a stress test on a more or less frequent basis than would be required under paragraph (a)(2)(i) of this section. A state member bank’s request for reconsideration must include an explanation as to why the request for reconsideration should be granted. The Board will respond in writing within 14 calendar days of receipt of the company’s request.
(b) Scenarios provided by the Board – (1) In general. In conducting a stress test under this section, a state member bank must, at a minimum, use the scenarios provided by the Board. Except as provided in paragraphs (b)(2) and (3) of this section, the Board will provide a description of the scenarios no later than February 15 of each calendar year.
(2) Additional components. (i) The Board may require a state member bank with significant trading activity, as determined by the Board and specified in the Capital Assessments and Stress Testing report (FR Y-14), to include a trading and counterparty component in its severely adverse scenario in the stress test required by this section. The Board may also require a state member bank that is subject to 12 CFR part 217, subpart F or that is a subsidiary of a bank holding company that is subject to section § 252.54(b)(2)(i) to include a trading and counterparty component in the state member bank’s severely adverse scenario in the stress test required by this section. The data used in this component must be as of a date between October 1 of the previous calendar year and March 1 of the calendar year in which the stress test is performed, and the Board will communicate the as-of date and a description of the component to the company no later than March 1 of that calendar year.
(ii) The Board may require a state member bank to include one or more additional components in its severely adverse scenario in the stress test required by this section based on the state member bank’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy.
(3) Additional scenarios. The Board may require a state member bank to include one or more additional scenarios in the stress test required by this section based on the state member bank’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy.
(4) Notice and response – (i) Notification of additional component or scenario. If the Board requires a state member bank to include one or more additional components in its severely adverse scenario under paragraph (b)(2) of this section or to use one or more additional scenarios under paragraph (b)(3) of this section, the Board will notify the company in writing by December 31 and include a discussion of the basis for its determination.
(ii) Request for reconsideration and Board response. Within 14 calendar days of receipt of a notification under paragraph (b)(4)(i) of this section, the state member bank may request in writing that the Board reconsider the requirement that the company include the additional component(s) or additional scenario(s), including an explanation as to why the request for reconsideration should be granted. The Board will respond in writing within 14 calendar days of receipt of the company’s request.
(iii) Description of component. The Board will provide the state member bank with a description of any additional component(s) or additional scenario(s) by March 1.
§ 252.15 Methodologies and practices.
(a) Potential impact on capital. In conducting a stress test under § 252.14, for each quarter of the planning horizon, a state member bank must estimate the following for each scenario required to be used:
(1) Losses, pre-provision net revenue, provision for credit losses, and net income; and
(2) The potential impact on the regulatory capital levels and ratios applicable to the covered bank, and any other capital ratios specified by the Board, incorporating the effects of any capital action over the planning horizon and maintenance of an allowance for loan losses or adjusted allowance for credit losses, as appropriate, for credit exposures throughout the planning horizon.
(b) Controls and oversight of stress testing processes – (1) In general. The senior management of a state member bank must establish and maintain a system of controls, oversight, and documentation, including policies and procedures, that are designed to ensure that its stress testing processes are effective in meeting the requirements in this subpart. These policies and procedures must, at a minimum, describe the company’s stress testing practices and methodologies, and processes for validating and updating the company’s stress test practices and methodologies consistent with applicable laws and regulations.
(2) Oversight of stress testing processes. The board of directors, or a committee thereof, of a state member bank must review and approve the policies and procedures of the stress testing processes as frequently as economic conditions or the condition of the company may warrant, but no less than each year that a stress test is conducted. The board of directors and senior management of the state member bank must receive a summary of the results of the stress test conducted under this section.
(3) Role of stress testing results. The board of directors and senior management of a state member bank must consider the results of the stress test in the normal course of business, including but not limited to, the state member bank’s capital planning, assessment of capital adequacy, and risk management practices.
§ 252.16 Reports of stress test results.
(a) Reports to the Board of stress test results – (1) General. A state member bank must report the results of the stress test to the Board in the manner and form prescribed by the Board, in accordance with paragraphs (a)(2) of this section.
(2) Timing. For each stress test cycle in which a stress test is conducted:
(i) A state member bank that is a covered company subsidiary must report the results of the stress test to the Board by April 5, unless that time is extended by the Board in writing; and
(ii) A state member bank that is not a covered company subsidiary must report the results of the stress test to the Board by July 31, unless that time is extended by the Board in writing.
(b) Contents of reports. The report required under paragraph (a) of this section must include the following information for the baseline scenario, severely adverse scenario, and any other scenario required under § 252.14(b)(3):
(1) A description of the types of risks being included in the stress test;
(2) A summary description of the methodologies used in the stress test; and
(3) For each quarter of the planning horizon, estimates of aggregate losses, pre-provision net revenue, provision for credit losses, net income, and regulatory capital ratios;
(c) Confidential treatment of information submitted. The confidentiality of information submitted to the Board under this subpart and related materials shall be determined in accordance with applicable exemptions under the Freedom of Information Act (5 U.S.C. 552(b)) and the Board’s Rules Regarding Availability of Information (12 CFR part 261).
§ 252.17 Disclosure of stress test results.
(a) Public disclosure of results – (1) General. A state member bank must publicly disclose a summary of the results of the stress test required under this subpart.
(2) Timing. For each stress test cycle in which a stress test is conducted:
(i) A state member bank that is a covered company subsidiary must publicly disclose a summary of the results of the stress test within 15 calendar days after the Board discloses the results of its supervisory stress test of the covered company pursuant to § 252.46(b), unless that time is extended by the Board in writing; and
(ii) A state member bank that is not a covered company subsidiary must publicly disclose a summary of the results of the stress test in the period beginning on October 15 and ending on October 31, unless that time is extended by the Board in writing.
(3) Disclosure method. The summary required under this section may be disclosed on the website of a state member bank, or in any other forum that is reasonably accessible to the public.
(b) Summary of results – (1) State member banks that are subsidiaries of bank holding companies. A state member bank that is a subsidiary of a bank holding company satisfies the public disclosure requirements under this subpart if the bank holding company publicly discloses summary results of its stress test pursuant to this section or § 252.58, unless the Board determines that the disclosures at the holding company level do not adequately capture the potential impact of the scenarios on the capital of the state member bank and requires the state member bank to make public disclosures.
(2) State member banks that are not subsidiaries of bank holding companies. A state member bank that is not a subsidiary of a bank holding company or that is required to make disclosures under paragraph (b)(1) of this section must publicly disclose, at a minimum, the following information regarding the severely adverse scenario:
(i) A description of the types of risks being included in the stress test;
(ii) A summary description of the methodologies used in the stress test;
(iii) Estimates of –
(A) Aggregate losses;
(B) Pre-provision net revenue
(C) Provision for credit losses;
(D) Net income; and
(E) Pro forma regulatory capital ratios and any other capital ratios specified by the Board; and
(iv) An explanation of the most significant causes for the changes in regulatory capital ratios.
(c) Content of results. (1) The disclosure of aggregate losses, pre-provision net revenue, provision for credit losses, and net income that is required under paragraph (b) of this section must be on a cumulative basis over the planning horizon.
(2) The disclosure of pro forma regulatory capital ratios and any other capital ratios specified by the Board that is required under paragraph (b) of this section must include the beginning value, ending value and minimum value of each ratio over the planning horizon.
Subpart C – Risk Committee Requirement for Bank Holding Companies With Total Consolidated Assets of $50 Billion or More and Less Than $100 Billion
§ 252.20 [Reserved]
§ 252.21 Applicability.
(a) General applicability. A bank holding company must comply with the risk-committee requirements set forth in this subpart beginning on the first day of the ninth quarter following the date on which its average total consolidated assets equal or exceed $50 billion.
(b) Cessation of requirements. A bank holding company will remain subject to the requirements of this subpart until the earlier of the date on which:
(1) Its total consolidated assets are below $50 billion for each of four consecutive calendar quarters; and
(2) It becomes subject to the requirements of subpart D of this part.
§ 252.22 Risk committee requirement for bank holding companies with total consolidated assets of $50 billion or more.
(a) Risk committee – (1) General. A bank holding company subject to this subpart must maintain a risk committee that approves and periodically reviews the risk-management policies of the bank holding company’s global operations and oversees the operation of the bank holding company’s global risk-management framework.
(2) Risk-management framework. The bank holding company’s global risk-management framework must be commensurate with its structure, risk profile, complexity, activities, and size, and must include:
(i) Policies and procedures establishing risk-management governance, risk-management procedures, and risk-control infrastructure for its global operations; and
(ii) Processes and systems for implementing and monitoring compliance with such policies and procedures, including:
(A) Processes and systems for identifying and reporting risks and risk-management deficiencies, including regarding emerging risks, and ensuring effective and timely implementation of actions to address emerging risks and risk-management deficiencies for its global operations;
(B) Processes and systems for establishing managerial and employee responsibility for risk management;
(C) Processes and systems for ensuring the independence of the risk-management function; and
(D) Processes and systems to integrate risk management and associated controls with management goals and its compensation structure for its global operations.
(3) Corporate governance requirements. The risk committee must:
(i) Have a formal, written charter that is approved by the bank holding company’s board of directors;
(ii) Be an independent committee of the board of directors that has, as its sole and exclusive function, responsibility for the risk-management policies of the bank holding company’s global operations and oversight of the operation of the bank holding company’s global risk-management framework;
(iii) Report directly to the bank holding company’s board of directors;
(iv) Receive and review regular reports on a not less than a quarterly basis from the bank holding company’s chief risk officer provided pursuant to paragraph (b)(3)(ii) of this section; and
(v) Meet at least quarterly, or more frequently as needed, and fully document and maintain records of its proceedings, including risk-management decisions.
(4) Minimum member requirements. The risk committee must:
(i) Include at least one member having experience in identifying, assessing, and managing risk exposures of large, complex financial firms; and
(ii) Be chaired by a director who:
(A) Is not an officer or employee of the bank holding company and has not been an officer or employee of the bank holding company during the previous three years;
(B) Is not a member of the immediate family, as defined in 12 CFR 225.41(b)(3), of a person who is, or has been within the last three years, an executive officer of the bank holding company, as defined in 12 CFR 215.2(e)(1); and
(C)(1) Is an independent director under Item 407 of the Securities and Exchange Commission’s Regulation S-K (17 CFR 229.407(a)), if the bank holding company has an outstanding class of securities traded on an exchange registered with the U.S. Securities and Exchange Commission as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) (national securities exchange); or
(2) Would qualify as an independent director under the listing standards of a national securities exchange, as demonstrated to the satisfaction of the Board, if the bank holding company does not have an outstanding class of securities traded on a national securities exchange.
(b) Chief risk officer – (1) General. A bank holding company subject to this subpart must appoint a chief risk officer with experience in identifying, assessing, and managing risk exposures of large, complex financial firms.
(2) Responsibilities. (i) The chief risk officer is responsible for overseeing:
(A) The establishment of risk limits on an enterprise-wide basis and the monitoring of compliance with such limits;
(B) The implementation of and ongoing compliance with the policies and procedures set forth in paragraph (a)(2)(i) of this section and the development and implementation of the processes and systems set forth in paragraph (a)(2)(ii) of this section; and
(C) The management of risks and risk controls within the parameters of the company’s risk-control framework, and monitoring and testing of the company’s risk controls.
(ii) The chief risk officer is responsible for reporting risk-management deficiencies and emerging risks to the risk committee and resolving risk-management deficiencies in a timely manner.
(3) Corporate governance requirements. (i) The bank holding company must ensure that the compensation and other incentives provided to the chief risk officer are consistent with providing an objective assessment of the risks taken by the bank holding company; and
(ii) The chief risk officer must report directly to both the risk committee and chief executive officer of the company.
Subpart D – Enhanced Prudential Standards for Bank Holding Companies With Total Consolidated Assets of $100 Billion or More
§ 252.30 Scope.
This subpart applies to bank holding companies with average total consolidated assets of $100 billion or more.
§ 252.31 Applicability.
(a) Applicability – (1) Initial applicability. Subject to paragraph (c) of this section, a bank holding company must comply with the risk-management and risk-committee requirements set forth in § 252.33 and the liquidity risk-management and liquidity stress test requirements set forth in §§ 252.34 and 252.35 no later than the first day of the fifth quarter following the date on which its average total consolidated assets equal or exceed $100 billion.
(2) Changes in requirements following a change in category. A bank holding company with average total consolidated assets of $100 billion or more that changes from one category of banking organization described in § 252.5(b) through (e) to another of such categories must comply with the requirements applicable to the new category no later than on the first day of the second quarter following the change in the bank holding company’s category.
(b) Cessation of requirements. Except as provided in paragraph (c) of this section, a bank holding company is subject to the risk-management and risk committee requirements set forth in § 252.33 and the liquidity risk-management and liquidity stress test requirements set forth in §§ 252.34 and 252.35 until its total consolidated assets are below $100 billion for each of four consecutive calendar quarters.
(c) Applicability for bank holding companies that are subsidiaries of foreign banking organizations. If a bank holding company that has average total consolidated assets of $100 billion or more is controlled by a foreign banking organization, the U.S. intermediate holding company established or designated by the foreign banking organization must comply with the risk-management and risk committee requirements set forth in § 252.153(e)(3) and the liquidity risk-management and liquidity stress test requirements set forth in § 252.153(e)(4).
§ 252.32 Risk-based and leverage capital and stress test requirements.
A bank holding company subject to this subpart must comply with, and hold capital commensurate with the requirements of, any regulations adopted by the Board relating to capital planning and stress tests, in accordance with the applicability provisions set forth therein.
§ 252.33 Risk-management and risk committee requirements.
(a) Risk committee – (1) General. A bank holding company subject to this subpart must maintain a risk committee that approves and periodically reviews the risk-management policies of the bank holding company’s global operations and oversees the operation of the bank holding company’s global risk-management framework. The risk committee’s responsibilities include liquidity risk-management as set forth in § 252.34(b).
(2) Risk-management framework. The bank holding company’s global risk-management framework must be commensurate with its structure, risk profile, complexity, activities, and size and must include:
(i) Policies and procedures establishing risk-management governance, risk-management procedures, and risk-control infrastructure for its global operations; and
(ii) Processes and systems for implementing and monitoring compliance with such policies and procedures, including:
(A) Processes and systems for identifying and reporting risks and risk-management deficiencies, including regarding emerging risks, and ensuring effective and timely implementation of actions to address emerging risks and risk-management deficiencies for its global operations;
(B) Processes and systems for establishing managerial and employee responsibility for risk management;
(C) Processes and systems for ensuring the independence of the risk-management function; and
(D) Processes and systems to integrate risk management and associated controls with management goals and its compensation structure for its global operations.
(3) Corporate governance requirements. The risk committee must:
(i) Have a formal, written charter that is approved by the bank holding company’s board of directors;
(ii) Be an independent committee of the board of directors that has, as its sole and exclusive function, responsibility for the risk-management policies of the bank holding company’s global operations and oversight of the operation of the bank holding company’s global risk-management framework;
(iii) Report directly to the bank holding company’s board of directors;
(iv) Receive and review regular reports on not less than a quarterly basis from the bank holding company’s chief risk officer provided pursuant to paragraph (b)(3)(ii) of this section; and
(v) Meet at least quarterly, or more frequently as needed, and fully document and maintain records of its proceedings, including risk-management decisions.
(4) Minimum member requirements. The risk committee must:
(i) Include at least one member having experience in identifying, assessing, and managing risk exposures of large, complex financial firms; and
(ii) Be chaired by a director who:
(A) Is not an officer or employee of the bank holding company and has not been an officer or employee of the bank holding company during the previous three years;
(B) Is not a member of the immediate family, as defined in section 225.41(b)(3) of the Board’s Regulation Y (12 CFR 225.41(b)(3)), of a person who is, or has been within the last three years, an executive officer of the bank holding company, as defined in section 215.2(e)(1) of the Board’s Regulation O (12 CFR 215.2(e)(1)); and
(C)(1) Is an independent director under Item 407 of the Securities and Exchange Commission’s Regulation S-K (17 CFR 229.407(a)), if the bank holding company has an outstanding class of securities traded on an exchange registered with the U.S. Securities and Exchange Commission as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) (national securities exchange); or
(2) Would qualify as an independent director under the listing standards of a national securities exchange, as demonstrated to the satisfaction of the Board, if the bank holding company does not have an outstanding class of securities traded on a national securities exchange.
(b) Chief risk officer – (1) General. A bank holding company subject to this subpart must appoint a chief risk officer with experience in identifying, assessing, and managing risk exposures of large, complex financial firms.
(2) Responsibilities. (i) The chief risk officer is responsible for overseeing:
(A) The establishment of risk limits on an enterprise-wide basis and the monitoring of compliance with such limits;
(B) The implementation of and ongoing compliance with the policies and procedures set forth in paragraph (a)(2)(i) of this section and the development and implementation of the processes and systems set forth in paragraph (a)(2)(ii) of this section; and
(C) The management of risks and risk controls within the parameters of the company’s risk control framework, and monitoring and testing of the company’s risk controls.
(ii) The chief risk officer is responsible for reporting risk-management deficiencies and emerging risks to the risk committee and resolving risk-management deficiencies in a timely manner.
(3) Corporate governance requirements. (i) The bank holding company must ensure that the compensation and other incentives provided to the chief risk officer are consistent with providing an objective assessment of the risks taken by the bank holding company; and
(ii) The chief risk officer must report directly to both the risk committee and chief executive officer of the company.
§ 252.34 Liquidity risk-management requirements.
(a) Responsibilities of the board of directors – (1) Liquidity risk tolerance. The board of directors of a bank holding company that is subject to this subpart must:
(i) Approve the acceptable level of liquidity risk that the bank holding company may assume in connection with its operating strategies (liquidity risk tolerance) at least annually, taking into account the bank holding company’s capital structure, risk profile, complexity, activities, and size; and
(ii) Receive and review at least semi-annually information provided by senior management to determine whether the bank holding company is operating in accordance with its established liquidity risk tolerance.
(2) Liquidity risk-management strategies, policies, and procedures. The board of directors must approve and periodically review the liquidity risk-management strategies, policies, and procedures established by senior management pursuant to paragraph (c)(1) of this section.
(b) Responsibilities of the risk committee. The risk committee (or a designated subcommittee of such committee composed of members of the board of directors) must approve the contingency funding plan described in paragraph (f) of this section at least annually, and must approve any material revisions to the plan prior to the implementation of such revisions.
(c) Responsibilities of senior management – (1) Liquidity risk. (i) Senior management of a bank holding company subject to this subpart must establish and implement strategies, policies, and procedures designed to effectively manage the risk that the bank holding company’s financial condition or safety and soundness would be adversely affected by its inability or the market’s perception of its inability to meet its cash and collateral obligations (liquidity risk). The board of directors must approve the strategies, policies, and procedures pursuant to paragraph (a)(2) of this section.
(ii) Senior management must oversee the development and implementation of liquidity risk measurement and reporting systems, including those required by this section and § 252.35.
(iii) Senior management must determine at least quarterly whether the bank holding company is operating in accordance with such policies and procedures and whether the bank holding company is in compliance with this section and § 252.35 (or more often, if changes in market conditions or the liquidity position, risk profile, or financial condition warrant), and establish procedures regarding the preparation of such information.
(2) Liquidity risk tolerance. Senior management must report to the board of directors or the risk committee regarding the bank holding company’s liquidity risk profile and liquidity risk tolerance at least quarterly (or more often, if changes in market conditions or the liquidity position, risk profile, or financial condition of the company warrant).
(3) Business lines or products. (i) Senior management must approve new products and business lines and evaluate the liquidity costs, benefits, and risks of each new business line and each new product that could have a significant effect on the company’s liquidity risk profile. The approval is required before the company implements the business line or offers the product. In determining whether to approve the new business line or product, senior management must consider whether the liquidity risk of the new business line or product (under both current and stressed conditions) is within the company’s established liquidity risk tolerance.
(ii) Senior management must review at least annually significant business lines and products to determine whether any line or product creates or has created any unanticipated liquidity risk, and to determine whether the liquidity risk of each strategy or product is within the company’s established liquidity risk tolerance.
(4) Cash-flow projections. Senior management must review the cash-flow projections produced under paragraph (e) of this section at least quarterly (or more often, if changes in market conditions or the liquidity position, risk profile, or financial condition of the bank holding company warrant) to ensure that the liquidity risk is within the established liquidity risk tolerance.
(5) Liquidity risk limits. Senior management must establish liquidity risk limits as set forth in paragraph (g) of this section and review the company’s compliance with those limits at least quarterly (or more often, if changes in market conditions or the liquidity position, risk profile, or financial condition of the company warrant).
(6) Liquidity stress testing. Senior management must:
(i) Approve the liquidity stress testing practices, methodologies, and assumptions required in § 252.35(a) at least quarterly, and whenever the bank holding company materially revises its liquidity stress testing practices, methodologies or assumptions;
(ii) Review the liquidity stress testing results produced under § 252.35(a) at least quarterly;
(iii) Review the independent review of the liquidity stress tests under § 252.34(d) periodically; and
(iv) Approve the size and composition of the liquidity buffer established under § 252.35(b) at least quarterly.
(d) Independent review function. (1) A bank holding company subject to this subpart must establish and maintain a review function that is independent of management functions that execute funding to evaluate its liquidity risk management.
(2) The independent review function must:
(i) Regularly, but no less frequently than annually, review and evaluate the adequacy and effectiveness of the company’s liquidity risk-management processes, including its liquidity stress test processes and assumptions;
(ii) Assess whether the company’s liquidity risk-management function complies with applicable laws and regulations, and sound business practices; and
(iii) Report material liquidity risk-management issues to the board of directors or the risk committee in writing for corrective action, to the extent permitted by applicable law.
(e) Cash-flow projections. (1) A bank holding company subject to this subpart must produce comprehensive cash-flow projections that project cash flows arising from assets, liabilities, and off-balance sheet exposures over, at a minimum, short- and long-term time horizons. The bank holding company must update short-term cash-flow projections daily and must update longer-term cash-flow projections at least monthly.
(2) The bank holding company must establish a methodology for making cash-flow projections that results in projections that:
(i) Include cash flows arising from contractual maturities, intercompany transactions, new business, funding renewals, customer options, and other potential events that may impact liquidity;
(ii) Include reasonable assumptions regarding the future behavior of assets, liabilities, and off-balance sheet exposures;
(iii) Identify and quantify discrete and cumulative cash flow mismatches over these time periods; and
(iv) Include sufficient detail to reflect the capital structure, risk profile, complexity, currency exposure, activities, and size of the bank holding company and include analyses by business line, currency, or legal entity as appropriate.
(3) The bank holding company must adequately document its methodology for making cash flow projections and the included assumptions and submit such documentation to the risk committee.
(f) Contingency funding plan – (1) General. A bank holding company subject to this subpart must establish and maintain a contingency funding plan that sets out the company’s strategies for addressing liquidity needs during liquidity stress events. The contingency funding plan must be commensurate with the company’s capital structure, risk profile, complexity, activities, size, and established liquidity risk tolerance. The company must update the contingency funding plan at least annually, and when changes to market and idiosyncratic conditions warrant.
(2) Components of the contingency funding plan – (i)
Quantitative assessment. The contingency funding plan must:
(A) Identify liquidity stress events that could have a significant impact on the bank holding company’s liquidity;
(B) Assess the level and nature of the impact on the bank holding company’s liquidity that may occur during identified liquidity stress events;
(C) Identify the circumstances in which the bank holding company would implement its action plan described in paragraph (f)(2)(ii)(A) of this section, which circumstances must include failure to meet any minimum liquidity requirement imposed by the Board;
(D) Assess available funding sources and needs during the identified liquidity stress events;
(E) Identify alternative funding sources that may be used during the identified liquidity stress events; and
(F) Incorporate information generated by the liquidity stress testing required under § 252.35(a).
(ii) Liquidity event management process. The contingency funding plan must include an event management process that sets out the bank holding company’s procedures for managing liquidity during identified liquidity stress events. The liquidity event management process must:
(A) Include an action plan that clearly describes the strategies the company will use to respond to liquidity shortfalls for identified liquidity stress events, including the methods that the company will use to access alternative funding sources;
(B) Identify a liquidity stress event management team that would execute the action plan described in paragraph (f)(2)(ii)(A) of this section;
(C) Specify the process, responsibilities, and triggers for invoking the contingency funding plan, describe the decision-making process during the identified liquidity stress events, and describe the process for executing contingency measures identified in the action plan; and
(D) Provide a mechanism that ensures effective reporting and communication within the bank holding company and with outside parties, including the Board and other relevant supervisors, counterparties, and other stakeholders.
(iii) Monitoring. The contingency funding plan must include procedures for monitoring emerging liquidity stress events. The procedures must identify early warning indicators that are tailored to the company’s capital structure, risk profile, complexity, activities, and size.
(iv) Testing. The bank holding company must periodically test:
(A) The components of the contingency funding plan to assess the plan’s reliability during liquidity stress events;
(B) The operational elements of the contingency funding plan, including operational simulations to test communications, coordination, and decision-making by relevant management; and
(C) The methods the bank holding company will use to access alternative funding sources to determine whether these funding sources will be readily available when needed.
(g) Liquidity risk limits – (1) General. A bank holding company must monitor sources of liquidity risk and establish limits on liquidity risk that are consistent with the company’s established liquidity risk tolerance and that reflect the company’s capital structure, risk profile, complexity, activities, and size.
(2) Liquidity risk limits established by a global systemically important BHC, Category II bank holding company, or Category III bank holding company. If the bank holding company is a global systemically important BHC, Category II bank holding company, or Category III bank holding company, liquidity risk limits established under paragraph (g)(1) of this section must include limits on:
(i) Concentrations in sources of funding by instrument type, single counterparty, counterparty type, secured and unsecured funding, and as applicable, other forms of liquidity risk;
(ii) The amount of liabilities that mature within various time horizons; and
(iii) Off-balance sheet exposures and other exposures that could create funding needs during liquidity stress events.
(h) Collateral, legal entity, and intraday liquidity risk monitoring. A bank holding company subject to this subpart must establish and maintain procedures for monitoring liquidity risk as set forth in this paragraph.
(1) Collateral. The bank holding company must establish and maintain policies and procedures to monitor assets that have been, or are available to be, pledged as collateral in connection with transactions to which it or its affiliates are counterparties. These policies and procedures must provide that the bank holding company:
(i) Calculates all of its collateral positions according to the frequency specified in paragraph (h)(1)(i)(A) or (B) of this section, or as directed by the Board, specifying the value of pledged assets relative to the amount of security required under the relevant contracts and the value of unencumbered assets available to be pledged;
(A) If the bank holding company is not a Category IV bank holding company, on at least a weekly basis; or
(B) If the bank holding company is a Category IV bank holding company, on at least a monthly basis;
(ii) Monitors the levels of unencumbered assets available to be pledged by legal entity, jurisdiction, and currency exposure;
(iii) Monitors shifts in the bank holding company’s funding patterns, such as shifts between intraday, overnight, and term pledging of collateral; and
(iv) Tracks operational and timing requirements associated with accessing collateral at its physical location (for example, the custodian or securities settlement system that holds the collateral).
(2) Legal entities, currencies, and business lines. The bank holding company must establish and maintain procedures for monitoring and controlling liquidity risk exposures and funding needs within and across significant legal entities, currencies, and business lines, taking into account legal and regulatory restrictions on the transfer of liquidity between legal entities.
(3) Intraday exposures. The bank holding company must establish and maintain procedures for monitoring intraday liquidity risk exposures that are consistent with the bank holding company’s capital structure, risk profile, complexity, activities, and size. If the bank holding company is a global systemically important BHC, Category II bank holding company, or a Category III bank holding company, these procedures must address how the management of the bank holding company will:
(i) Monitor and measure expected daily gross liquidity inflows and outflows;
(ii) Manage and transfer collateral to obtain intraday credit;
(iii) Identify and prioritize time-specific obligations so that the bank holding company can meet these obligations as expected and settle less critical obligations as soon as possible;
(iv) Manage the issuance of credit to customers where necessary; and
(v) Consider the amounts of collateral and liquidity needed to meet payment systems obligations when assessing the bank holding company’s overall liquidity needs.
§ 252.35 Liquidity stress testing and buffer requirements.
(a) Liquidity stress testing requirement – (1) General. A bank holding company subject to this subpart must conduct stress tests to assess the potential impact of the liquidity stress scenarios set forth in paragraph (a)(3) of this section on its cash flows, liquidity position, profitability, and solvency, taking into account its current liquidity condition, risks, exposures, strategies, and activities.
(i) The bank holding company must take into consideration its balance sheet exposures, off-balance sheet exposures, size, risk profile, complexity, business lines, organizational structure, and other characteristics of the bank holding company that affect its liquidity risk profile in conducting its stress test.
(ii) In conducting a liquidity stress test using the scenarios described in paragraphs (a)(3)(i) and (iii) of this section, the bank holding company must address the potential direct adverse impact of associated market disruptions on the bank holding company and incorporate the potential actions of other market participants experiencing liquidity stresses under the market disruptions that would adversely affect the bank holding company.
(2) Frequency. The bank holding company must perform the liquidity stress tests required under paragraph (a)(1) of this section according to the frequency specified in paragraph (a)(2)(i) or (ii), or as directed by the Board:
(i) If the bank holding company is not a Category IV bank holding company, at least monthly; or
(ii) If the bank holding company is a Category IV bank holding company, at least quarterly.
(3) Stress scenarios. (i) Each liquidity stress test conducted under paragraph (a)(1) of this section must include, at a minimum:
(A) A scenario reflecting adverse market conditions;
(B) A scenario reflecting an idiosyncratic stress event for the bank holding company; and
(C) A scenario reflecting combined market and idiosyncratic stresses.
(ii) The bank holding company must incorporate additional liquidity stress scenarios into its liquidity stress test, as appropriate, based on its financial condition, size, complexity, risk profile, scope of operations, or activities. The Board may require the bank holding company to vary the underlying assumptions and stress scenarios.
(4) Planning horizon. Each stress test conducted under paragraph (a)(1) of this section must include an overnight planning horizon, a 30-day planning horizon, a 90-day planning horizon, a one-year planning horizon, and any other planning horizons that are relevant to the bank holding company’s liquidity risk profile. For purposes of this section, a “planning horizon” is the period over which the relevant stressed projections extend. The bank holding company must use the results of the stress test over the 30-day planning horizon to calculate the size of the liquidity buffer under paragraph (b) of this section.
(5) Requirements for assets used as cash-flow sources in a stress test. (i) To the extent an asset is used as a cash flow source to offset projected funding needs during the planning horizon in a liquidity stress test, the fair market value of the asset must be discounted to reflect any credit risk and market volatility of the asset.
(ii) Assets used as cash-flow sources during a planning horizon must be diversified by collateral, counterparty, borrowing capacity, and other factors associated with the liquidity risk of the assets.
(iii) A line of credit does not qualify as a cash flow source for purposes of a stress test with a planning horizon of 30 days or less. A line of credit may qualify as a cash flow source for purposes of a stress test with a planning horizon that exceeds 30 days.
(6) Tailoring. Stress testing must be tailored to, and provide sufficient detail to reflect, a bank holding company’s capital structure, risk profile, complexity, activities, and size.
(7) Governance – (i) Policies and procedures. A bank holding company subject to this subpart must establish and maintain policies and procedures governing its liquidity stress testing practices, methodologies, and assumptions that provide for the incorporation of the results of liquidity stress tests in future stress testing and for the enhancement of stress testing practices over time.
(ii) Controls and oversight. A bank holding company subject to this subpart must establish and maintain a system of controls and oversight that is designed to ensure that its liquidity stress testing processes are effective in meeting the requirements of this section. The controls and oversight must ensure that each liquidity stress test appropriately incorporates conservative assumptions with respect to the stress scenario in paragraph (a)(3) of this section and other elements of the stress test process, taking into consideration the bank holding company’s capital structure, risk profile, complexity, activities, size, business lines, legal entity or jurisdiction, and other relevant factors. The assumptions must be approved by the chief risk officer and be subject to the independent review under § 252.34(d) of this subpart.
(iii) Management information systems. The bank holding company must maintain management information systems and data processes sufficient to enable it to effectively and reliably collect, sort, and aggregate data and other information related to liquidity stress testing.
(8) Notice and response. If the Board determines that a bank holding company must conduct liquidity stress tests according to a frequency other than the frequency provided in paragraphs (a)(2)(i) and (ii) of this section, the Board will notify the bank holding company before the change in frequency takes effect, and describe the basis for its determination. Within 14 calendar days of receipt of a notification under this paragraph, the bank holding company may request in writing that the Board reconsider the requirement. The Board will respond in writing to the company’s request for reconsideration prior to requiring the company conduct liquidity stress tests according to a frequency other than the frequency provided in paragraphs (a)(2)(i) and (ii) of this section.
(b) Liquidity buffer requirement. (1) A bank holding company subject to this subpart must maintain a liquidity buffer that is sufficient to meet the projected net stressed cash-flow need over the 30-day planning horizon of a liquidity stress test conducted in accordance with paragraph (a) of this section under each scenario set forth in paragraph (a)(3)(i) through (iii) of this section.
(2) Net stressed cash-flow need. The net stressed cash-flow need for a bank holding company is the difference between the amount of its cash-flow need and the amount of its cash flow sources over the 30-day planning horizon.
(3) Asset requirements. The liquidity buffer must consist of highly liquid assets that are unencumbered, as defined in paragraph (b)(3)(ii) of this section:
(i) Highly liquid asset. A highly liquid asset includes:
(A) Cash;
(B) Assets that meet the criteria for high quality liquid assets as defined in 12 CFR 249.20; or
(C) Any other asset that the bank holding company demonstrates to the satisfaction of the Board:
(1) Has low credit risk and low market risk;
(2) Is traded in an active secondary two-way market that has committed market makers and independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined within one day and settled at that price within a reasonable time period conforming with trade custom; and
(3) Is a type of asset that investors historically have purchased in periods of financial market distress during which market liquidity has been impaired.
(ii) Unencumbered. An asset is unencumbered if it:
(A) Is free of legal, regulatory, contractual, or other restrictions on the ability of such company promptly to liquidate, sell or transfer the asset; and
(B) Is either:
(1) Not pledged or used to secure or provide credit enhancement to any transaction; or
(2) Pledged to a central bank or a U.S. government-sponsored enterprise, to the extent potential credit secured by the asset is not currently extended by such central bank or U.S. government-sponsored enterprise or any of its consolidated subsidiaries.
(iii) Calculating the amount of a highly liquid asset. In calculating the amount of a highly liquid asset included in the liquidity buffer, the bank holding company must discount the fair market value of the asset to reflect any credit risk and market price volatility of the asset.
(iv) Operational requirements. With respect to the liquidity buffer, the bank holding company must:
(A) Establish and implement policies and procedures that require highly liquid assets comprising the liquidity buffer to be under the control of the management function in the bank holding company that is charged with managing liquidity risk; and
(B) Demonstrate the capability to monetize a highly liquid asset under each scenario required under § 252.35(a)(3).
(v) Diversification. The liquidity buffer must not contain significant concentrations of highly liquid assets by issuer, business sector, region, or other factor related to the bank holding company’s risk, except with respect to cash and securities issued or guaranteed by the United States, a U.S. government agency, or a U.S. government-sponsored enterprise.
Subpart E – Supervisory Stress Test Requirements for Certain U.S. Banking Organizations With $100 Billion or More in Total Consolidated Assets and Nonbank Financial Companies Supervised by the Board
§ 252.40 [Reserved]
§ 252.41 Authority and purpose.
(a) Authority. 12 U.S.C. 321-338a, 1818, 1831p-1, 1844(b), 1844(c), 5361, 5365, 5366, sec. 401(e), Pub. L. 115-174, 132 Stat. 1296.
(b) Purpose. This subpart implements section 165 of the Dodd-Frank Act (12 U.S.C. 5365) and section 401(e) of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which requires the Board to conduct annual analyses of nonbank financial companies supervised by the Board and bank holding companies with $100 billion or more in total consolidated assets to evaluate whether such companies have the capital, on a total consolidated basis, necessary to absorb losses as a result of adverse economic conditions.
§ 252.42 Definitions
For purposes of this subpart E, the following definitions apply:
Advanced approaches means the risk-weighted assets calculation methodologies at 12 CFR part 217, subpart E, as applicable, and any successor regulation.
Baseline scenario means a set of conditions that affect the U.S. economy or the financial condition of a covered company and that reflect the consensus views of the economic and financial outlook.
Covered company means:
(1) A U.S. bank holding company with average total consolidated assets of $100 billion or more;
(2) A U.S. intermediate holding company subject to this section pursuant to § 252.153; and
(3) A nonbank financial company supervised by the Board.
Foreign banking organization has the same meaning as in 12 CFR 211.21(o).
Pre-provision net revenue means the sum of net interest income and non-interest income less expenses before adjusting for loss provisions.
Planning horizon means the period of at least nine consecutive quarters, beginning on the first day of a stress test cycle over which the relevant projections extend.
Provision for credit losses means:
(1) With respect to a covered company that has adopted the current expected credit losses methodology under GAAP, the provision for credit losses, as would be reported by the covered company on the FR Y-9C in the current stress test cycle; and,
(2) With respect to a covered company that has not adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses as would be reported by the covered company on the FR Y-9C in the current stress test cycle.
Regulatory capital ratio means a capital ratio for which the Board has established minimum requirements for the company by regulation or order, including, as applicable, the company’s regulatory capital ratios calculated under 12 CFR part 217 and the deductions required under 12 CFR 248.12; except that the company shall not use the advanced approaches to calculate its regulatory capital ratios.
Scenarios are those sets of conditions that affect the U.S. economy or the financial condition of a covered company that the Board determines are appropriate for use in the supervisory stress tests, including, but not limited to, baseline and severely adverse scenarios.
Severely adverse scenario means a set of conditions that affect the U.S. economy or the financial condition of a covered company and that overall are significantly more severe than those associated with the baseline scenario and may include trading or other additional components.
Stress test cycle means the period beginning on January 1 of a calendar year and ending on December 31 of that year.
Subsidiary has the same meaning as in 12 CFR 225.2.
§ 252.43 Applicability.
(a) Scope – (1) Applicability. Except as provided in paragraph (b) of this section, this subpart applies to any covered company, which includes:
(i) Any U.S. bank holding company with average total consolidated assets of $100 billion or more;
(ii) Any U.S. intermediate holding company subject to this section pursuant to § 252.153; and
(iii) Any nonbank financial company supervised by the Board that is made subject to this section pursuant to a rule or order of the Board.
(2) Ongoing applicability. A bank holding company or U.S. intermediate holding company (including any successor company) that is subject to any requirement in this subpart shall remain subject to any such requirement unless and until its total consolidated assets fall below $100 billion for each of four consecutive quarters.
(b) Transitional arrangements. (1) A bank holding company that becomes a covered company on or before September 30 of a calendar year must comply with the requirements of this subpart beginning on January 1 of the second calendar year after the bank holding company becomes a covered company, unless that time is extended by the Board in writing.
(2) A bank holding company that becomes a covered company after September 30 of a calendar year must comply with the requirements of this subpart beginning on January 1 of the third calendar year after the bank holding company becomes a covered company, unless that time is extended by the Board in writing.
§ 252.44 Analysis conducted by the Board.
(a) In general. (1) The Board will conduct an analysis of each covered company’s capital, on a total consolidated basis, taking into account all relevant exposures and activities of that covered company, to evaluate the ability of the covered company to absorb losses in specified economic and financial conditions.
(2) The analysis will include an assessment of the projected losses, net income, and pro forma capital levels and regulatory capital ratios and other capital ratios for the covered company and use such analytical techniques that the Board determines are appropriate to identify, measure, and monitor risks of the covered company that may affect the financial stability of the United States.
(3) In conducting the analysis, the Board will not incorporate changes to a firm’s business plan that are likely to have a material impact on the covered company’s capital adequacy and funding profile in its projections of losses, net income, pro forma capital levels, and capital ratios.
(b) Economic and financial scenarios related to the Board’s analysis. The Board will conduct its analysis using a minimum of two different scenarios, including a baseline scenario and a severely adverse scenario. The Board will notify covered companies of the scenarios that the Board will apply to conduct the analysis for each stress test cycle to which the covered company is subject by no later than February 15 of that year, except with respect to trading or any other components of the scenarios and any additional scenarios that the Board will apply to conduct the analysis, which will be communicated by no later than March 1 of that year.
(c) In conducting a stress test under this section, the Board will make the following assumptions regarding a covered company’s capital actions over the planning horizon:
(1) The covered company will not pay any dividends on any instruments that qualify as common equity tier 1 capital;
(2) The covered company will make payments on instruments that qualify as additional tier 1 capital or tier 2 capital equal to the stated dividend, interest, or principal due on such instrument;
(3) The covered company will not make a redemption or repurchase of any capital instrument that is eligible for inclusion in the numerator of a regulatory capital ratio; and
(4) The covered company will not make any issuances of common stock or preferred stock.
(d) Frequency of analysis conducted by the Board – (1) General. Except as provided in paragraph (d)(2) of this section, the Board will conduct its analysis of a covered company according to the frequency in Table 1 to § 252.44(d)(1).
Table 1 to § 252.44(
| If the covered company is a: | Then the Board will conduct its analysis: |
|---|---|
| Global systemically important BHC | Annually. |
| Category II bank holding company | Annually. |
| Category II U.S. intermediate holding company | Annually. |
| Category III bank holding company | Annually. |
| Category III U.S. intermediate holding company | Annually. |
| Category IV bank holding company | Biennially, occurring in each year ending in an even number. |
| Category IV U.S. intermediate holding company | Biennially, occurring in each year ending in an even number. |
| Nonbank financial company supervised by the Board | Annually. |
(2) Change in frequency. (i) The Board may conduct a stress test of a covered company on a more or less frequent basis than would be required under paragraph (d)(1) of this section based on the company’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy.
(ii) A Category IV bank holding company or Category IV U.S. intermediate holding company may elect to have the Board conduct a stress test with respect to the company in a year ending in an odd number by providing notice to the Board and the appropriate Federal Reserve Bank by January 15 of that year. Notwithstanding the previous sentence, such a company may elect to have the Board conduct a stress test with respect to the company in the year 2021 by providing notice to the Board and the appropriate Federal Reserve Bank by April 5, 2021.
(3) Notice and response – (i) Notification of change in frequency. If the Board determines to change the frequency of the stress test under paragraph (d)(2)(i) of this section, the Board will notify the company in writing and provide a discussion of the basis for its determination.
(ii) Request for reconsideration and Board response. Within 14 calendar days of receipt of a notification under paragraph (d)(3)(i) of this section, a covered company may request in writing that the Board reconsider the requirement to conduct a stress test on a more or less frequent basis than would be required under paragraph (d)(1) of this section. A covered company’s request for reconsideration must include an explanation as to why the request for reconsideration should be granted. The Board will respond in writing within 14 calendar days of receipt of the company’s request.
§ 252.45 Data and information required to be submitted in support of the Board’s analyses.
(a) Regular submissions. Each covered company must submit to the Board such data, on a consolidated basis, that the Board determines is necessary in order for the Board to derive the relevant pro forma estimates of the covered company over the planning horizon under the scenarios described in § 252.44(b).
(b) Additional submissions required by the Board. The Board may require a covered company to submit any other information on a consolidated basis that the Board deems necessary in order to:
(1) Ensure that the Board has sufficient information to conduct its analysis under this subpart; and
(2) Project a company’s pre-provision net revenue, losses, provision for credit losses, and net income; and pro forma capital levels, regulatory capital ratios, and any other capital ratio specified by the Board under the scenarios described in § 252.44(b).
(c) Confidential treatment of information submitted. The confidentiality of information submitted to the Board under this subpart and related materials shall be determined in accordance with the Freedom of Information Act (5 U.S.C. 552(b)) and the Board’s Rules Regarding Availability of Information (12 CFR part 261).
§ 252.46 Review of the Board’s analysis; publication of summary results.
(a) Review of results. Based on the results of the analysis conducted under this subpart, the Board will conduct an evaluation to determine whether the covered company has the capital, on a total consolidated basis, necessary to absorb losses and continue its operation by maintaining ready access to funding, meeting its obligations to creditors and other counterparties, and continuing to serve as a credit intermediary under baseline, adverse and severely adverse scenarios, and any additional scenarios.
(b) Publication of results by the Board. (1) The Board will publicly disclose a summary of the results of the Board’s analyses of a covered company by June 30 of the calendar year in which the stress test was conducted pursuant to § 252.44.
(2) The Board will notify companies of the date on which it expects to publicly disclose a summary of the Board’s analyses pursuant to paragraph (b)(1) of this section at least 14 calendar days prior to the expected disclosure date.
§ 252.47 Corporate use of stress test results.
(a) In general. The board of directors and senior management of each covered company must consider the results of the analysis conducted by the Board under this subpart, as appropriate:
(1) As part of the covered company’s capital plan and capital planning process, including when making changes to the covered company’s capital structure (including the level and composition of capital);
(2) When assessing the covered company’s exposures, concentrations, and risk positions; and
(3) In the development or implementation of any plans of the covered company for recovery or resolution.
(b) Resolution plan updates. Each covered company must update its resolution plan as the Board determines appropriate, based on the results of the Board’s analyses of the covered company under this subpart.
Subpart F – Company-Run Stress Test Requirements for Certain U.S. Bank Holding Companies and Nonbank Financial Companies Supervised by the Board
§ 252.50 [Reserved]
§ 252.51 Authority and purpose.
(a) Authority. 12 U.S.C. 321-338a, 1818, 1831p-1, 1844(b), 1844(c), 5361, 5365, 5366.
(b) Purpose. This subpart establishes the requirement for a covered company to conduct stress tests. This subpart also establishes definitions of stress test and related terms, methodologies for conducting stress tests, and reporting and disclosure requirements.
§ 252.52 Definitions.
For purposes of this subpart, the following definitions apply:
Advanced approaches means the risk-weighted assets calculation methodologies at 12 CFR part 217, subpart E, as applicable, and any successor regulation.
Baseline scenario means a set of conditions that affect the U.S. economy or the financial condition of a covered company and that reflect the consensus views of the economic and financial outlook.
Capital action has the same meaning as in 12 CFR 225.8(d).
Covered company means:
(1) A global systemically important BHC;
(2) A Category II bank holding company;
(3) A Category III bank holding company;
(4) A Category II U.S. intermediate holding company subject to this section pursuant to § 252.153;
(5) A Category III U.S. intermediate holding company subject to this section pursuant to § 252.153; and
(6) A nonbank financial company supervised by the Board that is made subject to this section pursuant to a rule or order of the Board.
Foreign banking organization has the same meaning as in 12 CFR 211.21(o).
Planning horizon means the period of at least nine consecutive quarters, beginning on the first day of a stress test cycle over which the relevant projections extend.
Pre-provision net revenue means the sum of net interest income and non-interest income less expenses before adjusting for loss provisions.
Provision for credit losses means:
(1) With respect to a covered company that has adopted the current expected credit losses methodology under GAAP, the provision for credit losses, as would be reported by the covered company on the FR Y-9C in the current stress test cycle; and
(2) With respect to a covered company that has not adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses as would be reported by the covered company on the FR Y-9C in the current stress test cycle.
Regulatory capital ratio means a capital ratio for which the Board has established minimum requirements for the company by regulation or order, including, as applicable, the company’s regulatory capital ratios calculated under 12 CFR part 217 and the deductions required under 12 CFR 248.12; except that the company shall not use the advanced approaches to calculate its regulatory capital ratios.
Scenarios are those sets of conditions that affect the U.S. economy or the financial condition of a covered company that the Board determines are appropriate for use in the company-run stress tests, including, but not limited to, baseline and severely adverse scenarios.
Severely adverse scenario means a set of conditions that affect the U.S. economy or the financial condition of a covered company and that overall are significantly more severe than those associated with the baseline scenario and may include trading or other additional components.
Stress test means a process to assess the potential impact of scenarios on the consolidated earnings, losses, and capital of a covered company over the planning horizon, taking into account its current condition, risks, exposures, strategies, and activities.
Stress test cycle means the period beginning on January 1 of a calendar year and ending on December 31 of that year.
Subsidiary has the same meaning as in 12 CFR 225.2.
§ 252.53 Applicability.
(a) Scope – (1) Applicability. Except as provided in paragraph (b) of this section, this subpart applies to any covered company, which includes:
(i) Any global systemically important BHC;
(ii) Any Category II bank holding company;
(iii) Any Category III bank holding company;
(iv) Any Category II U.S. intermediate holding company subject to this section pursuant to § 252.153;
(v) Any Category III U.S. intermediate holding company subject to this section pursuant to § 252.153; and
(vi) Any nonbank financial company supervised by the Board that is made subject to this section pursuant to a rule or order of the Board.
(2) Ongoing applicability. (i) A bank holding company (including any successor company) that is subject to any requirement in this subpart shall remain subject to any such requirement unless and until the bank holding company:
(A) Is not a global systemically important BHC;
(B) Is not a Category II bank holding company; and
(C) Is not a Category III bank holding company.
(ii) A U.S. intermediate holding company (including any successor company) that is subject to any requirement in this subpart shall remain subject to any such requirement unless and until the U.S. intermediate holding company:
(A) Is not a Category II U.S. intermediate holding company; and
(B) Is not a Category III U.S. intermediate holding company.
(b) Transitional arrangements. (1) A company that becomes a covered company on or before September 30 of a calendar year must comply with the requirements of this subpart beginning on January 1 of the second calendar year after the company becomes a covered company, unless that time is extended by the Board in writing.
(2) A company that becomes a covered company after September 30 of a calendar year must comply with the requirements of this subpart beginning on January 1 of the third calendar year after the company becomes a covered company, unless that time is extended by the Board in writing.
§ 252.54 Stress test.
(a) Stress test – (1) In general. A covered company must conduct a stress test as required under this subpart.
(2) Frequency – (i) General. Except as provided in paragraph (a)(2)(ii) of this section, a covered company must conduct a stress test according to the frequency in Table 1 to § 252.54(a)(2)(i).
Table 1 to § 252.54(
| If the covered company is a | Then the stress test must be conducted |
|---|---|
| Global systemically important BHC | Annually, by April 5 of each calendar year based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. |
| Category II bank holding company | Annually, by April 5 of each calendar year based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. |
| Category II U.S. intermediate holding company | Annually, by April 5 of each calendar year based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. |
| Category III bank holding company | Biennially, by April 5 of each calendar year ending in an even number, based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. |
| Category III U.S. intermediate holding company | Biennially, by April 5 of each calendar year ending in an even number, based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. |
| Nonbank financial company supervised by the Board | Periodically, as determined by rule or order. |
(ii) Change in frequency. The Board may require a covered company to conduct a stress test on a more or less frequent basis than would be required under paragraph (a)(2)(i) of this section based on the company’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy.
(3) Notice and response – (i) Notification of change in frequency. If the Board requires a covered company to change the frequency of the stress test under paragraph (a)(2)(ii) of this section, the Board will notify the company in writing and provide a discussion of the basis for its determination.
(ii) Request for reconsideration and Board response. Within 14 calendar days of receipt of a notification under paragraph (a)(3)(i) of this section, a covered company may request in writing that the Board reconsider the requirement to conduct a stress test on a more or less frequent basis than would be required under paragraph (a)(2)(i) of this section. A covered company’s request for reconsideration must include an explanation as to why the request for reconsideration should be granted. The Board will respond in writing within 14 calendar days of receipt of the company’s request.
(b) Scenarios provided by the Board – (1) In general. In conducting a stress test under this section, a covered company must, at a minimum, use the scenarios provided by the Board. Except as provided in paragraphs (b)(2) and (3) of this section, the Board will provide a description of the scenarios to each covered company no later than February 15 of the calendar year in which the stress test is performed pursuant to this section.
(2) Additional components. (i) The Board may require a covered company with significant trading activity to include a trading and counterparty component in its severely adverse scenario in the stress test required by this section. The data used in this component must be as of a date selected by the Board between October 1 of the previous calendar year and March 1 of the calendar year in which the stress test is performed pursuant to this section, and the Board will communicate the as-of date and a description of the component to the company no later than March 1 of the calendar year in which the stress test is performed pursuant to this section. A covered company has significant trading activity if it has:
(A) Aggregate trading assets and liabilities of $50 billion or more, or aggregate trading assets and liabilities equal to 10 percent or more of total consolidated assets;
(B) Is not a Category IV bank holding company.
(ii) The Board may require a covered company to include one or more additional components in its severely adverse scenario in the stress test required by this section based on the company’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy.
(3) Additional scenarios. The Board may require a covered company to use one or more additional scenarios in the stress test required by this section based on the company’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy.
(4) Notice and response – (i) Notification of additional component. If the Board requires a covered company to include one or more additional components in its adverse and severely adverse scenarios under paragraph (b)(2) of this section or to use one or more additional scenarios under paragraph (b)(3) of this section, the Board will notify the company in writing. The Board will provide such notification no later than December 31 of the preceding calendar year. The notification will include a general description of the additional component(s) or additional scenario(s) and the basis for requiring the company to include the additional component(s) or additional scenario(s).
(ii) Request for reconsideration and Board response. Within 14 calendar days of receipt of a notification under this paragraph, the covered company may request in writing that the Board reconsider the requirement that the company include the additional component(s) or additional scenario(s), including an explanation as to why the request for reconsideration should be granted. The Board will respond in writing within 14 calendar days of receipt of the company’s request.
(iii) Description of component. The Board will provide the covered company with a description of any additional component(s) or additional scenario(s) by March 1 of the calendar year in which the stress test is performed pursuant to this section.
§ 252.55 [Reserved]
§ 252.56 Methodologies and practices.
(a) Potential impact on capital. In conducting a stress test under § 252.54, for each quarter of the planning horizon, a covered company must estimate the following for each scenario required to be used:
(1) Losses, pre-provision net revenue, provision for credit losses, and net income; and
(2) The potential impact on the regulatory capital levels and ratios applicable to the covered bank, and any other capital ratios specified by the Board, and in doing so must:
(i) Incorporate the effects of any capital action over the planning horizon and maintenance of an allowance for loan losses or adjusted allowance for credit losses, as appropriate, for credit exposures throughout the planning horizon; and
(ii) Exclude the impacts of changes to a firm’s business plan that are likely to have a material impact on the covered company’s capital adequacy and funding profile.
(b) Assumptions regarding capital actions. In conducting a stress test under § 252.54, a covered company is required to make the following assumptions regarding its capital actions over the planning horizon:
(1) The covered company will not pay any dividends on any instruments that qualify as common equity tier 1 capital;
(2) The covered company will make payments on instruments that qualify as additional tier 1 capital or tier 2 capital equal to the stated dividend, interest, or principal due on such instrument;
(3) The covered company will not make a redemption or repurchase of any capital instrument that is eligible for inclusion in the numerator of a regulatory capital ratio; and
(4) The covered company will not make any issuances of common stock or preferred stock.
(c) Controls and oversight of stress testing processes – (1) In general. The senior management of a covered company must establish and maintain a system of controls, oversight, and documentation, including policies and procedures, that are designed to ensure that its stress testing processes are effective in meeting the requirements in this subpart. These policies and procedures must, at a minimum, describe the covered company’s stress testing practices and methodologies, and processes for validating and updating the company’s stress test practices and methodologies consistent with applicable laws and regulations.
(2) Oversight of stress testing processes. The board of directors, or a committee thereof, of a covered company must review and approve the policies and procedures of the stress testing processes as frequently as economic conditions or the condition of the covered company may warrant, but no less than each year a stress test is conducted. The board of directors and senior management of the covered company must receive a summary of the results of any stress test conducted under this subpart.
(3) Role of stress testing results. The board of directors and senior management of each covered company must consider the results of the analysis it conducts under this subpart, as appropriate:
(i) As part of the covered company’s capital plan and capital planning process, including when making changes to the covered company’s capital structure (including the level and composition of capital);
(ii) When assessing the covered company’s exposures, concentrations, and risk positions; and
(iii) In the development or implementation of any plans of the covered company for recovery or resolution.
§ 252.57 Reports of stress test results.
(a) Reports to the Board of stress test results. A covered company must report the results of the stress test required under § 252.54 to the Board in the manner and form prescribed by the Board. Such results must be submitted by April 5 of the calendar year in which the stress test is conducted pursuant to § 252.54, unless that time is extended by the Board in writing.
(b) Confidential treatment of information submitted. The confidentiality of information submitted to the Board under this subpart and related materials shall be determined in accordance with applicable exemptions under the Freedom of Information Act (5 U.S.C. 552(b)) and the Board’s Rules Regarding Availability of Information (12 CFR part 261).
§ 252.58 Disclosure of stress test results.
(a) Public disclosure of results – (1) In general. A covered company must publicly disclose a summary of the results of the stress test required under § 252.54 within the period that is 15 calendar days after the Board publicly discloses the results of its supervisory stress test of the covered company pursuant to § 252.46(b), unless that time is extended by the Board in writing.
(2) Disclosure method. The summary required under this section may be disclosed on the Web site of a covered company, or in any other forum that is reasonably accessible to the public.
(b) Summary of results. The summary results must, at a minimum, contain the following information regarding the severely adverse scenario:
(1) A description of the types of risks included in the stress test;
(2) A general description of the methodologies used in the stress test, including those employed to estimate losses, revenues, provision for credit losses, and changes in capital positions over the planning horizon.
(3) Estimates of –
(i) Pre-provision net revenue and other revenue;
(ii) Provision for credit losses, realized losses or gains on available-for-sale and held-to-maturity securities, trading and counterparty losses or gains;
(iii) Net income before taxes;
(iv) Loan losses (dollar amount and as a percentage of average portfolio balance) in the aggregate and by subportfolio, including: Domestic closed-end first-lien mortgages; domestic junior lien mortgages and home equity lines of credit; commercial and industrial loans; commercial real estate loans; credit card exposures; other consumer loans; and all other loans; and
(v) Pro forma regulatory capital ratios and any other capital ratios specified by the Board;
(4) An explanation of the most significant causes for the changes in regulatory capital ratios; and
(5) With respect to any depository institution subsidiary that is subject to stress testing requirements pursuant to 12 U.S.C. 5365(i)(2), as implemented by subpart B of this part, 12 CFR part 46 (OCC), or 12 CFR part 325, subpart C (FDIC), changes over the planning horizon in regulatory capital ratios and any other capital ratios specified by the Board and an explanation of the most significant causes for the changes in regulatory capital ratios.
(c) Content of results. (1) The following disclosures required under paragraph (b) of this section must be on a cumulative basis over the planning horizon:
(i) Pre-provision net revenue and other revenue;
(ii) Provision for credit losses, realized losses/gains on available-for-sale and held-to-maturity securities, trading and counterparty losses, and other losses or gain;
(iii) Net income before taxes; and
(iv) Loan losses in the aggregate and by subportfolio.
(2) The disclosure of pro forma regulatory capital ratios and any other capital ratios specified by the Board that is required under paragraph (b) of this section must include the beginning value, ending value, and minimum value of each ratio over the planning horizon.
Subpart G – External Long-term Debt Requirement, External Total Loss-absorbing Capacity Requirement and Buffer, and Restrictions on Corporate Practices for U.S. Global Systemically Important Banking Organizations
§ 252.60 Applicability.
(a) General applicability. This subpart applies to any U.S. bank holding company that is identified as a global systemically important BHC.
(b) Initial applicability. A global systemically important BHC shall be subject to the requirements of this subpart beginning on the later of:
(1) January 1, 2019; or
(2) 1095 days (three years) after the date on which the company becomes a global systemically important BHC.
§ 252.61 Definitions.
For purposes of this subpart:
Additional tier 1 capital has the same meaning as in 12 CFR 217.20(c).
Common equity tier 1 capital has the same meaning as in 12 CFR 217.20(b).
Common equity tier 1 capital ratio has the same meaning as in 12 CFR 217.10(b)(1) and 12 CFR 217.10(c), as applicable.
Common equity tier 1 minority interest has the same meaning as in 12 CFR 217.2.
Default right (1) Means any:
(i) Right of a party, whether contractual or otherwise (including rights incorporated by reference to any other contract, agreement or document, and rights afforded by statute, civil code, regulation and common law), to liquidate, terminate, cancel, rescind, or accelerate the agreement or transactions thereunder, set off or net amounts owing in respect thereto (except rights related to same-day payment netting), exercise remedies in respect of collateral or other credit support or property related thereto (including the purchase and sale of property), demand payment or delivery thereunder or in respect thereof (other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure), suspend, delay or defer payment or performance thereunder, modify the obligations of a party thereunder or any similar rights; and
(ii) Right or contractual provision that alters the amount of collateral or margin that must be provided with respect to an exposure thereunder, including by altering any initial amount, threshold amount, variation margin, minimum transfer amount, the margin value of collateral or any similar amount, that entitles a party to demand the return of any collateral or margin transferred by it to the other party or a custodian or that modifies a transferee’s right to reuse collateral or margin (if such right previously existed), or any similar rights, in each case, other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure; and
(2) Does not include any right under a contract that allows a party to terminate the contract on demand or at its option at a specified time, or from time to time, without the need to show cause.
Discretionary bonus payment has the same meaning as under 12 CFR 217.2.
Distribution has the same meaning as under 12 CFR 217.2.
Eligible debt security means, with respect to a global systemically important BHC:
(1) A debt instrument that:
(i) Is paid in, and issued by the global systemically important BHC;
(ii) Is not secured, not guaranteed by the global systemically important BHC or a subsidiary of the global systemically important BHC, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to 365 days (one year) from the date of issuance;
(iv) Is governed by the laws of the United States or any State thereof;
(v) Does not provide the holder of the instrument a contractual right to accelerate payment of principal or interest on the instrument, except a right that is exercisable on one or more dates that are specified in the instrument or in the event of:
(A) A receivership, insolvency, liquidation, or similar proceeding of the global systemically important BHC; or
(B) A failure of the global systemically important BHC to pay principal or interest on the instrument when due and payable that continues for 30 days or more;
(vi) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the global systemically important BHC’s credit quality, but may have an interest rate that is adjusted periodically independent of the global systemically important BHC’s credit quality, in relation to general market interest rates or similar adjustments;
(vii) Is not a structured note; and
(viii) Does not provide that the instrument may be converted into or exchanged for equity of the global systemically important BHC; and
(2) A debt instrument issued prior to December 31, 2016 that:
(i) Is paid in, and issued by the global systemically important BHC;
(ii) Is not secured, not guaranteed by the global systemically important BHC or a subsidiary of the global systemically important BHC, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to 365 days (one year) from the date of issuance;
(iv) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the global systemically important BHC’s credit quality, but may have an interest rate that is adjusted periodically independent of the global systemically important BHC’s credit quality, in relation to general market interest rates or similar adjustments;
(v) Is not a structured note; and
(vi) Does not provide that the instrument may be converted into or exchanged for equity of the global systemically important BHC.
External TLAC risk-weighted buffer means, with respect to a global systemically important BHC, the sum of 2.5 percent, any applicable countercyclical capital buffer under 12 CFR 217.11(b) (expressed as a percentage), and the global systemically important BHC’s method 1 capital surcharge.
GAAP means generally accepted accounting principles as used in the United States.
Global systemically important BHC has the same meaning as in 12 CFR 217.2.
GSIB surcharge has the same meaning as in 12 CFR 217.2.
Method 1 capital surcharge means, with respect to a global systemically important BHC, the most recent method 1 capital surcharge (expressed as a percentage) the global systemically important BHC was required to calculate pursuant to subpart H of Regulation Q (12 CFR 217.400 through 217.406).
Outstanding eligible external long-term debt amount is defined in § 252.62(b).
Person has the same meaning as in 12 CFR 225.2.
Qualified financial contract has the same meaning as in section 210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)).
Structured note means a debt instrument that:
(1) Has a principal amount, redemption amount, or stated maturity that is subject to reduction based on the performance of any asset, entity, index, or embedded derivative or similar embedded feature;
(2) Has an embedded derivative or similar embedded feature that is linked to one or more equity securities, commodities, assets, or entities;
(3) Does not specify a minimum principal amount that becomes due upon acceleration or early termination; or
(4) Is not classified as debt under GAAP, provided that an instrument is not a structured note solely because it is one or both of the following:
(i) An instrument that is not denominated in U.S. dollars; or
(ii) An instrument where interest payments are based on an interest rate index.
Supplementary leverage ratio has the same meaning as in 12 CFR 217.10(c)(4).
Tier 1 minority interest has the same meaning as in 12 CFR 217.2.
Tier 2 capital has the same meaning as in 12 CFR 217.20(d).
Total leverage exposure has the same meaning as in 12 CFR 217.10(c)(4)(ii).
Total risk-weighted assets means the greater of total risk-weighted assets as calculated under 12 CFR part 217, subpart D (the standardized approach) or 12 CFR part 217, subpart E (the internal ratings-based and advanced measurement approaches).
§ 252.62 External long-term debt requirement.
(a) External long-term debt requirement. Except as provided under paragraph (c) of this section, a global systemically important BHC must maintain an outstanding eligible external long-term debt amount that is no less than the amount equal to the greater of:
(1) The global systemically important BHC’s total risk-weighted assets multiplied by the sum of 6 percent plus the global systemically important BHC’s GSIB surcharge (expressed as a percentage); and
(2) 4.5 percent of the global systemically important BHC’s total leverage exposure.
(b) Outstanding eligible external long-term debt amount. (1) A global systemically important BHC’s outstanding eligible external long-term debt amount is the sum of:
(i) One hundred (100) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the global systemically important BHC in greater than or equal to 730 days (two years);
(ii) Fifty (50) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the global systemically important BHC in greater than or equal to 365 days (one year) and less than 730 days (two years); and
(iii) Zero (0) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the global systemically important BHC in less than 365 days (one year).
(2) For purposes of paragraph (b)(1) of this section, the date on which principal is due to be paid on an outstanding eligible debt security is calculated from the earlier of:
(i) The date on which payment of principal is required under the terms governing the instrument, without respect to any right of the holder to accelerate payment of principal; and
(ii) The date the holder of the instrument first has the contractual right to request or require payment of the amount of principal, provided that, with respect to a right that is exercisable on one or more dates that are specified in the instrument only on the occurrence of an event (other than an event of a receivership, insolvency, liquidation, or similar proceeding of the global systemically important BHC, or a failure of the global systemically important BHC to pay principal or interest on the instrument when due), the date for the outstanding eligible debt security under this paragraph (b)(2)(ii) will be calculated as if the event has occurred.
(3) After notice and response proceedings consistent with 12 CFR part 263, subpart E, the Board may order a global systemically important BHC to exclude from its outstanding eligible long-term debt amount any debt security with one or more features that would significantly impair the ability of such debt security to take losses.
(c) Redemption and repurchase. A global systemically important BHC may not redeem or repurchase any outstanding eligible debt security without the prior approval of the Board if, immediately after the redemption or repurchase, the global systemically important BHC would not meet its external long-term debt requirement under paragraph (a) of this section, or its external total loss-absorbing capacity requirement under § 252.63(a).
§ 252.63 External total loss-absorbing capacity requirement and buffer.
(a) External total loss-absorbing capacity requirement. A global systemically important BHC must maintain an outstanding external total loss-absorbing capacity amount that is no less than the amount equal to the greater of:
(1) 18 percent of the global systemically important BHC’s total risk-weighted assets; and
(2) 7.5 percent of the global systemically important BHC’s total leverage exposure.
(b) Outstanding external total loss-absorbing capacity amount. A global systemically important BHC’s outstanding external total loss-absorbing capacity amount is the sum of:
(1) The global systemically important BHC’s common equity tier 1 capital (excluding any common equity tier 1 minority interest);
(2) The global systemically important BHC’s additional tier 1 capital (excluding any tier 1 minority interest); and
(3) The global systemically important BHC’s outstanding eligible external long-term debt amount plus 50 percent of the amount due to be paid of unpaid principal of outstanding eligible debt securities issued by the global systemically important BHC in, as calculated in § 252.62(b)(2), greater than or equal to 365 days (one year) but less than 730 days (two years).
(c) External TLAC buffer – (1) Composition of the external TLAC risk-weighted buffer. The external TLAC risk-weighted buffer is composed solely of common equity tier 1 capital.
(2) Definitions. For purposes of this paragraph, the following definitions apply:
(i) Eligible retained income. The eligible retained income of a global systemically important BHC is the greater of:
(A) The global systemically important BHC’s net income, calculated in accordance with the instructions to the FR Y-9C, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income; and
(B) The average of the global systemically important BHC’s net income, calculated in accordance with the instructions to the FR Y-9C, for the four calendar quarters preceding the current calendar quarter.
(ii) Maximum external TLAC risk-weighted payout ratio. The maximum external TLAC risk-weighted payout ratio is the percentage of eligible retained income that a global systemically important BHC can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter. The maximum external TLAC risk-weighted payout ratio is based on the global systemically important BHC’s external TLAC risk-weighted buffer level, calculated as of the last day of the previous calendar quarter, as set forth in Table 1 to § 252.63.
(iii) Maximum external TLAC risk-weighted payout amount. A global systemically important BHC’s maximum external TLAC risk-weighted payout amount for the current calendar quarter is equal to the global systemically important BHC’s eligible retained income, multiplied by the applicable maximum external TLAC risk-weighted payout ratio, as set forth in Table 1 to § 252.63.
(iv) Maximum external TLAC leverage payout ratio. The maximum external TLAC leverage payout ratio is the percentage of eligible retained income that a global systemically important BHC can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter. The maximum external TLAC leverage payout ratio is based on the global systemically important BHC’s external TLAC leverage buffer level, calculated as of the last day of the previous calendar quarter, as set forth in Table 2 to § 252.63.
(v) Maximum external TLAC leverage payout amount. A global systemically important BHC’s maximum external TLAC leverage payout amount for the current calendar quarter is equal to the global systemically important BHC’s eligible retained income, multiplied by the applicable maximum TLAC leverage payout ratio, as set forth in Table 2 to § 252.63.
(3) Calculation of the external TLAC risk-weighted buffer level. (i) A global systemically important BHC’s external TLAC risk-weighted buffer level is equal to the global systemically important BHC’s common equity tier 1 capital ratio (expressed as a percentage) minus the greater of zero and the following amount:
(A) 18 percent; minus
(B) The ratio (expressed as a percentage) of the global systemically important BHC’s additional tier 1 capital (excluding any tier 1 minority interest) to its total risk-weighted assets; and minus
(C) The ratio (expressed as a percentage) of the global systemically important BHC’s outstanding eligible external long-term debt amount plus 50 percent of the amount of unpaid principal of outstanding eligible debt securities issued by the global systemically important BHC due to be paid in, as calculated in § 252.62(b)(2), greater than or equal to 365 days (one year) but less than 730 days (two years) to total risk-weighted assets.
(ii) Notwithstanding paragraph (c)(3)(i) of this section, if the ratio (expressed as a percentage) of a global systemically important BHC’s external total loss-absorbing capacity amount as calculated under paragraph (b) of this section to its risk-weighted assets is less than or equal to 18 percent, the global systemically important BHC’s external TLAC risk-weighted buffer level is zero.
(4) Limits on distributions and discretionary bonus payments. (i) A global systemically important BHC shall not make distributions or discretionary bonus payments or create an obligation to make such distributions or payments during the current calendar quarter that, in the aggregate, exceed the maximum external TLAC risk-weighted payout amount or the maximum external TLAC leverage payout amount.
(ii) A global systemically important BHC with an external TLAC risk-weighted buffer level that is greater than the external TLAC risk-weighted buffer and an external TLAC leverage buffer that is greater than 2.0 percent, in accordance with paragraph (c)(5) of this section, is not subject to a maximum external TLAC risk-weighted payout amount or a maximum external TLAC leverage payout amount.
(iii) Except as provided in paragraph (c)(4)(iv) of this section, a global systemically important BHC may not make distributions or discretionary bonus payments during the current calendar quarter if the global systemically important BHC’s:
(A) Eligible retained income is negative; and
(B) External TLAC risk-weighted buffer level was less than the external TLAC risk-weighted buffer as of the end of the previous calendar quarter or external TLAC leverage buffer level was less than 2.0 percent as of the end of the previous calendar quarter.
(iv) Notwithstanding the limitations in paragraphs (c)(4)(i) through (iii) of this section, the Board may permit a global systemically important BHC to make a distribution or discretionary bonus payment upon a request of the global systemically important BHC, if the Board determines that the distribution or discretionary bonus payment would not be contrary to the purposes of this section, or to the safety and soundness of the global systemically important BHC. In making such a determination, the Board will consider the nature and extent of the request and the particular circumstances giving rise to the request.
(v)(A) A global systemically important BHC is subject to the lowest of the maximum payout amounts as determined under 12 CFR 217.11(a)(2), the maximum external TLAC risk-weighted payout amount as determined under this paragraph, and the maximum external TLAC leverage payout amount as determined under this paragraph.
(B) Additional limitations on distributions may apply to a global systemically important BHC under 12 CFR 225.4, 225.8, and 263.202.
(5) External TLAC leverage buffer – (i) General. A global systemically important BHC is subject to the lower of the maximum external TLAC risk-weighted payout amount as determined under paragraph (c)(2)(iii) of this section and the maximum external TLAC leverage payout amount as determined under paragraph (c)(2)(v) of this section.
(ii) Composition of the external TLAC leverage buffer. The external TLAC leverage buffer is composed solely of tier 1 capital.
(iii) Calculation of the external TLAC leverage buffer level. (A) A global systemically important BHC’s external TLAC leverage buffer level is equal to the global systemically important BHC’s supplementary leverage ratio (expressed as a percentage) minus the greater of zero and the following amount:
(1) 7.5 percent; minus
(2) The ratio (expressed as a percentage) of the global systemically important BHC’s outstanding eligible external long-term debt amount plus 50 percent of the amount of unpaid principal of outstanding eligible debt securities issued by the global systemically important BHC due to be paid in in, as calculated in § 252.62(b)(2), greater than or equal to 365 days (one year) but less than 730 days (two years) to total leverage exposure.
(B) Notwithstanding paragraph (c)(5)(iii) of this section, if the ratio (expressed as a percentage) of a global systemically important BHC’s external total loss-absorbing capacity amount as calculated under paragraph (b) of this section to its total leverage exposure is less than or equal to 7.5 percent, the global systemically important BHC’s external TLAC leverage buffer level is zero.
Table 1 to § 252.63 – Calculation of Maximum External TLAC Risk-Weighted Payout Amount
| External TLAC risk-weighted buffer level | Maximum External TLAC risk-weighted payout ratio (as a percentage of eligible retained income) |
|---|---|
| Greater than the external TLAC risk-weighted buffer | No payout ratio limitation applies. |
| Less than or equal to the external TLAC risk-weighted buffer, | 60 percent. |
| Less than or equal to 75 percent of the external TLAC risk-weighted buffer, | 40 percent. |
| Less than or equal to 50 percent of the external TLAC risk-weighted buffer, | 20 percent. |
| Less than or equal to 25 percent of the external TLAC risk-weighted buffer | 0 percent. |
Table 2 to § 252.63 – Calculation of Maximum External TLAC Leverage Payout Amount
| External TLAC leverage buffer level | Maximum External TLAC leverage payout ratio (as a percentage of eligible retained income) |
|---|---|
| Greater than 2.0 percent | No payout ratio limitation applies. |
| Less than or equal to 2.0 percent, and greater than 1.5 percent | 60 percent. |
| Less than or equal to 1.5 percent, and greater than 1.0 percent | 40 percent. |
| Less than or equal to 1.0 percent, and greater than 0.5 percent | 20 percent. |
| Less than or equal to 0.5 percent | 0 percent. |
§ 252.64 Restrictions on corporate practices of U.S. global systemically important banking organizations.
(a) Prohibited corporate practices. A global systemically important BHC may not directly:
(1) Issue any debt instrument with an original maturity of less than 365 days (one year), including short term deposits and demand deposits, to any person, unless the person is a subsidiary of the global systemically important BHC;
(2) Issue any instrument, or enter into any related contract, with respect to which the holder of the instrument has a contractual right to offset debt owed by the holder or its affiliates to a subsidiary of the global systemically important BHC against the amount, or a portion of the amount, owed by the global systemically important BHC under the instrument;
(3) Enter into a qualified financial contract that is not a credit enhancement with a person that is not a subsidiary of the global systemically important BHC;
(4) Enter into an agreement in which the global systemically important BHC guarantees a liability of a subsidiary of the global systemically important BHC if such liability permits the exercise of a default right that is related, directly or indirectly, to the global systemically important BHC becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding other than a receivership proceeding under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5381 through 5394) unless the liability is subject to requirements of the Board restricting such default rights or subject to any similar requirements of another U.S. federal banking agency; or
(5) Enter into, or otherwise begin to benefit from, any agreement that provides for its liabilities to be guaranteed by any of its subsidiaries.
(b) Limit on unrelated liabilities. (1) The aggregate amount, on an unconsolidated basis, of unrelated liabilities of a global systemically important BHC owed to persons that are not affiliates of the global systemically important BHC may not exceed 5 percent of the systemically important BHC’s external total loss-absorbing capacity amount, as calculated under § 252.63(b).
(2) For purposes of paragraph (b)(1) of this section, an unrelated liability is any non-contingent liability of the global systemically important BHC owed to a person that is not an affiliate of the global systemically important BHC other than:
(i) The instruments that are used to satisfy the global systemically important BHC’s external total loss-absorbing capacity amount, as calculated under § 252.63(b);
(ii) Any dividend or other liability arising from the instruments that are used to satisfy the global systemically important BHC’s external total loss-absorbing capacity amount, as calculated under § 252.63(b);
(iii) An eligible debt security that does not provide the holder of the instrument with a currently exercisable right to require immediate payment of the total or remaining principal amount; and
(iv) A secured liability, to the extent that it is secured, or a liability that otherwise represents a claim that would be senior to eligible debt securities in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(b)) and the Bankruptcy Code (11 U.S.C. 507).
(c) A Covered BHC is not subject to paragraph (b) of this section if all of the eligible debt securities issued by the Covered BHC would represent the most subordinated debt claim in a receivership, insolvency, liquidation, or similar proceeding of the Covered BHC.
§ 252.65 Disclosure requirements.
(a) A global systemically important BHC must publicly disclose a description of the financial consequences to unsecured debtholders of the global systemically important BHC entering into a resolution proceeding in which the global systemically important BHC is the only entity that would be subject to the resolution proceeding.
(b) A global systemically important BHC must provide the disclosure required by paragraph (a) of this section:
(1) In the offering documents for all of its eligible debt securities; and
(2) Either:
(i) On the global systemically important BHC’s Web site; or
(ii) In more than one public financial report or other public regulatory reports, provided that the global systemically important BHC publicly provides a summary table specifically indicating the location(s) of this disclosure.
Subpart H – Single-Counterparty Credit Limits
§ 252.70 Applicability and general provisions.
(a) In general. (1) This subpart establishes single counterparty credit limits for a covered company.
(2) For purposes of this subpart:
(i) Covered company means:
(A) A global systemically important BHC;
(B) A Category II bank holding company; and
(C) A Category III bank holding company;
(ii) Major covered company means any covered company that is a global systemically important BHC.
(b) Credit exposure limits. (1) Section 252.72 establishes credit exposure limits for a covered company and a major covered company.
(2) A covered company is required to calculate its aggregate net credit exposure, gross credit exposure, and net credit exposure to a counterparty using the methods in this subpart.
(c) Applicability of this subpart. (1)(i) A company that is a covered company as of October 5, 2018, must comply with the requirements of this subpart, including but not limited to § 252.72, beginning on July 1, 2020, unless that time is extended by the Board in writing.
(ii) Notwithstanding paragraph (c)(1)(i) of this section, a company that is a major covered company as of October 5, 2018, must comply with the requirements of this subpart, including but not limited to § 252.72, beginning on January 1, 2020, unless that time is extended by the Board in writing.
(2) A covered company that becomes subject to this subpart after October 5, 2018 must comply with the requirements of this subpart beginning on the first day of the ninth calendar quarter after it becomes a covered company, unless that time is accelerated or extended by the Board in writing.
(d) Cessation of requirements. (1) Any company that becomes a covered company will remain subject to the requirements of this subpart unless and until:
(i) The covered company is not a global systemically important BHC;
(ii) The covered company is not a Category II bank holding company; and
(iii) The covered company is not a Category III bank holding company.
(2) A covered company that has ceased to be a major covered company for purposes of § 252.72(b) is no longer subject to the requirements of § 252.72(b) beginning on the first day of the calendar quarter following the reporting date on which it ceased to be a major covered company; provided that the covered company remains subject to the requirements of this subpart, unless it ceases to be a covered company pursuant to paragraph (d)(1) of this section.
§ 252.71 Definitions.
Unless defined in this section, terms that are set forth in § 252.2 of this part and used in this subpart have the definitions assigned in § 252.2. For purposes of this subpart:
(a) Adjusted market value means:
(1) With respect to the value of cash, securities, or other eligible collateral transferred by the covered company to a counterparty, the sum of:
(i) The market value of the cash, securities, or other eligible collateral; and
(ii) The product of the market value of the securities or other eligible collateral multiplied by the applicable collateral haircut in Table 1 to § 217.132 of the Board’s Regulation Q (12 CFR 217.132); and
(2) With respect to cash, securities, or other eligible collateral received by the covered company from a counterparty:
(i) The market value of the cash, securities, or other eligible collateral; minus
(ii) The market value of the securities or other eligible collateral multiplied by the applicable collateral haircut in Table 1 to § 217.132 of the Board’s Regulation Q (12 CFR 217.132).
(3) Prior to calculating the adjusted market value pursuant to paragraphs (a)(1) and (2) of this section, with regard to a transaction that meets the definition of “repo-style transaction” in § 217.2 of the Board’s Regulation Q (12 CFR 217.2), the covered company would first multiply the applicable collateral haircuts in Table 1 to § 217.132 of the Board’s Regulation Q (12 CFR 217.132) by the square root of
(b) Affiliate means, with respect to a company:
(1) Any subsidiary of the company and any other company that is consolidated with the company under applicable accounting standards; or
(2) For a company that is not subject to principles or standards referenced in paragraph (b)(1) of this section, any subsidiary of the company and any other company that would be consolidated with the company, if consolidation would have occurred if such principles or standards had applied.
(c) Aggregate net credit exposure means the sum of all net credit exposures of a covered company and all of its subsidiaries to a single counterparty as calculated under this subpart.
(d) Bank-eligible investments means investment securities that a national bank is permitted to purchase, sell, deal in, underwrite, and hold under 12 U.S.C. 24 (Seventh) and 12 CFR part 1.
(e) Counterparty means, with respect to a credit transaction:
(1) With respect to a natural person, the natural person, and, if the credit exposure of the covered company to such natural person exceeds 5 percent of the covered company’s tier 1 capital, the natural person and members of the person’s immediate family collectively;
(2) With respect to any company that is not a subsidiary of the covered company, the company and its affiliates collectively;
(3) With respect to a State, the State and all of its agencies, instrumentalities, and political subdivisions (including any municipalities) collectively;
(4) With respect to a foreign sovereign entity that is not assigned a zero percent risk weight under the standardized approach in the Board’s Regulation Q (12 CFR part 217, subpart D), the foreign sovereign entity and all of its agencies and instrumentalities (but not including any political subdivision) collectively; and
(5) With respect to a political subdivision of a foreign sovereign entity such as a state, province, or municipality, any political subdivision of the foreign sovereign entity and all of such political subdivision’s agencies and instrumentalities, collectively.
(f) Covered company is defined in § 252.70(a)(2)(i) of this subpart.
(g) Credit derivative has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(h) Credit transaction means, with respect to a counterparty:
(1) Any extension of credit to the counterparty, including loans, deposits, and lines of credit, but excluding uncommitted lines of credit;
(2) Any repurchase agreement or reverse repurchase agreement with the counterparty;
(3) Any securities lending or securities borrowing transaction with the counterparty;
(4) Any guarantee, acceptance, or letter of credit (including any endorsement, confirmed letter of credit, or standby letter of credit) issued on behalf of the counterparty;
(5) Any purchase of securities issued by or other investment in the counterparty;
(6) Any credit exposure to the counterparty in connection with a derivative transaction between the covered company and the counterparty;
(7) Any credit exposure to the counterparty in connection with a credit derivative or equity derivative between the covered company and a third party, the reference asset of which is an obligation or equity security of, or equity investment in, the counterparty; and
(8) Any transaction that is the functional equivalent of the above, and any other similar transaction that the Board, by regulation or order, determines to be a credit transaction for purposes of this subpart.
(i) Depository institution has the same meaning as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
(j) Derivative transaction means any transaction that is a contract, agreement, swap, warrant, note, or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices, or other assets.
(k) Eligible collateral means collateral in which, notwithstanding the prior security interest of any custodial agent, the covered company has a perfected, first priority security interest (or the legal equivalent thereof, if outside of the United States), with the exception of cash on deposit, and is in the form of:
(1) Cash on deposit with the covered company or a subsidiary of the covered company (including cash in foreign currency or U.S. dollars held for the covered company by a custodian or trustee, whether inside or outside of the United States);
(2) Debt securities (other than mortgage- or asset-backed securities and resecuritization securities, unless those securities are issued by a U.S. government-sponsored enterprise) that are bank-eligible investments and that are investment grade, except for any debt securities issued by the covered company or any subsidiary of the covered company;
(3) Equity securities that are publicly traded, except for any equity securities issued by the covered company or any subsidiary of the covered company;
(4) Convertible bonds that are publicly traded, except for any convertible bonds issued by the covered company or any subsidiary of the covered company; or
(5) Gold bullion.
(l) Eligible credit derivative means a single-name credit derivative or a standard, non-tranched index credit derivative, provided that:
(1) The contract meets the requirements of an eligible guarantee and has been confirmed by the protection purchaser and the protection provider;
(2) Any assignment of the contract has been confirmed by all relevant parties;
(3) If the credit derivative is a credit default swap, the contract includes the following credit events:
(i) Failure to pay any amount due under the terms of the reference exposure, subject to any applicable minimal payment threshold that is consistent with standard market practice and with a grace period that is closely in line with the grace period of the reference exposure; and
(ii) Receivership, insolvency, liquidation, conservatorship, or inability of the reference exposure issuer to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and similar events;
(4) The terms and conditions dictating the manner in which the contract is to be settled are incorporated into the contract;
(5) If the contract allows for cash settlement, the contract incorporates a robust valuation process to estimate loss reliably and specifies a reasonable period for obtaining post-credit event valuations of the reference exposure;
(6) If the contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of at least one of the exposures that is permitted to be transferred under the contract provide that any required consent to transfer may not be unreasonably withheld; and
(7) If the credit derivative is a credit default swap, the contract clearly identifies the parties responsible for determining whether a credit event has occurred, specifies that this determination is not the sole responsibility of the protection provider, and gives the protection purchaser the right to notify the protection provider of the occurrence of a credit event.
(m) Eligible equity derivative means an equity derivative, provided that:
(1) The derivative contract has been confirmed by all relevant parties;
(2) Any assignment of the derivative contract has been confirmed by all relevant parties; and
(3) The terms and conditions dictating the manner in which the derivative contract is to be settled are incorporated into the contract.
(n) Eligible guarantee has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(o) Eligible guarantor has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(p) Equity derivative has the same meaning as “equity derivative contract” in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(q) Exempt counterparty means an entity that is identified as exempt from the requirements of this subpart under § 252.77, or that is otherwise excluded from this subpart, including any sovereign entity assigned a zero percent risk weight under the standardized approach in the Board’s Regulation Q (12 CFR part 217, subpart D).
(r) Financial entity means:
(1)(i) A bank holding company or an affiliate thereof; a savings and loan holding company as defined in section 10(n) of the Home Owners’ Loan Act (12 U.S.C. 1467a(n)); a U.S. intermediate holding company established or designated for purposes of compliance with this part; or a nonbank financial company supervised by the Board;
(ii) A depository institution as defined in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States; a federal credit union or state credit union as defined in section 2 of the Federal Credit Union Act (12 U.S.C. 1752(1) and (6)); a national association, state member bank, or state nonmember bank that is not a depository institution; an institution that functions solely in a trust or fiduciary capacity as described in section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(D)); an industrial loan company, an industrial bank, or other similar institution described in section 2(c)(2)(H) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(H));
(iii) An entity that is state-licensed or registered as:
(A) A credit or lending entity, including a finance company; money lender; installment lender; consumer lender or lending company; mortgage lender, broker, or bank; motor vehicle title pledge lender; payday or deferred deposit lender; premium finance company; commercial finance or lending company; or commercial mortgage company; except entities registered or licensed solely on account of financing the entity’s direct sales of goods or services to customers;
(B) A money services business, including a check casher; money transmitter; currency dealer or exchange; or money order or traveler’s check issuer;
(iv) Any person registered with the Commodity Futures Trading Commission as a swap dealer or major swap participant pursuant to the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or an entity that is registered with the U.S. Securities and Exchange Commission as a security-based swap dealer or a major security-based swap participant pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.);
(v) A securities holding company as defined in section 618 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 1850a); a broker or dealer as defined in sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)-(5)); an investment adviser as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or a company that has elected to be regulated as a business development company pursuant to section 54(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-53(a));
(vi) A private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is deemed not to be an investment company under section 3 of the Investment Company Act of 1940 pursuant to Investment Company Act Rule 3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange Commission;
(vii) A commodity pool, a commodity pool operator, or a commodity trading advisor as defined, respectively, in sections 1a(10), 1a(11), and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10), 1a(11), and 1a(12)); a floor broker, a floor trader, or introducing broker as defined, respectively, in sections 1a(22), 1a(23) and 1a(31) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined in section 1a(28) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28));
(viii) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974 (29 U.S.C. 1002);
(ix) An entity that is organized as an insurance company, primarily engaged in writing insurance or reinsuring risks underwritten by insurance companies, or is subject to supervision as such by a State insurance regulator or foreign insurance regulator;
(x) Any designated financial market utility, as defined in section 803 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5462); and
(xi) An entity that would be a financial entity described in paragraphs (r)(1)(i) through (x) of this section, if it were organized under the laws of the United States or any State thereof; and
(2) Provided that, for purposes of this subpart, “financial entity” does not include any counterparty that is a foreign sovereign entity or multilateral development bank.
(s) Foreign sovereign entity means a sovereign entity other than the United States government and the entity’s agencies, departments, ministries, and central bank collectively.
(t) Gross credit exposure means, with respect to any credit transaction, the credit exposure of the covered company before adjusting, pursuant to § 252.74, for the effect of any eligible collateral, eligible guarantee, eligible credit derivative, eligible equity derivative, other eligible hedge, and any unused portion of certain extensions of credit.
(u) Immediate family means the spouse of an individual, the individual’s minor children, and any of the individual’s children (including adults) residing in the individual’s home.
(v) Intraday credit exposure means credit exposure of a covered company to a counterparty that by its terms is to be repaid, sold, or terminated by the end of its business day in the United States.
(w) Investment grade has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(x) Major counterparty means any counterparty that is or includes:
(1) A major covered company;
(2) A top-tier foreign banking organization that meets the requirements of § 252.172(c)(3) through (5); or
(3) Any nonbank financial company supervised by the Board.
(y) Major covered company is defined in § 252.70(a)(2)(ii) of this subpart.
(z) Multilateral development bank has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(aa) Net credit exposure means, with respect to any credit transaction, the gross credit exposure of a covered company and all of its subsidiaries calculated under § 252.73, as adjusted in accordance with § 252.74.
(bb) Qualifying central counterparty has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(cc) Qualifying master netting agreement has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(dd) Securities financing transaction means any repurchase agreement, reverse repurchase agreement, securities borrowing transaction, or securities lending transaction.
(ee) Short sale means any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller.
(ff) Sovereign entity means a central national government (including the U.S. government) or an agency, department, ministry, or central bank, but not including any political subdivision such as a state, province, or municipality.
(gg) Subsidiary. A company is a subsidiary of another company if:
(1) The company is consolidated by the other company under applicable accounting standards; or
(2) For a company that is not subject to principles or standards referenced in paragraph (gg)(1) of this definition, consolidation would have occurred if such principles or standards had applied.
(hh) Tier 1 capital means common equity tier 1 capital and additional tier 1 capital, as defined in the Board’s Regulation Q (12 CFR part 217) and as reported by the bank holding company on the most recent FR Y-9C report on a consolidated basis.
(ii) Total consolidated assets. A company’s total consolidated assets are determined based on:
(1) The average of the bank holding company’s total consolidated assets in the four most recent consecutive quarters as reported quarterly on the FR Y-9C; or
(2) If the bank holding company has not filed an FR Y-9C for each of the four most recent consecutive quarters, the average of the bank holding company’s total consolidated assets, as reported on the company’s FR Y-9C, for the most recent quarter or consecutive quarters, as applicable.
§ 252.72 Credit exposure limits.
(a) General limit on aggregate net credit exposure. No covered company may have an aggregate net credit exposure to any counterparty that exceeds 25 percent of the tier 1 capital of the covered company.
(b) Limit on aggregate net credit exposure of major covered companies to major counterparties. No major covered company may have aggregate net credit exposure to any major counterparty that exceeds 15 percent of the tier 1 capital of the major covered company.
§ 252.73 Gross credit exposure.
(a) Calculation of gross credit exposure. The amount of gross credit exposure of a covered company to a counterparty with respect to a credit transaction is, in the case of:
(1) A deposit of the covered company held by the counterparty, loan by a covered company to the counterparty, and lease in which the covered company is the lessor and the counterparty is the lessee, equal to the amount owed by the counterparty to the covered company under the transaction.
(2) A debt security or debt investment held by the covered company that is issued by the counterparty, equal to:
(i) The market value of the securities, for trading and available-for-sale securities; and
(ii) The amortized purchase price of the securities or investments, for securities or investments held to maturity.
(3) An equity security held by the covered company that is issued by the counterparty, equity investment in a counterparty, and other direct investments in a counterparty, equal to the market value.
(4) A securities financing transaction must be valued using any of the methods that the covered company is authorized to use under the Board’s Regulation Q (12 CFR part 217, subparts D and E) to value such transactions:
(i)(A) As calculated for each transaction, in the case of a securities financing transaction between the covered company and the counterparty that is not subject to a bilateral netting agreement or does not meet the definition of “repo-style transaction” in § 217.2 of the Board’s Regulation Q (12 CFR 217.2); or
(B) As calculated for a netting set, in the case of a securities financing transaction between the covered company and the counterparty that is subject to a bilateral netting agreement with that counterparty and meets the definition of “repo-style transaction” in § 217.2 of the Board’s Regulation Q (12 CFR 217.2);
(ii) For purposes of paragraph (a)(4)(i) of this section, the covered company must:
(A) Assign a value of zero to any security received from the counterparty that does not meet the definition of “eligible collateral” in § 252.71(k); and
(B) Include the value of securities that are eligible collateral received by the covered company from the counterparty (including any exempt counterparty), calculated in accordance with paragraphs (a)(4)(i) through (iv) of this section, when calculating its gross credit exposure to the issuer of those securities;
(iii) Notwithstanding paragraphs (a)(4)(i) and (ii) of this section and with respect to each credit transaction, a covered company’s gross credit exposure to a collateral issuer under this paragraph (a)(4) is limited to the covered company’s gross credit exposure to the counterparty on the credit transaction; and
(iv) In cases where the covered company receives eligible collateral from a counterparty in addition to the cash or securities received from that counterparty, the counterparty may reduce its gross credit exposure to that counterparty in accordance with § 252.74(b).
(5) A committed credit line extended by a covered company to a counterparty, equal to the face amount of the committed credit line.
(6) A guarantee or letter of credit issued by a covered company on behalf of a counterparty, equal to the maximum potential loss to the covered company on the transaction.
(7) A derivative transaction must be valued using any of the methods that the covered company is authorized to use under the Board’s Regulation Q (12 CFR part 217, subparts D and E) to value such transactions:
(i)(A) As calculated for each transaction, in the case of a derivative transaction between the covered company and the counterparty, including an equity derivative but excluding a credit derivative described in paragraph (a)(8) of this section, that is not subject to a qualifying master netting agreement; or
(B) As calculated for a netting set, in the case of a derivative transaction between the covered company and the counterparty, including an equity derivative but excluding a credit derivative described in paragraph (a)(8) of this section, that is subject to a qualifying master netting agreement.
(ii) In cases where a covered company is required to recognize an exposure to an eligible guarantor pursuant to § 252.74(d), the covered company must exclude the relevant derivative transaction when calculating its gross exposure to the original counterparty under this section.
(8) A credit derivative between the covered company and a third party where the covered company is the protection provider and the reference asset is an obligation or debt security of the counterparty, equal to the maximum potential loss to the covered company on the transaction.
(b) Investments in and exposures to securitization vehicles, investment funds, and other special purpose vehicles that are not subsidiaries. Notwithstanding paragraph (a) of this section, a covered company must calculate pursuant to § 252.75 its gross credit exposure due to any investment in the debt or equity of, and any credit derivative or equity derivative between the covered company and a third party where the covered company is the protection provider and the reference asset is an obligation or equity security of, or equity investment in, a securitization vehicle, investment fund, and other special purpose vehicle that is not a subsidiary of the covered company.
(c) Attribution rule. Notwithstanding any other requirement in this subpart, a covered company must treat any transaction with any natural person or entity as a credit transaction with another party, to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, the other party.
§ 252.74 Net credit exposure.
(a) In general. For purposes of this subpart, a covered company must calculate its net credit exposure to a counterparty by adjusting its gross credit exposure to that counterparty in accordance with the rules set forth in this section.
(b) Eligible collateral. (1) In computing its net credit exposure to a counterparty for any credit transaction other than a securities financing transaction, a covered company must reduce its gross credit exposure on the transaction by the adjusted market value of any eligible collateral.
(2) A covered company that reduces its gross credit exposure to a counterparty as required under paragraph (b)(1) of this section must include the adjusted market value of the eligible collateral, when calculating its gross credit exposure to the collateral issuer.
(3) Notwithstanding paragraph (b)(2) of this section, a covered company’s gross credit exposure to a collateral issuer under this paragraph (b) is limited to:
(i) Its gross credit exposure to the counterparty on the credit transaction, or
(ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction if valued in accordance with § 252.73(a).
(c) Eligible guarantees. (1) In calculating net credit exposure to a counterparty for any credit transaction, a covered company must reduce its gross credit exposure to the counterparty by the amount of any eligible guarantee from an eligible guarantor that covers the transaction.
(2) A covered company that reduces its gross credit exposure to a counterparty as required under paragraph (c)(1) of this section must include the amount of eligible guarantees when calculating its gross credit exposure to the eligible guarantor.
(3) Notwithstanding paragraph (c)(2) of this section, a covered company’s gross credit exposure to an eligible guarantor with respect to an eligible guarantee under this paragraph (c) is limited to:
(i) Its gross credit exposure to the counterparty on the credit transaction prior to recognition of the eligible guarantee, or
(ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction prior to recognition of the eligible guarantee if valued in accordance with § 252.73(a).
(d) Eligible credit and equity derivatives. (1) In calculating net credit exposure to a counterparty for a credit transaction under this section, a covered company must reduce its gross credit exposure to the counterparty by:
(i) In the case of any eligible credit derivative from an eligible guarantor, the notional amount of the eligible credit derivative; or
(ii) In the case of any eligible equity derivative from an eligible guarantor, the gross credit exposure amount to the counterparty (calculated in accordance with § 252.73(a)(7)).
(2)(i) A covered company that reduces its gross credit exposure to a counterparty as provided under paragraph (d)(1) of this section must include, when calculating its net credit exposure to the eligible guarantor, including in instances where the underlying credit transaction would not be subject to the credit limits of § 252.72 (for example, due to an exempt counterparty), either
(A) In the case of any eligible credit derivative from an eligible guarantor, the notional amount of the eligible credit derivative; or
(B) In the case of any eligible equity derivative from an eligible guarantor, the gross credit exposure amount to the counterparty (calculated in accordance with § 252.73(a)(7)).
(ii) Notwithstanding paragraph (d)(2)(i) of this section, in cases where the eligible credit derivative or eligible equity derivative is used to hedge covered positions that are subject to the Board’s market risk rule (12 CFR part 217, subpart F) and the counterparty on the hedged transaction is not a financial entity, the amount of credit exposure that a company must recognize to the eligible guarantor is the amount that would be calculated pursuant to § 252.73(a).
(3) Notwithstanding paragraph (d)(2) of this section, a covered company’s gross credit exposure to an eligible guarantor with respect to an eligible credit derivative or an eligible equity derivative under this paragraph (d) is limited to:
(i) Its gross credit exposure to the counterparty on the credit transaction prior to recognition of the eligible credit derivative or the eligible equity derivative, or
(ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction prior to recognition of the eligible credit derivative or the eligible equity derivative if valued in accordance with § 252.73(a).
(e) Other eligible hedges. In calculating net credit exposure to a counterparty for a credit transaction under this section, a covered company may reduce its gross credit exposure to the counterparty by the face amount of a short sale of the counterparty’s debt security or equity security, provided that:
(1) The instrument in which the covered company has a short position is junior to, or pari passu with, the instrument in which the covered company has the long position; and
(2) The instrument in which the covered company has a short position and the instrument in which the covered company has the long position are either both treated as trading or available-for-sale exposures or both treated as held-to-maturity exposures.
(f) Unused portion of certain extensions of credit. (1) In computing its net credit exposure to a counterparty for a committed credit line or revolving credit facility under this section, a covered company may reduce its gross credit exposure by the amount of the unused portion of the credit extension to the extent that the covered company does not have any legal obligation to advance additional funds under the extension of credit and the used portion of the credit extension has been fully secured by eligible collateral.
(2) To the extent that the used portion of a credit extension has been secured by eligible collateral, the covered company may reduce its gross credit exposure by the adjusted market value of any eligible collateral received from the counterparty, even if the used portion has not been fully secured by eligible collateral.
(3) To qualify for the reduction in net credit exposure under this paragraph, the credit contract must specify that any used portion of the credit extension must be fully secured by the adjusted market value of any eligible collateral.
(g) Credit transactions involving exempt counterparties. (1) A covered company’s credit transactions with an exempt counterparty are not subject to the requirements of this subpart, including but not limited to § 252.72.
(2) Notwithstanding paragraph (g)(1) of this section, in cases where a covered company has a credit transaction with an exempt counterparty and the covered company has obtained eligible collateral from that exempt counterparty or an eligible guarantee or eligible credit or equity derivative from an eligible guarantor, the covered company must include (for purposes of this subpart) such exposure to the issuer of such eligible collateral or the eligible guarantor, as calculated in accordance with the rules set forth in this section, when calculating its gross credit exposure to that issuer of eligible collateral or eligible guarantor.
(h) Currency mismatch adjustments. For purposes of calculating its net credit exposure to a counterparty under this section, a covered company must apply, as applicable:
(1) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible collateral and calculating its gross credit exposure to an issuer of eligible collateral, pursuant to paragraph (b) of this section, the currency mismatch adjustment approach of § 217.37(c)(3)(ii) of the Board’s Regulation Q (12 CFR 217.37(c)(3)(ii)); and
(2) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible guarantee, eligible equity derivative, or eligible credit derivative from an eligible guarantor and calculating its gross credit exposure to an eligible guarantor, pursuant to paragraphs (c) and (d) of this section, the currency mismatch adjustment approach of § 217.36(f) of the Board’s Regulation Q (12 CFR 217.36(f)).
(i) Maturity mismatch adjustments. For purposes of calculating its net credit exposure to a counterparty under this section, a covered company must apply, as applicable, the maturity mismatch adjustment approach of § 217.36(d) of the Board’s Regulation Q (12 CFR 217.36(d)):
(1) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible collateral or any eligible guarantees, eligible equity derivatives, or eligible credit derivatives from an eligible guarantor, pursuant to paragraphs (b) through (d) of this section, and
(2) In calculating its gross credit exposure to an issuer of eligible collateral, pursuant to paragraph (b) of this section, or to an eligible guarantor, pursuant to paragraphs (c) and (d) of this section; provided that
(3) The eligible collateral, eligible guarantee, eligible equity derivative, or eligible credit derivative subject to paragraph (i)(1) of this section:
(i) Has a shorter maturity than the credit transaction;
(ii) Has an original maturity equal to or greater than one year;
(iii) Has a residual maturity of not less than three months; and
(iv) The adjustment approach is otherwise applicable.
§ 252.75 Investments in and exposures to securitization vehicles, investment funds, and other special purpose vehicles that are not subsidiaries of the covered company.
(a) In general. (1) For purposes of this section, the following definitions apply:
(i) SPV means a securitization vehicle, investment fund, or other special purpose vehicle that is not a subsidiary of the covered company.
(ii) SPV exposure means an investment in the debt or equity of an SPV, or a credit derivative or equity derivative between the covered company and a third party where the covered company is the protection provider and the reference asset is an obligation or equity security of, or equity investment in, an SPV.
(2)(i) A covered company must determine whether the amount of its gross credit exposure to an issuer of assets in an SPV, due to an SPV exposure, is equal to or greater than 0.25 percent of the covered company’s tier 1 capital using one of the following two methods:
(A) The sum of all of the issuer’s assets (with each asset valued in accordance with § 252.73(a)) in the SPV; or
(B) The application of the look-through approach described in paragraph (b) of this section.
(ii) With respect to the determination required under paragraph (a)(2)(i) of this section, a covered company must use the same method to calculate gross credit exposure to each issuer of assets in a particular SPV.
(iii) In making a determination under paragraph (a)(2)(i) of this section, the covered company must consider only the credit exposure to the issuer arising from the covered company’s SPV exposure.
(iv) For purposes of this paragraph (a)(2), a covered company that is unable to identify each issuer of assets in an SPV must attribute to a single unknown counterparty the amount of its gross credit exposure to all unidentified issuers and calculate such gross credit exposure using one method in either paragraph (a)(2)(i)(A) or (a)(2)(i)(B) of this section.
(3)(i) If a covered company determines pursuant to paragraph (a)(2) of this section that the amount of its gross credit exposure to an issuer of assets in an SPV is less than 0.25 percent of the covered company’s tier 1 capital, the amount of the covered company’s gross credit exposure to that issuer may be attributed to either that issuer of assets or the SPV:
(A) If attributed to the issuer of assets, the issuer of assets must be identified as a counterparty, and the gross credit exposure calculated under paragraph (a)(2)(i)(A) of this section to that issuer of assets must be aggregated with any other gross credit exposures (valued in accordance with § 252.73) to that same counterparty; and
(B) If attributed to the SPV, the covered company’s gross credit exposure is equal to the covered company’s SPV exposure, valued in accordance with § 252.73(a).
(ii) If a covered company determines pursuant to paragraph (a)(2) of this section that the amount of its gross credit exposure to an issuer of assets in an SPV is equal to or greater than 0.25 percent of the covered company’s tier 1 capital or the covered company is unable to determine that the amount of the gross credit exposure is less than 0.25 percent of the covered company’s tier 1 capital:
(A) The covered company must calculate the amount of its gross credit exposure to the issuer of assets in the SPV using the look-through approach in paragraph (b) of this section;
(B) The issuer of assets in the SPV must be identified as a counterparty, and the gross credit exposure calculated in accordance with paragraph (b) must be aggregated with any other gross credit exposures (valued in accordance with § 252.73) to that same counterparty; and
(C) When applying the look-through approach in paragraph (b) of this section, a covered company that is unable to identify each issuer of assets in an SPV must attribute to a single unknown counterparty the amount of its gross credit exposure, calculated in accordance with paragraph (b) of this section, to all unidentified issuers.
(iii) For purposes of this section, a covered company must aggregate all gross credit exposures to unknown counterparties for all SPVs as if the exposures related to a single unknown counterparty; this single unknown counterparty is subject to the limits of § 252.72 as if it were a single counterparty.
(b) Look-through approach. A covered company that is required to calculate the amount of its gross credit exposure with respect to an issuer of assets in accordance with this paragraph (b) must calculate the amount as follows:
(1) Where all investors in the SPV rank pari passu, the amount of the gross credit exposure to the issuer of assets is equal to the covered company’s pro rata share of the SPV multiplied by the value of the underlying asset in the SPV, valued in accordance with § 252.73(a); and
(2) Where all investors in the SPV do not rank pari passu, the amount of the gross credit exposure to the issuer of assets is equal to:
(i) The pro rata share of the covered company’s investment in the tranche of the SPV; multiplied by
(ii) The lesser of:
(A) The market value of the tranche in which the covered company has invested, except in the case of a debt security that is held to maturity, in which case the tranche must be valued at the amortized purchase price of the securities; and
(B) The value of each underlying asset attributed to the issuer in the SPV, each as calculated pursuant to § 252.73(a).
(c) Exposures to third parties. (1) Notwithstanding any other requirement in this section, a covered company must recognize, for purposes of this subpart, a gross credit exposure to each third party that has a contractual obligation to provide credit or liquidity support to an SPV whose failure or material financial distress would cause a loss in the value of the covered company’s SPV exposure.
(2) The amount of any gross credit exposure that is required to be recognized to a third party under paragraph (c)(1) of this section is equal to the covered company’s SPV exposure, up to the maximum contractual obligation of that third party to the SPV, valued in accordance with § 252.73(a). (This gross credit exposure is in addition to the covered company’s gross credit exposure to the SPV or the issuers of assets of the SPV, calculated in accordance with paragraphs (a) and (b) of this section.)
(3) A covered company must aggregate the gross credit exposure to a third party recognized in accordance with paragraphs (c)(1) and (2) of this section with its other gross credit exposures to that third party (that are unrelated to the SPV) for purposes of compliance with the limits of § 252.72.
§ 252.76 Aggregation of exposures to more than one counterparty due to economic interdependence or control relationships.
(a) In general. (1) If a covered company has an aggregate net credit exposure to any counterparty that exceeds 5 percent of its tier 1 capital, the covered company must assess its relationship with the counterparty under paragraph (b)(2) of this section to determine whether the counterparty is economically interdependent with one or more other counterparties of the covered company and under paragraph (c)(1) of this section to determine whether the counterparty is connected by a control relationship with one or more other counterparties.
(2) If, pursuant to an assessment required under paragraph (a)(1) of this section, the covered company determines that one or more of the factors of paragraph (b)(2) or (c)(1) of this section are met with respect to one or more counterparties, or the Board determines pursuant to paragraph (d) of this section that one or more other counterparties of a covered company are economically interdependent or that one or more other counterparties of a covered company are connected by a control relationship, the covered company must aggregate its net credit exposure to the counterparties for all purposes under this subpart, including, but not limited to, § 252.72.
(3) In connection with any request pursuant to paragraph (b)(3) or (c)(2) of this section, the Board may require the covered company to provide additional information.
(b) Aggregation of exposures to more than one counterparty due to economic interdependence. (1) For purposes of this paragraph, two counterparties are economically interdependent if the failure, default, insolvency, or material financial distress of one counterparty would cause the failure, default, insolvency, or material financial distress of the other counterparty, taking into account the factors in paragraph (b)(2) of this section.
(2) A covered company must assess whether the financial distress of one counterparty (counterparty A) would prevent the ability of the other counterparty (counterparty B) to fully and timely repay counterparty B’s liabilities and whether the insolvency or default of counterparty A is likely to be associated with the insolvency or default of counterparty B and, therefore, these counterparties are economically interdependent, by evaluating the following:
(i) Whether 50 percent or more of one counterparty’s gross revenue is derived from, or gross expenditures are directed to, transactions with the other counterparty;
(ii) Whether counterparty A has fully or partly guaranteed the credit exposure of counterparty B, or is liable by other means, in an amount that is 50 percent or more of the covered company’s net credit exposure to counterparty A;
(iii) Whether 25 percent or more of one counterparty’s production or output is sold to the other counterparty, which cannot easily be replaced by other customers;
(iv) Whether the expected source of funds to repay the loans of both counterparties is the same and neither counterparty has another independent source of income from which the loans may be serviced and fully repaid;
(v) Whether two or more counterparties rely on the same source for the majority of their funding and, in the event of the common provider’s default, an alternative provider cannot be found.
(3)(i) Notwithstanding paragraph (b)(2) of this section, if a covered company determines that one or more of the factors in paragraph (b)(2) is met, the covered company may request in writing a determination from the Board that those counterparties are not economically interdependent and that the covered company is not required to aggregate those counterparties.
(ii) Upon a request by a covered company pursuant to paragraph (b)(3) of this section, the Board may grant temporary relief to the covered company and not require the covered company to aggregate one counterparty with another counterparty provided that the counterparty could promptly modify its business relationships, such as by reducing its reliance on the other counterparty, to address any economic interdependence concerns, and provided that such relief is in the public interest and is consistent with the purpose of this subpart and 12 U.S.C. 5365(e).
(c) Aggregation of exposures to more than one counterparty due to certain control relationships. (1) For purposes of this subpart, one counterparty (counterparty A) is deemed to control the other counterparty (counterparty B) if:
(i) Counterparty A owns, controls, or holds with the power to vote 25 percent or more of any class of voting securities of counterparty B; or
(ii) Counterparty A controls in any manner the election of a majority of the directors, trustees, or general partners (or individuals exercising similar functions) of counterparty B.
(2)(i) Notwithstanding paragraph (c)(1) of this section, if a covered company determines that one or more of the factors in paragraph (c)(1) is met, the covered company may request in writing a determination from the Board that counterparty A does not control counterparty B and that the covered company is not required to aggregate those counterparties.
(ii) Upon a request by a covered company pursuant to paragraph (c)(2) of this section, the Board may grant temporary relief to the covered company and not require the covered company to aggregate counterparty A with counterparty B provided that, taking into account the specific facts and circumstances, such indicia of control does not result in the entities being connected by control relationships for purposes of this subpart, and provided that such relief is in the public interest and is consistent with the purpose of this subpart and 12 U.S.C. 5365(e).
(d) Board determinations for aggregation of counterparties due to economic interdependence or control relationships. The Board may determine, after notice to the covered company and opportunity for hearing, that one or more counterparties of a covered company are:
(1) Economically interdependent for purposes of this subpart, considering the factors in paragraph (b)(2) of this section, as well as any other indicia of economic interdependence that the Board determines in its discretion to be relevant; or
(2) Connected by control relationships for purposes of this subpart, considering the factors in paragraph (c)(1) of this section and whether counterparty A:
(i) Controls the power to vote 25 percent or more of any class of voting securities of Counterparty B pursuant to a voting agreement;
(ii) Has significant influence on the appointment or dismissal of counterparty B’s administrative, management, or governing body, or the fact that a majority of members of such body have been appointed solely as a result of the exercise of counterparty A’s voting rights; or
(iii) Has the power to exercise a controlling influence over the management or policies of counterparty B.
(e) Board determinations for aggregation of counterparties to prevent evasion. Notwithstanding paragraphs (b) and (c) of this section, a covered company must aggregate its exposures to a counterparty with the covered company’s exposures to another counterparty if the Board determines in writing after notice and opportunity for hearing, that the exposures to the two counterparties must be aggregated to prevent evasions of the purposes of this subpart, including, but not limited to § 252.76 and 12 U.S.C. 5365(e).
§ 252.77 Exemptions.
(a) Exempted exposure categories. The following categories of credit transactions are exempt from the limits on credit exposure under this subpart:
(1) Any direct claim on, and the portion of a claim that is directly and fully guaranteed as to principal and interest by, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, only while operating under the conservatorship or receivership of the Federal Housing Finance Agency, and any additional obligation issued by a U.S. government-sponsored entity as determined by the Board;
(2) Intraday credit exposure to a counterparty;
(3) Any trade exposure to a qualifying central counterparty related to the covered company’s clearing activity, including potential future exposure arising from transactions cleared by the qualifying central counterparty and pre-funded default fund contributions;
(4) Any credit transaction with the Bank for International Settlements, the International Monetary Fund, the International Bank for Reconstruction and Development, the International Finance Corporation, the International Development Association, the Multilateral Investment Guarantee Agency, or the International Centre for Settlement of Investment Disputes;
(5) Any credit transaction with the European Commission or the European Central Bank; and
(6) Any transaction that the Board exempts if the Board finds that such exemption is in the public interest and is consistent with the purpose of this subpart.
(b) Exemption for Federal Home Loan Banks. For purposes of this subpart, a covered company does not include any Federal Home Loan Bank.
(c) Additional exemptions by the Board. The Board may, by regulation or order, exempt transactions, in whole or in part, from the definition of the term “credit exposure,” if the Board finds that the exemption is in the public interest and is consistent with the purpose of 12 U.S.C. 5365(e).
§ 252.78 Compliance.
(a) Scope of compliance. (1) Using all available data, including any data required to be maintained or reported to the Federal Reserve under this subpart, a covered company must comply with the requirements of this subpart on a daily basis at the end of each business day.
(2) A covered company must report its compliance to the Federal Reserve as of the end of the quarter, unless the Board determines and notifies that company in writing that more frequent reporting is required.
(3) In reporting its compliance, a covered company must calculate and include in its gross credit exposure to an issuer of eligible collateral or eligible guarantor the amounts of eligible collateral, eligible guarantees, eligible equity derivatives, and eligible credit derivatives that were provided to the covered company in connection with credit transactions with exempt counterparties, valued in accordance with and as required by § 252.74(b) through (d) and (g).
(b) Qualifying Master Netting Agreement. With respect to any qualifying master netting agreement, a covered company must establish and maintain procedures that meet or exceed the requirements of § 217.3(d) of the Board’s Regulation Q (12 CFR 217.3(d)) to monitor possible changes in relevant law and to ensure that the agreement continues to satisfy these requirements.
(c) Noncompliance. (1) Except as otherwise provided in this section, if a covered company is not in compliance with this subpart with respect to a counterparty solely due to the circumstances listed in paragraphs (c)(2)(i) through (v) of this section, the covered company will not be subject to enforcement actions for a period of 90 days (or, with prior notice to the company, such shorter or longer period determined by the Board, in its sole discretion, to be appropriate to preserve the safety and soundness of the covered company or U.S. financial stability), if the covered company uses reasonable efforts to return to compliance with this subpart during this period. The covered company may not engage in any additional credit transactions with such a counterparty in contravention of this rule during the period of noncompliance, except as provided in paragraph (c)(2).
(2) A covered company may request a special temporary credit exposure limit exemption from the Board. The Board may grant approval for such exemption in cases where the Board determines that such credit transactions are necessary or appropriate to preserve the safety and soundness of the covered company or U.S. financial stability. In acting on a request for an exemption, the Board will consider the following:
(i) A decrease in the covered company’s capital stock and surplus;
(ii) The merger of the covered company with another covered company;
(iii) A merger of two counterparties; or
(iv) An unforeseen and abrupt change in the status of a counterparty as a result of which the covered company’s credit exposure to the counterparty becomes limited by the requirements of this section; or
(v) Any other factor(s) the Board determines, in its discretion, is appropriate.
(d) Other measures. The Board may impose supervisory oversight and additional reporting measures that it determines are appropriate to monitor compliance with this subpart. Covered companies must furnish, in the manner and form prescribed by the Board, such information to monitor compliance with this subpart and the limits therein as the Board may require.
Subpart I – Requirements for Qualified Financial Contracts of Global Systemically Important Banking Organizations
§ 252.81 Definitions.
For purposes of this subpart:
Central counterparty (CCP) has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
Chapter 11 proceeding means a proceeding under Chapter 11 of Title 11, United States Code (11 U.S.C. 1101-74.).
Consolidated affiliate means an affiliate of another company that
(1) Either consolidates the other company, or is consolidated by the other company, on financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles, the International Financial Reporting Standards, or other similar standards;
(2) Is, along with the other company, consolidated with a third company on a financial statement prepared in accordance with principles or standards referenced in paragraph (1) of this definition; or
(3) For a company that is not subject to principles or standards referenced in paragraph (1), if consolidation as described in paragraph (1) or (2) of this definition would have occurred if such principles or standards had applied.
Default right (1) Means, with respect to a QFC, any:
(i) Right of a party, whether contractual or otherwise (including, without limitation, rights incorporated by reference to any other contract, agreement, or document, and rights afforded by statute, civil code, regulation, and common law), to liquidate, terminate, cancel, rescind, or accelerate such agreement or transactions thereunder, set off or net amounts owing in respect thereto (except rights related to same-day payment netting), exercise remedies in respect of collateral or other credit support or property related thereto (including the purchase and sale of property), demand payment or delivery thereunder or in respect thereof (other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure), suspend, delay, or defer payment or performance thereunder, or modify the obligations of a party thereunder, or any similar rights; and
(ii) Right or contractual provision that alters the amount of collateral or margin that must be provided with respect to an exposure thereunder, including by altering any initial amount, threshold amount, variation margin, minimum transfer amount, the margin value of collateral, or any similar amount, that entitles a party to demand the return of any collateral or margin transferred by it to the other party or a custodian or that modifies a transferee’s right to reuse collateral or margin (if such right previously existed), or any similar rights, in each case, other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure;
(2) With respect to § 252.84, does not include any right under a contract that allows a party to terminate the contract on demand or at its option at a specified time, or from time to time, without the need to show cause.
Excluded bank:
(1) Means a national bank, a Federal savings association, a Federal branch, a Federal agency, or an FSI that is exempted from the scope of this subpart pursuant to paragraph (b)(2) or (b)(3) of § 252.82;
(2) Does not include any entity described in paragraph (1) of this definition that is owned pursuant to section 3(a)(A)(ii) of the Bank Holding Company Act (12 U.S.C. 1842(a)(A)(ii)); is owned by a depository institution in satisfaction of debt previously contracted in good faith; is a portfolio concern, as defined under 13 CFR 107.50, that is controlled by a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662); is owned pursuant to paragraph (11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24); or is a DPC branch subsidiary.
FDI Act proceeding means a proceeding in which the Federal Deposit Insurance Corporation is appointed as conservator or receiver under section 11 of the Federal Deposit Insurance Act (12 U.S.C. 1821).
FDI Act stay period means, in connection with an FDI Act proceeding, the period of time during which a party to a QFC with a party that is subject to an FDI Act proceeding may not exercise any right that the party that is not subject to an FDI Act proceeding has to terminate, liquidate, or net such QFC, in accordance with section 11(e) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)) and any implementing regulations.
Financial counterparty means a person that is:
(1)(i) A bank holding company or an affiliate thereof; a savings and loan holding company as defined in section 10(n) of the Home Owners’ Loan Act (12 U.S.C. 1467a(n)); a U.S. intermediate holding company that is established or designated for purposes of compliance with this part; or a nonbank financial company supervised by the Board;
(ii) A depository institution as defined in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States; a Federal credit union or State credit union as defined in section 2 of the Federal Credit Union Act (12 U.S.C. 1752(1) & (6)); an institution that functions solely in a trust or fiduciary capacity as described in section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(D)); an industrial loan company, an industrial bank, or other similar institution described in section 2(c)(2)(H) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(H));
(iii) An entity that is state-licensed or registered as:
(A) A credit or lending entity, including a finance company; money lender; installment lender; consumer lender or lending company; mortgage lender, broker, or bank; motor vehicle title pledge lender; payday or deferred deposit lender; premium finance company; commercial finance or lending company; or commercial mortgage company; except entities registered or licensed solely on account of financing the entity’s direct sales of goods or services to customers;
(B) A money services business, including a check casher; money transmitter; currency dealer or exchange; or money order or traveler’s check issuer;
(iv) A regulated entity as defined in section 1303(20) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended (12 U.S.C. 4502(20)) or any entity for which the Federal Housing Finance Agency or its successor is the primary federal regulator;
(v) Any institution chartered in accordance with the Farm Credit Act of 1971, as amended, 12 U.S.C. 2002 et seq., that is regulated by the Farm Credit Administration;
(vi) Any entity registered with the Commodity Futures Trading Commission as a swap dealer or major swap participant pursuant to the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or an entity that is registered with the U.S. Securities and Exchange Commission as a security-based swap dealer or a major security-based swap participant pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.);
(vii) A securities holding company, with the meaning specified in section 618 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 1850a); a broker or dealer as defined in sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)-(5)); an investment adviser as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or a company that has elected to be regulated as a business development company pursuant to section 54(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-53(a));
(viii) A private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is deemed not to be an investment company under section 3 of the Investment Company Act of 1940 pursuant to Investment Company Act Rule 3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange Commission;
(ix) A commodity pool, a commodity pool operator, or a commodity trading advisor as defined, respectively, in sections 1a(10), 1a(11), and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10), 1a(11), and 1a(12)); a floor broker, a floor trader, or introducing broker as defined, respectively, in sections 1a(22), 1a(23) and 1a(31) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined in section 1a(28) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28));
(x) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974 (29 U.S.C. 1002);
(xi) An entity that is organized as an insurance company, primarily engaged in writing insurance or reinsuring risks underwritten by insurance companies, or is subject to supervision as such by a State insurance regulator or foreign insurance regulator; or
(xii) An entity that would be a financial counterparty described in paragraphs (1)(i)-(xi) of this definition, if the entity were organized under the laws of the United States or any state thereof.
(2) The term “financial counterparty” does not include any counterparty that is:
(i) A sovereign entity;
(ii) A multilateral development bank; or
(iii) The Bank for International Settlements.
Financial market utility (FMU) means any person, regardless of the jurisdiction in which the person is located or organized, that manages or operates a multilateral system for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and the person, but does not include:
(1) Designated contract markets, registered futures associations, swap data repositories, and swap execution facilities registered under the Commodity Exchange Act (7 U.S.C. 1 et seq.), or national securities exchanges, national securities associations, alternative trading systems, security-based swap data repositories, and swap execution facilities registered under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.), solely by reason of their providing facilities for comparison of data respecting the terms of settlement of securities or futures transactions effected on such exchange or by means of any electronic system operated or controlled by such entities, provided that the exclusions in this clause apply only with respect to the activities that require the entity to be so registered; or
(2) Any broker, dealer, transfer agent, or investment company, or any futures commission merchant, introducing broker, commodity trading advisor, or commodity pool operator, solely by reason of functions performed by such institution as part of brokerage, dealing, transfer agency, or investment company activities, or solely by reason of acting on behalf of a FMU or a participant therein in connection with the furnishing by the FMU of services to its participants or the use of services of the FMU by its participants, provided that services performed by such institution do not constitute critical risk management or processing functions of the FMU.
FSI means a state savings association or state nonmember bank (as the terms are defined in section 3 of the Federal Deposit Insurance Act, 12 U.S.C. 1813).
Investment advisory contract means any contract or agreement whereby a person agrees to act as investment adviser to or to manage any investment or trading account of another person.
Master agreement means a QFC of the type set forth in sections 210(c)(8)(D)(ii)(XI), (iii)(IX), (iv)(IV), (v)(V), or (vi)(V) of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)(ii)(XI), (iii)(IX), (iv)(IV), (v)(V), or (vi)(V)) or a master agreement that the Federal Deposit Insurance Corporation determines by regulation is a QFC pursuant to section 210(c)(8)(D)(i) of Title II of the act (12 U.S.C. 5390(c)(8)(D)(i)).
Person has the same meaning as in 12 CFR 225.2.
Qualified financial contract (QFC) has the same meaning as in section 210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)).
Retail customer or counterparty has the same meaning as in § 249.3 of the Board’s Regulation WW (12 CFR 249.3).
Small financial institution means a company that:
(1) Is organized as a bank, as defined in section 3(a) of the Federal Deposit Insurance Act, the deposits of which are insured by the Federal Deposit Insurance Corporation; a savings association, as defined in section 3(b) of the Federal Deposit Insurance Act, the deposits of which are insured by the Federal Deposit Insurance Corporation; a farm credit system institution chartered under the Farm Credit Act of 1971; or an insured Federal credit union or State-chartered credit union under the Federal Credit Union Act; and
(2) Has total assets of $10,000,000,000 or less on the last day of the company’s most recent fiscal year.
U.S. special resolution regimes means the Federal Deposit Insurance Act (12 U.S.C. 1811-1835a) and regulations promulgated thereunder and Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5381-5394) and regulations promulgated thereunder.
§ 252.82 Applicability.
(a) General requirement. A covered entity must ensure that each covered QFC conforms to the requirements of §§ 252.83 and 252.84.
(b) Covered entities. For purposes of this subpart, a covered entity is:
(1) A bank holding company that is identified as a global systemically important BHC pursuant to 12 CFR 217.402;
(2) A subsidiary of a company identified in paragraph (b)(1) of this section other than a subsidiary that is:
(i) A national bank, a Federal savings association, a Federal branch, a Federal agency, an FSI;
(ii) A company owned pursuant to section 3(a)(A)(ii), 4(c)(2), 4(k)(4)(H), or 4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. 1842(a)(A)(ii), 1843(c)(2), 1843(k)(4)(H), 1843(k)(4)(I));
(iii) A company owned by a depository institution in satisfaction of debt previously contracted in good faith;
(iv) A portfolio concern, as defined under 13 CFR 107.50, that is controlled by a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662); or
(v) A company the business of which is to make investments that are designed primarily to promote the public welfare, of the type permitted under paragraph (11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the welfare of low- and moderate-income communities or families (such as providing housing, services, or jobs)); or
(3) A U.S. subsidiary, U.S. branch, or U.S. agency of a global systemically important foreign banking organization other than a U.S. subsidiary, U.S. branch, or U.S. agency that is:
(i) A national bank, a Federal savings association, a Federal branch, a Federal agency, an FSI;
(ii) A company owned pursuant to section 3(a)(A)(ii), 4(c)(2), 4(k)(4)(H), or 4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. 1842(a)(A)(ii), 1843(c)(2), 1843(k)(4)(H), 1843(k)(4)(I));
(iii) A company owned by a depository institution in satisfaction of debt previously contracted in good faith;
(iv) A portfolio concern, as defined under 13 CFR 107.50, that is controlled by a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662);
(v) A company the business of which is to make investments that are designed primarily to promote the public welfare, of the type permitted under paragraph (11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the welfare of low- and moderate-income communities or families (such as providing housing, services, or jobs);
(vi) A section 2(h)(2) company; or
(vii) A DPC branch subsidiary.
(c) Covered QFCs. For purposes of this subpart, a covered QFC is:
(1) With respect to a covered entity that is a covered entity on November 13, 2017, an in-scope QFC that the covered entity:
(i) Enters, executes, or otherwise becomes a party to on or after January 1, 2019; or
(ii) Entered, executed, or otherwise became a party to before January 1, 2019, if the covered entity or any affiliate that is a covered entity or excluded bank also enters, executes, or otherwise becomes a party to a QFC with the same person or a consolidated affiliate of the same person on or after January 1, 2019.
(2) With respect to a covered entity that becomes a covered entity after November 13, 2017, an in-scope QFC that the covered entity:
(i) Enters, executes or otherwise becomes a party to on or after the later of the date the covered entity first becomes a covered entity and January 1, 2019; or
(ii) Entered, executed, or otherwise became a party to before the date identified in paragraph (c)(2)(i) of this section with respect to the covered entity, if the covered entity or any affiliate that is a covered entity or excluded bank also enters, executes, or otherwise becomes a party to a QFC with the same person or consolidated affiliate of the same person on or after the date identified in paragraph (c)(2)(i) with respect to the covered entity.
(d) In-scope QFCs. An in-scope QFC is a QFC that explicitly:
(1) Restricts the transfer of a QFC (or any interest or obligation in or under, or any property securing, the QFC) from a covered entity; or
(2) Provides one or more default rights with respect to a QFC that may be exercised against a covered entity.
(e) Rules of construction. For purposes of this subpart:
(1) A covered entity does not become a party to a QFC solely by acting as agent with respect to the QFC; and
(2) The exercise of a default right with respect to a covered QFC includes the automatic or deemed exercise of the default right pursuant to the terms of the QFC or other arrangement.
(f) Initial applicability of requirements for covered QFCs. (1) With respect to each of its covered QFCs, a covered entity that is a covered entity on November 13, 2017 must conform the covered QFC to the requirements of this subpart by:
(i) January 1, 2019, if each party to the covered QFC is a covered entity or an excluded bank;
(ii) July 1, 2019, if each party to the covered QFC (other than the covered entity) is a financial counterparty that is not a covered entity or excluded bank; or
(iii) January 1, 2020, if a party to the covered QFC (other than the covered entity) is not described in paragraph (f)(1)(i) or (f)(1)(ii) of this section or if, notwithstanding paragraph (f)(1)(ii), a party to the covered QFC (other than the covered entity) is a small financial institution.
(2) With respect to each of its covered QFCs, a covered entity that is not a covered entity on November 13, 2017 must conform the covered QFC to the requirements of this subpart by:
(i) The first day of the calendar quarter immediately following 1 year after the date the covered entity first becomes a covered entity, if each party to the covered QFC is a covered entity or an excluded bank;
(ii) The first day of the calendar quarter immediately following 18 months from the date the covered entity first becomes a covered entity if each party to the covered QFC (other than the covered entity) is a financial counterparty that is not a covered entity or excluded bank; or
(iii) The first day of the calendar quarter immediately following 2 years from the date the covered entity first becomes a covered entity if a party to the covered QFC (other than the covered entity) is not described in paragraph (f)(2)(i) or (f)(2)(ii) of this section or if, notwithstanding paragraph (f)(2)(ii), a party to the covered QFC (other than the covered entity) is a small financial institution.
§ 252.83 U.S. Special Resolution Regimes.
(a) Covered QFCs not required to be conformed. (1) Notwithstanding § 252.82, a covered entity is not required to conform a covered QFC to the requirements of this section if:
(i) The covered QFC designates, in the manner described in paragraph (a)(2) of this section, the U.S. special resolution regimes as part of the law governing the QFC; and
(ii) Each party to the covered QFC, other than the covered entity, is:
(A) An individual that is domiciled in the United States, including any State;
(B) A company that is incorporated in or organized under the laws of the United States or any State;
(C) A company the principal place of business of which is located in the United States, including any State; or
(D) A U.S. branch or U.S. agency.
(2) A covered QFC designates the U.S. special resolution regimes as part of the law governing the QFC if the covered QFC:
(i) Explicitly provides that the covered QFC is governed by the laws of the United States or a state of the United States; and
(ii) Does not explicitly provide that one or both of the U.S. special resolution regimes, or a broader set of laws that includes a U.S. special resolution regime, is excluded from the laws governing the covered QFC.
(b) Provisions required. A covered QFC must explicitly provide that:
(1) In the event the covered entity becomes subject to a proceeding under a U.S. special resolution regime, the transfer of the covered QFC (and any interest and obligation in or under, and any property securing, the covered QFC) from the covered entity will be effective to the same extent as the transfer would be effective under the U.S. special resolution regime if the covered QFC (and any interest and obligation in or under, and any property securing, the covered QFC) were governed by the laws of the United States or a state of the United States; and
(2) In the event the covered entity or an affiliate of the covered entity becomes subject to a proceeding under a U.S. special resolution regime, default rights with respect to the covered QFC that may be exercised against the covered entity are permitted to be exercised to no greater extent than the default rights could be exercised under the U.S. special resolution regime if the covered QFC were governed by the laws of the United States or a state of the United States.
(c) Relevance of creditor protection provisions. The requirements of this section apply notwithstanding paragraphs (d), (f), and (h) of § 252.84.
§ 252.84 Insolvency proceedings.
(a) Covered QFCs not required to be conformed. Notwithstanding § 252.82, a covered entity is not required to conform a covered QFC to the requirements of this section if the covered QFC:
(1) Does not explicitly provide any default right with respect to the covered QFC that is related, directly or indirectly, to an affiliate of the direct party becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding; and
(2) Does not explicitly prohibit the transfer of a covered affiliate credit enhancement, any interest or obligation in or under the covered affiliate credit enhancement, or any property securing the covered affiliate credit enhancement to a transferee upon or following an affiliate of the direct party becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding or would prohibit such a transfer only if the transfer would result in the supported party being the beneficiary of the credit enhancement in violation of any law applicable to the supported party.
(b) General prohibitions. (1) A covered QFC may not permit the exercise of any default right with respect to the covered QFC that is related, directly or indirectly, to an affiliate of the direct party becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding.
(2) A covered QFC may not prohibit the transfer of a covered affiliate credit enhancement, any interest or obligation in or under the covered affiliate credit enhancement, or any property securing the covered affiliate credit enhancement to a transferee upon or following an affiliate of the direct party becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding unless the transfer would result in the supported party being the beneficiary of the credit enhancement in violation of any law applicable to the supported party.
(c) Definitions relevant to the general prohibitions – (1) Direct party. Direct party means a covered entity or excluded bank that is a party to the direct QFC.
(2) Direct QFC. Direct QFC means a QFC that is not a credit enhancement, provided that, for a QFC that is a master agreement that includes an affiliate credit enhancement as a supplement to the master agreement, the direct QFC does not include the affiliate credit enhancement.
(3) Affiliate credit enhancement. Affiliate credit enhancement means a credit enhancement that is provided by an affiliate of a party to the direct QFC that the credit enhancement supports.
(d) General creditor protections. Notwithstanding paragraph (b) of this section, a covered direct QFC and covered affiliate credit enhancement that supports the covered direct QFC may permit the exercise of a default right with respect to the covered QFC that arises as a result of:
(1) The direct party becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding;
(2) The direct party not satisfying a payment or delivery obligation pursuant to the covered QFC or another contract between the same parties that gives rise to a default right in the covered QFC; or
(3) The covered affiliate support provider or transferee not satisfying a payment or delivery obligation pursuant to a covered affiliate credit enhancement that supports the covered direct QFC.
(e) Definitions relevant to the general creditor protections – (1) Covered direct QFC. Covered direct QFC means a direct QFC to which a covered entity or excluded bank is a party.
(2) Covered affiliate credit enhancement. Covered affiliate credit enhancement means an affiliate credit enhancement in which a covered entity or excluded bank is the obligor of the credit enhancement.
(3) Covered affiliate support provider. Covered affiliate support provider means, with respect to a covered affiliate credit enhancement, the affiliate of the direct party that is obligated under the covered affiliate credit enhancement and is not a transferee.
(4) Supported party. Supported party means, with respect to a covered affiliate credit enhancement and the direct QFC that the covered affiliate credit enhancement supports, a party that is a beneficiary of the covered affiliate support provider’s obligation(s) under the covered affiliate credit enhancement.
(f) Additional creditor protections for supported QFCs. Notwithstanding paragraph (b) of this section, with respect to a covered direct QFC that is supported by a covered affiliate credit enhancement, the covered direct QFC and the covered affiliate credit enhancement may permit the exercise of a default right after the stay period that is related, directly or indirectly, to the covered affiliate support provider becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding if:
(1) The covered affiliate support provider that remains obligated under the covered affiliate credit enhancement becomes subject to a receivership, insolvency, liquidation, resolution, or similar proceeding, other than a Chapter 11 proceeding;
(2) Subject to paragraph (h) of this section, the transferee, if any, becomes subject to a receivership, insolvency, liquidation, resolution, or similar proceeding;
(3) The covered affiliate support provider does not remain, and a transferee does not become, obligated to the same, or substantially similar, extent as the covered affiliate support provider was obligated immediately prior to entering the receivership, insolvency, liquidation, resolution, or similar proceeding with respect to:
(i) The covered affiliate credit enhancement;
(ii) All other covered affiliate credit enhancements provided by the covered affiliate support provider in support of other covered direct QFCs between the direct party and the supported party under the covered affiliate credit enhancement referenced in paragraph (f)(3)(i) of this section; and
(iii) All covered affiliate credit enhancements provided by the covered affiliate support provider in support of covered direct QFCs between the direct party and affiliates of the supported party referenced in paragraph (f)(3)(ii) of this section; or
(4) In the case of a transfer of the covered affiliate credit enhancement to a transferee,
(i) All of the ownership interests of the direct party directly or indirectly held by the covered affiliate support provider are not transferred to the transferee; or
(ii) Reasonable assurance has not been provided that all or substantially all of the assets of the covered affiliate support provider (or net proceeds therefrom), excluding any assets reserved for the payment of costs and expenses of administration in the receivership, insolvency, liquidation, resolution, or similar proceeding, will be transferred or sold to the transferee in a timely manner.
(g) Definitions relevant to the additional creditor protections for supported QFCs – (1) Stay period. Stay period means, with respect to a receivership, insolvency, liquidation, resolution, or similar proceeding, the period of time beginning on the commencement of the proceeding and ending at the later of 5:00 p.m. (eastern time) on the business day following the date of the commencement of the proceeding and 48 hours after the commencement of the proceeding.
(2) Business day. Business day means a day on which commercial banks in the jurisdiction the proceeding is commenced are open for general business (including dealings in foreign exchange and foreign currency deposits).
(3) Transferee. Transferee means a person to whom a covered affiliate credit enhancement is transferred upon the covered affiliate support provider entering a receivership, insolvency, liquidation, resolution, or similar proceeding or thereafter as part of the resolution, restructuring, or reorganization involving the covered affiliate support provider.
(h) Creditor protections related to FDI Act proceedings. Notwithstanding paragraphs (b), (d), and (f) of this section, with respect to a covered direct QFC that is supported by a covered affiliate credit enhancement, the covered direct QFC and the covered affiliate credit enhancement may permit the exercise of a default right that is related, directly or indirectly, to the covered affiliate support provider becoming subject to FDI Act proceedings:
(1) After the FDI Act stay period, if the covered affiliate credit enhancement is not transferred pursuant to 12 U.S.C. 1821(e)(9)-(e)(10) and any regulations promulgated thereunder; or
(2) During the FDI Act stay period, if the default right may only be exercised so as to permit the supported party under the covered affiliate credit enhancement to suspend performance with respect to the supported party’s obligations under the covered direct QFC to the same extent as the supported party would be entitled to do if the covered direct QFC were with the covered affiliate support provider and were treated in the same manner as the covered affiliate credit enhancement.
(i) Prohibited terminations. A covered QFC must require, after an affiliate of the direct party has become subject to a receivership, insolvency, liquidation, resolution, or similar proceeding:
(1) The party seeking to exercise a default right to bear the burden of proof that the exercise is permitted under the covered QFC; and
(2) Clear and convincing evidence or a similar or higher burden of proof to exercise a default right.
§ 252.85 Approval of enhanced creditor protection conditions.
(a) Protocol compliance. (1) Unless the Board determines otherwise based on the specific facts and circumstances, a covered QFC is deemed to comply with this subpart if it is amended by the universal protocol or the U.S. protocol.
(2) A covered QFC will be deemed to be amended by the universal protocol for purposes of paragraph (a)(1) of this section notwithstanding the covered QFC being amended by one or more Country Annexes, as the term is defined in the universal protocol.
(3) For purposes of paragraphs (a)(1) and (2) of this section:
(i) The universal protocol means the ISDA 2015 Universal Resolution Stay Protocol, including the Securities Financing Transaction Annex and Other Agreements Annex, published by the International Swaps and Derivatives Association, Inc., as of May 3, 2016, and minor or technical amendments thereto;
(ii) The U.S. protocol means a protocol that is the same as the universal protocol other than as provided in paragraphs (a)(3)(ii)(A)-(F) of this section.
(A) The provisions of Section 1 of the attachment to the universal protocol may be limited in their application to covered entities and excluded banks and may be limited with respect to resolutions under the Identified Regimes, as those regimes are identified by the universal protocol;
(B) The provisions of Section 2 of the attachment to the universal protocol may be limited in their application to covered entities and excluded banks;
(C) The provisions of Section 4(b)(i)(A) of the attachment to the universal protocol must not apply with respect to U.S. special resolution regimes;
(D) The provisions of Section 4(b) of the attachment to the universal protocol may only be effective to the extent that the covered QFCs affected by an adherent’s election thereunder would continue to meet the requirements of this subpart;
(E) The provisions of Section 2(k) of the attachment to the universal protocol must not apply; and
(F) The U.S. protocol may include minor and technical differences from the universal protocol and differences necessary to conform the U.S. protocol to the differences described in paragraphs (a)(3)(ii)(A)-(E) of this section;
(iii) Amended by the universal protocol or the U.S. protocol, with respect to covered QFCs between adherents to the protocol, includes amendments through incorporation of the terms of the protocol (by reference or otherwise) into the covered QFC; and
(iv) The attachment to the universal protocol means the attachment that the universal protocol identifies as “ATTACHMENT to the ISDA 2015 UNIVERSAL RESOLUTION STAY PROTOCOL.”
(b) Proposal of enhanced creditor protection conditions. (1) A covered entity may request that the Board approve as compliant with the requirements of §§ 252.83 and 252.84 proposed provisions of one or more forms of covered QFCs, or proposed amendments to one or more forms of covered QFCs, with enhanced creditor protection conditions.
(2) Enhanced creditor protection conditions means a set of limited exemptions to the requirements of § 252.84(b) that is different than that of paragraphs (d), (f), and (h) of § 252.84.
(3) A covered entity making a request under paragraph (b)(1) of this section must provide:
(i) An analysis of the proposal that addresses each consideration in paragraph (d) of this section;
(ii) A written legal opinion verifying that proposed provisions or amendments would be valid and enforceable under applicable law of the relevant jurisdictions, including, in the case of proposed amendments, the validity and enforceability of the proposal to amend the covered QFCs; and
(iii) Any other relevant information that the Board requests.
(c) Board approval. The Board may approve, subject to any conditions or commitments the Board may set, a proposal by a covered entity under paragraph (b) of this section if the proposal, as compared to a covered QFC that contains only the limited exemptions in paragraphs of (d), (f), and (h) of § 252.84 or that is amended as provided under paragraph (a) of this section, would prevent or mitigate risks to the financial stability of the United States that could arise from the failure of a global systemically important BHC, a global systemically important foreign banking organization, or the subsidiaries of either and would protect the safety and soundness of bank holding companies and state member banks to at least the same extent.
(d) Considerations. In reviewing a proposal under this section, the Board may consider all facts and circumstances related to the proposal, including:
(1) Whether, and the extent to which, the proposal would reduce the resiliency of such covered entities during distress or increase the impact on U.S. financial stability were one or more of the covered entities to fail;
(2) Whether, and the extent to which, the proposal would materially decrease the ability of a covered entity, or an affiliate of a covered entity, to be resolved in a rapid and orderly manner in the event of the financial distress or failure of the entity that is required to submit a resolution plan;
(3) Whether, and the extent to which, the set of conditions or the mechanism in which they are applied facilitates, on an industry-wide basis, contractual modifications to remove impediments to resolution and increase market certainty, transparency, and equitable treatment with respect to the default rights of non-defaulting parties to a covered QFC;
(4) Whether, and the extent to which, the proposal applies to existing and future transactions;
(5) Whether, and the extent to which, the proposal would apply to multiple forms of QFCs or multiple covered entities;
(6) Whether the proposal would permit a party to a covered QFC that is within the scope of the proposal to adhere to the proposal with respect to only one or a subset of covered entities;
(7) With respect to a supported party, the degree of assurance the proposal provides to the supported party that the material payment and delivery obligations of the covered affiliate credit enhancement and the covered direct QFC it supports will continue to be performed after the covered affiliate support provider enters a receivership, insolvency, liquidation, resolution, or similar proceeding;
(8) The presence, nature, and extent of any provisions that require a covered affiliate support provider or transferee to meet conditions other than material payment or delivery obligations to its creditors;
(9) The extent to which the supported party’s overall credit risk to the direct party may increase if the enhanced creditor protection conditions are not met and the likelihood that the supported party’s credit risk to the direct party would decrease or remain the same if the enhanced creditor protection conditions are met; and
(10) Whether the proposal provides the counterparty with additional default rights or other rights.
§ 252.86 Foreign bank multi-branch master agreements.
(a) Treatment of foreign bank multi-branch master agreements. With respect to a U.S. branch or U.S. agency of a global systemically important foreign banking organization, a foreign bank multi-branch master agreement that is a covered QFC solely because the master agreement permits agreements or transactions that are QFCs to be entered into at one or more U.S. branches or U.S. agencies of the global systemically important foreign banking organization will be considered a covered QFC for purposes of this subpart only with respect to such agreements or transactions booked at such U.S. branches and U.S. agencies.
(b) Definition of foreign bank multi-branch master agreements. A foreign bank multi-branch master agreement means a master agreement that permits a U.S. branch or U.S. agency and another place of business of a foreign bank that is outside the United States to enter transactions under the agreement.
§ 252.87 Identification of global systemically important foreign banking organizations.
(a) For purposes of this subpart, a top-tier foreign banking organization that is or controls a covered company (as defined at 12 CFR 243.2(f)) is a global systemically important foreign banking organization if any of the following conditions is met:
(1) The top-tier foreign banking organization determines, pursuant to paragraph (c) of this section, that the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology; or
(2) The Board, using information available to the Board, determines:
(i) That the top-tier foreign banking organization would be a global systemically important banking organization under the global methodology;
(ii) That the top-tier foreign banking organization, if it were subject to the Board’s Regulation Q (part 217 of this chapter), would be identified as a global systemically important BHC under § 217.402 of the Board’s Regulation Q; or
(iii) That any U.S. intermediate holding company controlled by the top-tier foreign banking organization, if the U.S. intermediate holding company is or were subject to § 217.402 of the Board’s Regulation Q, is or would be identified as a global systemically important BHC.
(b) Each top-tier foreign banking organization that determines pursuant to paragraph (c) of this section that it has the characteristics of a global systemically important banking organization under the global methodology must notify the Board of the determination by January 1 of each calendar year.
(c) A top-tier foreign banking organization that is or controls a covered company (as defined at 12 CFR 243.2(f)) and prepares or reports for any purpose the indicator amounts necessary to determine whether the top-tier foreign banking organization is a global systemically important banking organization under the global methodology must use the data to determine whether the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology.
(d) Each top-tier foreign banking organization that controls a U.S. intermediate holding company and that meets the requirements of § 252.153(b)(5) and (6) also meets the requirements of paragraphs (b) and (c) of this section.
§ 252.88 Exclusion of certain QFCs.
(a) Exclusion of QFCs with FMUs. Notwithstanding § 252.82, a covered entity is not required to conform to the requirements of this subpart a covered QFC to which:
(1) A CCP is party; or
(2) Each party (other than the covered entity) is an FMU.
(b) Exclusion of certain excluded bank QFCs. If a covered QFC is also a covered QFC under parts 47 or 382 of this title that an affiliate of the covered entity is also required to conform pursuant to parts 47 or 382 of this title and the covered entity is:
(1) The affiliate credit enhancement provider with respect to the covered QFC, then the covered entity is required to conform the credit enhancement to the requirements of this subpart but is not required to conform the direct QFC to the requirements of this subpart; or
(2) The direct party to which the excluded bank is the affiliate credit enhancement provider, then the covered entity is required to conform the direct QFC to the requirements of this subpart but is not required to conform the credit enhancement to the requirements of this subpart.
(c) Exclusion of certain contracts. Notwithstanding § 252.82, a covered entity is not required to conform the following types of contracts or agreements to the requirements of this subpart:
(1) An investment advisory contract that:
(i) Is with a retail customer or counterparty;
(ii) Does not explicitly restrict the transfer of the contract (or any QFC entered pursuant thereto or governed thereby, or any interest or obligation in or under, or any property securing, any such QFC or the contract) from the covered entity except as necessary to comply with section 205(a)(2) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-5(a)(2)); and
(iii) Does not explicitly provide a default right with respect to the contract or any QFC entered pursuant thereto or governed thereby.
(2) A warrant that:
(i) Evidences a right to subscribe to or otherwise acquire a security of the covered entity or an affiliate of the covered entity; and
(ii) Was issued prior to November 13, 2017.
(d) Exemption by order. The Board may exempt by order one or more covered entities from conforming one or more contracts or types of contracts to one or more of the requirements of this subpart after considering:
(1) The potential impact of the exemption on the ability of the covered entity(ies), or affiliates of the covered entity(ies), to be resolved in a rapid and orderly manner in the event of the financial distress or failure of the entity that is required to submit a resolution plan;
(2) The burden the exemption would relieve; and
(3) Any other factor the Board deems relevant.
Subparts J-L [Reserved]
Subpart M – Risk Committee Requirement for Foreign Banking Organizations With Total Consolidated Assets of at Least $50 Billion but Less Than $100 Billion
§ 252.130 [Reserved]
§ 252.131 Applicability.
(a) General applicability. A foreign banking organization with average total consolidated assets of at least $50 billion but less than $100 billion must comply with the risk-committee requirements set forth in this subpart beginning on the first day of the ninth quarter following the date on which its average total consolidated assets equal or exceed $50 billion.
(b) Cessation of requirements. A foreign banking organization will remain subject to the risk-committee requirements of this section until the earlier of the date on which:
(1) Its total consolidated assets are below $50 billion for each of four consecutive calendar quarters; and
(2) It becomes subject to the requirements of subpart N or subpart O of this part.
§ 252.132 Risk-committee requirements for foreign banking organizations with total consolidated assets of $50 billion or more but less than $100 billion.
(a) U.S. risk committee certification. A foreign banking organization subject to this subpart, must, on an annual basis, certify to the Board that it maintains a committee of its global board of directors (or equivalent thereof), on a standalone basis or as part of its enterprise-wide risk committee (or equivalent thereof) that:
(1) Oversees the risk management policies of the combined U.S. operations of the foreign banking organization; and
(2) Includes at least one member having experience in identifying, assessing, and managing risk exposures of large, complex firms.
(b) Timing of certification. The certification required under paragraph (a) of this section must be filed on an annual basis with the Board concurrently with the FR Y-7.
(c) Responsibilities of the foreign banking organization. The foreign banking organization must take appropriate measures to ensure that its combined U.S. operations implement the risk management policies overseen by the U.S. risk committee described in paragraph (a) of this section, and its combined U.S. operations provide sufficient information to the U.S. risk committee to enable the U.S. risk committee to carry out the responsibilities of this subpart.
(d) Noncompliance with this section. If a foreign banking organization does not satisfy the requirements of this section, the Board may impose requirements, conditions, or restrictions relating to the activities or business operations of the combined U.S. operations of the foreign banking organization. The Board will coordinate with any relevant State or Federal regulator in the implementation of such requirements, conditions, or restrictions. If the Board determines to impose one or more requirements, conditions, or restrictions under this paragraph, the Board will notify the organization before it applies any requirement, condition or restriction, and describe the basis for imposing such requirement, condition, or restriction. Within 14 calendar days of receipt of a notification under this paragraph, the company may request in writing that the Board reconsider the requirement, condition, or restriction. The Board will respond in writing to the organization’s request for reconsideration prior to applying the requirement, condition, or restriction.
Subpart N – Enhanced Prudential Standards for Foreign Banking Organizations With Total Consolidated Assets of $100 Billion or More and Combined U.S. Assets of Less Than $100 Billion
§ 252.140 Scope.
This subpart applies to foreign banking organizations with average total consolidated assets of $100 billion or more, but average combined U.S. assets of less than $100 billion.
§ 252.142 Applicability.
(a) General applicability. A foreign banking organization with average total consolidated assets of $100 billion or more and average combined U.S. assets of less than $100 billion must:
(1) Comply with the capital stress testing, risk-management and risk-committee requirements set forth in this subpart beginning no later than on the first day of the ninth quarter the date on which its average total consolidated assets equal or exceed $100 billion; and
(2) Comply with the risk-based and leverage capital requirements and liquidity risk-management requirements set forth in this subpart beginning no later than on the first day of the ninth quarter following the date on which its total consolidated assets equal or exceed $250 billion; and
(3) Comply with the U.S. intermediate holding company requirement set forth in § 252.147 beginning no later than on the first day of the ninth quarter following the date on which its average U.S. non-branch assets equal or exceed $50 billion.
(b) Cessation of requirements – (1) Enhanced prudential standards applicable to the foreign banking organization. (i) A foreign banking organization will remain subject to the requirements set forth in §§ 252.144 and 252.146 until its total consolidated assets are below $100 billion for each of four consecutive calendar quarters, or it becomes subject to the requirements of subpart O of this part.
(ii) A foreign banking organization will remain subject to the requirements set forth in §§ 252.143 and 252.145 until its total consolidated assets are below $250 billion for each of four consecutive calendar quarters, or it becomes subject to the requirements of subpart O of this part.
(2) Intermediate holding company requirement. A foreign banking organization will remain subject to the U.S. intermediate holding company requirement set forth in § 252.147 until the sum of the total consolidated assets of the top-tier U.S. subsidiaries of the foreign banking organization (excluding any section 2(h)(2) company and DPC branch subsidiary) is below $50 billion for each of four consecutive calendar quarters, or it becomes subject to the U.S. intermediate holding company requirements of subpart O of this part.
§ 252.143 Risk-based and leverage capital requirements for foreign banking organizations with total consolidated assets of $250 billion or more and combined U.S. assets of less than $100 billion.
(a) General requirements. (1) A foreign banking organization subject to this subpart and with average total consolidated assets of $250 billion or more must certify to the Board that it meets capital adequacy standards on a consolidated basis established by its home-country supervisor that are consistent with the regulatory capital framework published by the Basel Committee on Banking Supervision, as amended from time to time (Basel Capital Framework).
(i) For purposes of this paragraph, home-country capital adequacy standards that are consistent with the Basel Capital Framework include all minimum risk-based capital ratios, any minimum leverage ratio, and all restrictions based on any applicable capital buffers set forth in “Basel III: A global regulatory framework for more resilient banks and banking systems” (2010) (Basel III Accord), each as applicable and as implemented in accordance with the Basel III Accord, including any transitional provisions set forth therein.
(ii) [Reserved]
(2) In the event that a home-country supervisor has not established capital adequacy standards that are consistent with the Basel Capital Framework, the foreign banking organization must demonstrate to the satisfaction of the Board that it would meet or exceed capital adequacy standards on a consolidated basis that are consistent with the Basel Capital Framework were it subject to such standards.
(b) Reporting. A foreign banking organization subject to this subpart and with average total consolidated assets of $250 billion or more must provide to the Board reports relating to its compliance with the capital adequacy measures described in paragraph (a) of this section concurrently with filing the FR Y-7Q.
(c) Noncompliance with the Basel Capital Framework. If a foreign banking organization does not satisfy the requirements of this section, the Board may impose requirements, conditions, or restrictions, including risk-based or leverage capital requirements, relating to the activities or business operations of the U.S. operations of the organization. The Board will coordinate with any relevant State or Federal regulator in the implementation of such requirements, conditions, or restrictions. If the Board determines to impose one or more requirements, conditions, or restrictions under this paragraph, the Board will notify the organization before it applies any requirement, condition or restriction, and describe the basis for imposing such requirement, condition, or restriction. Within 14 calendar days of receipt of a notification under this paragraph, the organization may request in writing that the Board reconsider the requirement, condition, or restriction. The Board will respond in writing to the organization’s request for reconsideration prior to applying the requirement, condition, or restriction.
§ 252.144 Risk-management and risk-committee requirements for foreign banking organizations with total consolidated assets of $100 billion or more but combined U.S. assets of less than $100 billion.
(a) Risk-management and risk-committee requirements for foreign banking organizations with combined U.S. assets of less than $50 billion – (1) U.S. risk committee certification. A foreign banking organization with average combined U.S. assets of less than $50 billion must, on an annual basis, certify to the Board that it maintains a committee of its global board of directors (or equivalent thereof), on a standalone basis or as part of its enterprise-wide risk committee (or equivalent thereof) that:
(i) Oversees the risk-management policies of the combined U.S. operations of the foreign banking organization; and
(ii) Includes at least one member having experience in identifying, assessing, and managing risk exposures of large, complex firms.
(2) Timing of certification. The certification required under paragraph (a) of this section must be filed on an annual basis with the Board concurrently with the FR Y-7.
(b) Risk-management and risk-committee requirements for foreign banking organizations with combined U.S. assets of $50 billion or more but less than $100 billion – (1) U.S. risk committee – (i) General. A foreign banking organization subject to this this subpart and with average combined U.S. assets of $50 billion or more must maintain a U.S. risk committee that approves and periodically reviews the risk-management policies of the combined U.S. operations of the foreign banking organization and oversees the risk-management framework of such combined U.S. operations.
(ii) Risk-management framework. The foreign banking organization’s risk-management framework for its combined U.S. operations must be commensurate with the structure, risk profile, complexity, activities, and size of its combined U.S. operations and consistent with its enterprise-wide risk management policies. The framework must include:
(A) Policies and procedures establishing risk-management governance, risk-management procedures, and risk-control infrastructure for the combined U.S. operations of the foreign banking organization; and
(B) Processes and systems for implementing and monitoring compliance with such policies and procedures, including:
(1) Processes and systems for identifying and reporting risks and risk-management deficiencies, including regarding emerging risks, on a combined U.S. operations basis and ensuring effective and timely implementation of actions to address emerging risks and risk-management deficiencies;
(2) Processes and systems for establishing managerial and employee responsibility for risk management of the combined U.S. operations;
(3) Processes and systems for ensuring the independence of the risk-management function of the combined U.S. operations; and
(4) Processes and systems to integrate risk management and associated controls with management goals and the compensation structure of the combined U.S. operations.
(iii) Placement of the U.S. risk committee. (A) A foreign banking organization that conducts its operations in the United States solely through a U.S. intermediate holding company must maintain its U.S. risk committee as a committee of the board of directors of its U.S. intermediate holding company (or equivalent thereof).
(B) A foreign banking organization that conducts its operations through U.S. branches or U.S. agencies (in addition to through its U.S. intermediate holding company, if any) may maintain its U.S. risk committee either:
(1) As a committee of the global board of directors (or equivalent thereof), on a standalone basis or as a joint committee with its enterprise-wide risk committee (or equivalent thereof); or
(2) As a committee of the board of directors of its U.S. intermediate holding company (or equivalent thereof), on a standalone basis or as a joint committee with the risk committee of its U.S. intermediate holding company required pursuant to § 252.147(e)(3).
(iv) Corporate governance requirements. The U.S. risk committee must meet at least quarterly and otherwise as needed, and must fully document and maintain records of its proceedings, including risk-management decisions.
(v) Minimum member requirements. The U.S. risk committee must:
(A) Include at least one member having experience in identifying, assessing, and managing risk exposures of large, complex financial firms; and
(B) Have at least one member who:
(1) Is not an officer or employee of the foreign banking organization or its affiliates and has not been an officer or employee of the foreign banking organization or its affiliates during the previous three years; and
(2) Is not a member of the immediate family, as defined in 12 CFR 225.41(b)(3), of a person who is, or has been within the last three years, an executive officer, as defined in 12 CFR 215.2(e)(1) of the foreign banking organization or its affiliates.
(2) [Reserved]
(c) U.S. chief risk officer – (1) General. A foreign banking organization with average combined U.S. assets of $50 billion or more but less than $100 billion or its U.S. intermediate holding company, if any, must appoint a U.S. chief risk officer with experience in identifying, assessing, and managing risk exposures of large, complex financial firms.
(2) Responsibilities. (i) The U.S. chief risk officer is responsible for overseeing:
(A) The measurement, aggregation, and monitoring of risks undertaken by the combined U.S. operations;
(B) The implementation of and ongoing compliance with the policies and procedures for the foreign banking organization’s combined U.S. operations set forth in paragraph (b)(1)(ii)(A) of this section and the development and implementation of processes and systems set forth in paragraph (b)(1)(ii)(B) of this section; and
(C) The management of risks and risk controls within the parameters of the risk-control framework for the combined U.S. operations, and the monitoring and testing of such risk controls.
(ii) The U.S. chief risk officer is responsible for reporting risks and risk-management deficiencies of the combined U.S. operations, and resolving such risk-management deficiencies in a timely manner.
(3) Corporate governance and reporting. The U.S. chief risk officer must:
(i) Receive compensation and other incentives consistent with providing an objective assessment of the risks taken by the combined U.S. operations of the foreign banking organization;
(ii) Be employed by and located in the U.S. branch, U.S. agency, U.S. intermediate holding company, if any, or another U.S. subsidiary;
(iii) Report directly to the U.S. risk committee and the global chief risk officer or equivalent management official (or officials) of the foreign banking organization who is responsible for overseeing, on an enterprise-wide basis, the implementation of and compliance with policies and procedures relating to risk-management governance, practices, and risk controls of the foreign banking organization unless the Board approves an alternative reporting structure based on circumstances specific to the foreign banking organization;
(iv) Regularly provide information to the U.S. risk committee, global chief risk officer, and the Board regarding the nature of and changes to material risks undertaken by the foreign banking organization’s combined U.S. operations, including risk-management deficiencies and emerging risks, and how such risks relate to the global operations of the foreign banking organization; and
(v) Meet regularly and as needed with the Board to assess compliance with the requirements of this section.
(d) Responsibilities of the foreign banking organization. The foreign banking organization must take appropriate measures to ensure that its combined U.S. operations implement the risk-management policies overseen by the U.S. risk committee described in paragraph (a) or (b) of this section, and its combined U.S. operations provide sufficient information to the U.S. risk committee to enable the U.S. risk committee to carry out the responsibilities of this subpart.
(e) Noncompliance with this section. If a foreign banking organization does not satisfy the requirements of this section, the Board may impose requirements, conditions, or restrictions relating to the activities or business operations of the combined U.S. operations of the foreign banking organization. The Board will coordinate with any relevant State or Federal regulator in the implementation of such requirements, conditions, or restrictions. If the Board determines to impose one or more requirements, conditions, or restrictions under this paragraph, the Board will notify the organization before it applies any requirement, condition, or restriction, and describe the basis for imposing such requirement, condition, or restriction. Within 14 calendar days of receipt of a notification under this paragraph, the organization may request in writing that the Board reconsider the requirement, condition, or restriction. The Board will respond in writing to the organization’s request for reconsideration prior to applying the requirement, condition, or restriction.
§ 252.145 Liquidity risk-management requirements for foreign banking organizations with total consolidated assets of $250 billion or more and combined U.S. assets of less than $100 billion.
(a) A foreign banking organization subject to this subpart with average total consolidated assets of $250 billion or more must report to the Board on an annual basis the results of an internal liquidity stress test for either the consolidated operations of the foreign banking organization or the combined U.S. operations of the foreign banking organization. Such liquidity stress test must be conducted consistent with the Basel Committee principles for liquidity risk management and must incorporate 30-day, 90-day, and one-year stress-test horizons. The “Basel Committee principles for liquidity risk management” means the document titled “Principles for Sound Liquidity Risk Management and Supervision” (September 2008) as published by the Basel Committee on Banking Supervision, as supplemented and revised from time to time.
(b) A foreign banking organization that does not comply with paragraph (a) of this section must limit the net aggregate amount owed by the foreign banking organization’s non-U.S. offices and its non-U.S. affiliates to the combined U.S. operations to 25 percent or less of the third party liabilities of its combined U.S. operations, on a daily basis.
§ 252.146 Capital stress testing requirements for foreign banking organizations with total consolidated assets of $100 billion or more and combined U.S. assets of less than $100 billion.
(a) Definitions. For purposes of this section, the following definitions apply:
(1) Eligible asset means any asset of the U.S. branch or U.S. agency held in the United States that is recorded on the general ledger of a U.S. branch or U.S. agency of the foreign banking organization (reduced by the amount of any specifically allocated reserves held in the United States and recorded on the general ledger of the U.S. branch or U.S. agency in connection with such assets), subject to the following exclusions and, for purposes of this definition, as modified by the rules of valuation set forth in paragraph (a)(1)(ii) of this section.
(i) The following assets do not qualify as eligible assets:
(A) Equity securities;
(B) Any assets classified as loss at the preceding examination by a regulatory agency, outside accountant, or the bank’s internal loan review staff;
(C) Accrued income on assets classified loss, doubtful, substandard or value impaired, at the preceding examination by a regulatory agency, outside accountant, or the bank’s internal loan review staff;
(D) Any amounts due from the home office, other offices and affiliates, including income accrued but uncollected on such amounts;
(E) The balance from time to time of any other asset or asset category disallowed at the preceding examination or by direction of the Board for any other reason until the underlying reasons for the disallowance have been removed;
(F) Prepaid expenses and unamortized costs, furniture and fixtures and leasehold improvements; and
(G) Any other asset that the Board determines should not qualify as an eligible asset.
(ii) The following rules of valuation apply:
(A) A marketable debt security is valued at its principal amount or market value, whichever is lower;
(B) An asset classified doubtful or substandard at the preceding examination by a regulatory agency, outside accountant, or the bank’s internal loan review staff, is valued at 50 percent and 80 percent, respectively;
(C) With respect to an asset classified value impaired, the amount representing the allocated transfer risk reserve that would be required for such exposure at a domestically chartered bank is valued at 0 and the residual exposure is valued at 80 percent; and
(D) Real estate located in the United States and carried on the accounting records as an asset are valued at net book value or appraised value, whichever is less.
(2) Liabilities of all U.S. branches and agencies of a foreign banking organization means all liabilities of all U.S. branches and agencies of the foreign banking organization, including acceptances and any other liabilities (including contingent liabilities), but excluding:
(i) Amounts due to and other liabilities to other offices, agencies, branches and affiliates of such foreign banking organization, including its head office, including unremitted profits; and
(ii) Reserves for possible loan losses and other contingencies.
(3) Pre-provision net revenue means revenue less expenses before adjusting for total loan loss provisions.
(4) Stress test cycle has the same meaning as in subpart F of this part.
(5) Total loan loss provisions means the amount needed to make reserves adequate to absorb estimated credit losses, based upon management’s evaluation of the loans and leases that the company has the intent and ability to hold for the foreseeable future or until maturity or payoff, as determined under applicable accounting standards.
(b) In general. (1) A foreign banking organization subject to this subpart must:
(i) Be subject on a consolidated basis to a capital stress testing regime by its home-country supervisor that meets the requirements of paragraph (b)(2) of this section; and
(ii) Conduct such stress tests or be subject to a supervisory stress test and meet any minimum standards set by its home-country supervisor with respect to the stress tests.
(2) The capital stress testing regime of a foreign banking organization’s home-country supervisor must include:
(i) A supervisory capital stress test conducted by the foreign banking organization’s home-country supervisor or an evaluation and review by the foreign banking organization’s home-country supervisor of an internal capital adequacy stress test conducted by the foreign banking organization, according to the frequency specified in the following paragraph (b)(2)(i)(A) or (B) of this section:
(A) If the foreign banking organization has average total consolidated assets of $250 billion or more, on at least an annual basis; or
(B) If the foreign banking organization has average total consolidated assets of less than $250 billion, at least biennially; and
(ii) Requirements for governance and controls of stress testing practices by relevant management and the board of directors (or equivalent thereof) of the foreign banking organization;
(c) Additional standards. (1) Unless the Board otherwise determines in writing, a foreign banking organization that does not meet each of the requirements in paragraphs (b)(1) and (2) of this section must:
(i) Maintain eligible assets in its U.S. branches and agencies that, on a daily basis, are not less than 105 percent of the average value over each day of the previous calendar quarter of the total liabilities of all branches and agencies operated by the foreign banking organization in the United States;
(ii) Conduct a stress test of its U.S. subsidiaries to determine whether those subsidiaries have the capital necessary to absorb losses as a result of adverse economic conditions, according to the frequency specified in paragraph (c)(1)(ii)(A) or (B) of this section:
(A) If the foreign banking organization has average total consolidated assets of $250 billion or more, on at least an annual basis; or
(B) If the foreign banking organization has average total consolidated assets of less than $250 billion, at least biennially; and
(iii) Report a summary of the results of the stress test to the Board that includes a description of the types of risks included in the stress test, a description of the conditions or scenarios used in the stress test, a summary description of the methodologies used in the stress test, estimates of aggregate losses, pre-provision net revenue, total loan loss provisions, net income before taxes and pro forma regulatory capital ratios required to be computed by the home-country supervisor of the foreign banking organization and any other relevant capital ratios, and an explanation of the most significant causes for any changes in regulatory capital ratios.
(2) An enterprise-wide stress test that is approved by the Board may meet the stress test requirement of paragraph (c)(1)(ii) of this section.
§ 252.147 U.S. intermediate holding company requirement for foreign banking organizations with combined U.S. assets of less than $100 billion and U.S. non-branch assets of $50 billion or more.
(a) Requirement to form a U.S. intermediate holding company – (1) Formation. A foreign banking organization with average U.S. non-branch assets of $50 billion or more must establish a U.S. intermediate holding company, or designate an existing subsidiary that meets the requirements of paragraph (a)(2) of this section, as its U.S. intermediate holding company.
(2) Structure. The U.S. intermediate holding company must be:
(i) Organized under the laws of the United States, any one of the fifty states of the United States, or the District of Columbia; and
(ii) Be governed by a board of directors or managers that is elected or appointed by the owners and that operates in an equivalent manner, and has equivalent rights, powers, privileges, duties, and responsibilities, to a board of directors of a company chartered as a corporation under the laws of the United States, any one of the fifty states of the United States, or the District of Columbia.
(3) Notice. Within 30 days of establishing or designating a U.S. intermediate holding company under this section, a foreign banking organization must provide to the Board:
(i) A description of the U.S. intermediate holding company, including its name, location, corporate form, and organizational structure;
(ii) A certification that the U.S. intermediate holding company meets the requirements of this section; and
(iii) Any other information that the Board determines is appropriate.
(b) Holdings and regulation of the U.S. intermediate holding company – (1) General. Subject to paragraph (c) of this section, a foreign banking organization that is required to form a U.S. intermediate holding company under paragraph (a) of this section must hold its entire ownership interest in any U.S. subsidiary (excluding each section 2(h)(2) company or DPC branch subsidiary, if any) through its U.S. intermediate holding company.
(2) Reporting. Each U.S. intermediate holding company shall submit information in the manner and form prescribed by the Board.
(3) Examinations and inspections. The Board may examine or inspect any U.S. intermediate holding company and each of its subsidiaries and prepare a report of their operations and activities.
(4) Global systemically important banking organizations. For purposes of this part, a top-tier foreign banking organization with average U.S. non-branch assets that equal or exceed $50 billion is a global systemically important foreign banking organization if any of the following conditions are met:
(i) The top-tier foreign banking organization determines, pursuant to paragraph (b)(6) of this section, that the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology; or
(ii) The Board, using information available to the Board, determines:
(A) That the top-tier foreign banking organization would be a global systemically important banking organization under the global methodology;
(B) That the top-tier foreign banking organization, if it were subject to the Board’s Regulation Q, would be identified as a global systemically important BHC under 12 CFR 217.402; or
(C) That the U.S. intermediate holding company, if it were subject to 12 CFR 217.402, would be identified as a global systemically important BHC.
(5) Notice. Each top-tier foreign banking organization that controls a U.S. intermediate holding company shall submit to the Board by January 1 of each calendar year through the U.S. intermediate holding company:
(i) Notice of whether the home-country supervisor (or other appropriate home country regulatory authority) of the top-tier foreign banking organization of the U.S. intermediate holding company has adopted standards consistent with the global methodology; and
(ii) Notice of whether the top-tier foreign banking organization prepares or reports the indicators used by the global methodology to identify a banking organization as a global systemically important banking organization and, if it does, whether the top-tier foreign banking organization has determined that it has the characteristics of a global systemically important banking organization under the global methodology pursuant to paragraph (b)(6) of this section.
(6) Global systemically important banking organization under the global methodology. A top-tier foreign banking organization that controls a U.S. intermediate holding company and prepares or reports for any purpose the indicator amounts necessary to determine whether the top-tier foreign banking organization is a global systemically important banking organization under the global methodology must use the data to determine whether the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology.
(c) Alternative organizational structure – (1) General. Upon a written request by a foreign banking organization, the Board may permit the foreign banking organization to: Establish or designate multiple U.S. intermediate holding companies; not transfer its ownership interests in certain subsidiaries to a U.S. intermediate holding company; or use an alternative organizational structure to hold its combined U.S. operations.
(2) Factors. In making a determination under paragraph (c)(1) of this section, the Board may consider whether applicable law would prohibit the foreign banking organization from owning or controlling one or more of its U.S. subsidiaries through a single U.S. intermediate holding company, or whether circumstances otherwise warrant an exception based on the foreign banking organization’s activities, scope of operations, structure, or similar considerations.
(3) Request – (i) Contents. A request submitted under this section must include an explanation of why the request should be granted and any other information required by the Board.
(ii) Timing. The Board shall act on a request for an alternative organizational structure within 90 days of receipt of a complete request, unless the Board provides notice to the organization that it is extending the period for action.
(4) Conditions. The Board may grant relief under this section upon such conditions as the Board deems appropriate, including, but not limited to, requiring the U.S. operations of the foreign banking organization to comply with additional enhanced prudential standards, or requiring the foreign banking organization to enter into supervisory agreements governing such alternative organizational structure.
(d) Modifications. The Board may modify the application of any section of this subpart to a foreign banking organization that is required to form a U.S. intermediate holding company or to such U.S. intermediate holding company if appropriate to accommodate the organizational structure of the foreign banking organization or characteristics specific to such foreign banking organization and such modification is appropriate and consistent with the capital structure, size, complexity, risk profile, scope of operations, or financial condition of each U.S. intermediate holding company, safety and soundness, and the financial stability mandate of section 165 of the Dodd-Frank Act.
(e) Enhanced prudential standards for U.S. intermediate holding companies – (1) Capital requirements for a U.S. intermediate holding company. (i)(A) A U.S. intermediate holding company must comply with 12 CFR part 217, other than subpart E of 12 CFR part 217, in the same manner as a bank holding company.
(B) A U.S. intermediate holding company may choose to comply with subpart E of 12 CFR part 217.
(ii) A U.S. intermediate holding company must comply with capital adequacy standards beginning on the date it is required to established under this subpart, or if the U.S. intermediate holding company is subject to capital adequacy standards on the date that the foreign banking organization becomes subject to § 252.142(a)(3), on the date that the foreign banking organization becomes subject to this subpart.
(2) Risk-management and risk-committee requirements – (i) General. A U.S. intermediate holding company must establish and maintain a risk committee that approves and periodically reviews the risk-management policies and oversees the risk-management framework of the U.S. intermediate holding company. The risk committee must be a committee of the board of directors of the U.S. intermediate holding company (or equivalent thereof). The risk committee may also serve as the U.S. risk committee for the combined U.S. operations required pursuant to § 252.144(b).
(ii) Risk-management framework. The U.S. intermediate holding company’s risk-management framework must be commensurate with the structure, risk profile, complexity, activities, and size of the U.S. intermediate holding company and consistent with the risk management policies for the combined U.S. operations of the foreign banking organization. The framework must include:
(A) Policies and procedures establishing risk-management governance, risk-management procedures, and risk-control infrastructure for the U.S. intermediate holding company; and
(B) Processes and systems for implementing and monitoring compliance with such policies and procedures, including:
(1) Processes and systems for identifying and reporting risks and risk-management deficiencies at the U.S. intermediate holding company, including regarding emerging risks and ensuring effective and timely implementation of actions to address emerging risks and risk-management deficiencies;
(2) Processes and systems for establishing managerial and employee responsibility for risk management of the U.S. intermediate holding company;
(3) Processes and systems for ensuring the independence of the risk-management function of the U.S. intermediate holding company; and
(4) Processes and systems to integrate risk management and associated controls with management goals and the compensation structure of the U.S. intermediate holding company.
(iii) Corporate governance requirements. The risk committee of the U.S. intermediate holding company must meet at least quarterly and otherwise as needed, and must fully document and maintain records of its proceedings, including risk-management decisions.
(iv) Minimum member requirements. The risk committee must:
(A) Include at least one member having experience in identifying, assessing, and managing risk exposures of large, complex financial firms; and
(B) Have at least one member who:
(1) Is not an officer or employee of the foreign banking organization or its affiliates and has not been an officer or employee of the foreign banking organization or its affiliates during the previous three years; and
(2) Is not a member of the immediate family, as defined in 12 CFR 225.41(b)(3), of a person who is, or has been within the last three years, an executive officer, as defined in 12 CFR 215.2(e)(1), of the foreign banking organization or its affiliates.
(v) The U.S. intermediate holding company must take appropriate measures to ensure that it implements the risk-management policies for the U.S. intermediate holding company and it provides sufficient information to the U.S. risk committee to enable the U.S. risk committee to carry out the responsibilities of this subpart;
(vi) A U.S. intermediate holding company must comply with risk-committee and risk-management requirements beginning on the date that it is required to be established or designated under this subpart or, if the U.S. intermediate holding company is subject to risk-committee and risk-management requirements on the date that the foreign banking organization becomes subject to § 252.147(a)(3), on the date that the foreign banking organization becomes subject to this subpart.
Subpart O – Enhanced Prudential Standards for Foreign Banking Organizations With Total Consolidated Assets of $100 Billion or More and Combined U.S. Assets of $100 Billion or More
§ 252.150 Scope.
This subpart applies to foreign banking organizations with average total consolidated assets of $100 billion or more and average combined U.S. assets of $100 billion or more.
§ 252.151 [Reserved]
§ 252.152 Applicability.
(a) General applicability. (1) A foreign banking organization must:
(i) Comply with the requirements of this subpart (other than the U.S. intermediate holding company requirement set forth in § 252.153) beginning on the first day of the ninth quarter following the date on which its average combined U.S. assets equal or exceed $100 billion; and
(ii) Comply with the requirement to establish or designate a U.S. intermediate holding company requirement set forth in § 252.153(a) beginning on the first day of the ninth quarter following the date on which its average U.S. non-branch assets equal or exceed $50 billion or, if the foreign banking organization has established or designated a U.S. intermediate holding company pursuant to § 252.147, beginning on the first day following the date on which the foreign banking organization’s average combined U.S. assets equal or exceed $100 billion.
(2) Changes in requirements following a change in category. A foreign banking organization that changes from one category of banking organization described in § 252.5(c) through (e) to another of such categories must comply with the requirements applicable to the new category under this subpart no later than on the first day of the second quarter following the change in the foreign banking organization’s category.
(b) Cessation of requirements – (1) Enhanced prudential standards applicable to the foreign banking organization. Subject to paragraph (c)(2) of this section, a foreign banking organization will remain subject to the applicable requirements of this subpart until its combined U.S. assets are below $100 billion for each of four consecutive calendar quarters.
(2) Intermediate holding company requirement. A foreign banking organization will remain subject to the U.S. intermediate holding company requirement set forth in § 252.153 until the sum of the total consolidated assets of the top-tier U.S. subsidiaries of the foreign banking organization (excluding any section 2(h)(2) company and DPC branch subsidiary) is below $50 billion for each of four consecutive calendar quarters, or until the foreign banking organization is subject to subpart N of this part and is in compliance with the U.S. intermediate holding company requirements as set forth in § 252.147.
§ 252.153 U.S. intermediate holding company requirement for foreign banking organizations with combined U.S. assets of $100 billion or more and U.S. non-branch assets of $50 billion or more.
(a) Requirement to form a U.S. intermediate holding company – (1) Formation. A foreign banking organization with average U.S. non-branch assets of $50 billion or more must establish a U.S. intermediate holding company, or designate an existing subsidiary that meets the requirements of paragraph (a)(2) of this section, as its U.S. intermediate holding company.
(2) Structure. The U.S. intermediate holding company must be:
(i) Organized under the laws of the United States, any one of the fifty states of the United States, or the District of Columbia; and
(ii) Be governed by a board of directors or managers that is elected or appointed by the owners and that operates in an equivalent manner, and has equivalent rights, powers, privileges, duties, and responsibilities, to a board of directors of a company chartered as a corporation under the laws of the United States, any one of the fifty states of the United States, or the District of Columbia.
(3) Notice. Within 30 days of establishing or designating a U.S. intermediate holding company under this section, a foreign banking organization must provide to the Board:
(i) A description of the U.S. intermediate holding company, including its name, location, corporate form, and organizational structure;
(ii) A certification that the U.S. intermediate holding company meets the requirements of this section; and
(iii) Any other information that the Board determines is appropriate.
(b) Holdings and regulation of the U.S. intermediate holding company – (1) General. Subject to paragraph (c) of this section, a foreign banking organization that is required to form a U.S. intermediate holding company under paragraph (a) of this section must hold its entire ownership interest in any U.S. subsidiary (excluding each section 2(h)(2) company or DPC branch subsidiary, if any) through its U.S. intermediate holding company.
(2) Reporting. Each U.S. intermediate holding company shall submit information in the manner and form prescribed by the Board.
(3) Examinations and inspections. The Board may examine or inspect any U.S. intermediate holding company and each of its subsidiaries and prepare a report of their operations and activities.
(4) For purposes of this part, a top-tier foreign banking organization with U.S. non-branch assets that equal or exceed $50 billion is a global systemically important foreign banking organization if any of the following conditions are met:
(i) The top-tier foreign banking organization determines, pursuant to paragraph (b)(6) of this section, that the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology; or
(ii) The Board, using information available to the Board, determines:
(A) That the top-tier foreign banking organization would be a global systemically important banking organization under the global methodology;
(B) That the top-tier foreign banking organization, if it were subject to the Board’s Regulation Q, would be identified as a global systemically important BHC under 12 CFR 217.402 of the Board’s Regulation Q; or
(C) That the U.S. intermediate holding company, if it were subject to 12 CFR 217.402 of the Board’s Regulation Q, would be identified as a global systemically important BHC.
(5) Each top-tier foreign banking organization that controls a U.S. intermediate holding company shall submit to the Board by January 1 of each calendar year through the U.S. intermediate holding company:
(i) Notice of whether the home country supervisor (or other appropriate home country regulatory authority) of the top-tier foreign banking organization of the U.S. intermediate holding company has adopted standards consistent with the global methodology; and
(ii) Notice of whether the top-tier foreign banking organization prepares or reports the indicators used by the global methodology to identify a banking organization as a global systemically important banking organization and, if it does, whether the top-tier foreign banking organization has determined that it has the characteristics of a global systemically important banking organization under the global methodology pursuant to paragraph (b)(6) of this section.
(6) A top-tier foreign banking organization that controls a U.S. intermediate holding company and prepares or reports for any purpose the indicator amounts necessary to determine whether the top-tier foreign banking organization is a global systemically important banking organization under the global methodology must use the data to determine whether the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology.
(c) Alternative organizational structure – (1) General. Upon a written request by a foreign banking organization, the Board may permit the foreign banking organization to: Establish or designate multiple U.S. intermediate holding companies; not transfer its ownership interests in certain subsidiaries to a U.S. intermediate holding company; or use an alternative organizational structure to hold its combined U.S. operations.
(2) Factors. In making a determination under paragraph (c)(1) of this section, the Board may consider whether applicable law would prohibit the foreign banking organization from owning or controlling one or more of its U.S. subsidiaries through a single U.S. intermediate holding company, or whether circumstances otherwise warrant an exception based on the foreign banking organization’s activities, scope of operations, structure, or other similar considerations.
(3) Request – (i) Contents. A request submitted under this section must include an explanation of why the request should be granted and any other information required by the Board.
(ii) Timing. The Board will act on a request for an alternative organizational structure within 90 days of receipt of a complete request, unless the Board provides notice to the organization that it is extending the period for action.
(4) Conditions. (i) The Board may grant relief under this section upon such conditions as the Board deems appropriate, including, but not limited to, requiring the U.S. operations of the foreign banking organization to comply with additional enhanced prudential standards, or requiring the foreign banking organization to enter into supervisory agreements governing such alternative organizational structure.
(ii) If the Board permits a foreign banking organization to form two or more U.S. intermediate holding companies under this section, each U.S. intermediate holding company must determine its category pursuant to § 252.5 of this part as though the U.S. intermediate holding companies were a consolidated company.
(d) Modifications. The Board may modify the application of any section of this subpart to a foreign banking organization that is required to form a U.S. intermediate holding company or to such U.S. intermediate holding company if appropriate to accommodate the organizational structure of the foreign banking organization or characteristics specific to such foreign banking organization and such modification is appropriate and consistent with the capital structure, size, complexity, risk profile, scope of operations, or financial condition of each U.S. intermediate holding company, safety and soundness, and the mandate of section 165 of the Dodd-Frank Act.
(e) Enhanced prudential standards for U.S. intermediate holding companies – (1) Capital requirements for a U.S. intermediate holding company. (i)(A) A U.S. intermediate holding company must comply with 12 CFR part 217, other than subpart E of 12 CFR part 217, in the same manner as a bank holding company.
(B) A U.S. intermediate holding company may choose to comply with subpart E of 12 CFR part 217.
(ii) A U.S. intermediate holding company must comply with applicable capital adequacy standards beginning on the date that it is required to be established or designated under this subpart or, if the U.S. intermediate holding company is subject to capital adequacy standards on the date that the foreign banking organization becomes subject to paragraph (a)(1)(ii) of this section, on the date that the foreign banking organization becomes subject to this subpart.
(2) Capital planning. (i) A U.S. intermediate holding company with total consolidated assets of $100 billion or more must comply with 12 CFR 225.8 in the same manner as a bank holding company.
(ii) A U.S. intermediate holding company with total consolidated assets of $100 billion or more must comply with 12 CFR 225.8 on the date prescribed in the transition provisions of 12 CFR 225.8.
(3) Risk-management and risk committee requirements – (i) General. A U.S. intermediate holding company must establish and maintain a risk committee that approves and periodically reviews the risk-management policies and oversees the risk-management framework of the U.S. intermediate holding company. The risk committee must be a committee of the board of directors of the U.S. intermediate holding company (or equivalent thereof). The risk committee may also serve as the U.S. risk committee for the combined U.S. operations required pursuant to § 252.155(a).
(ii) Risk-management framework. The U.S. intermediate holding company’s risk-management framework must be commensurate with the structure, risk profile, complexity, activities, and size of the U.S. intermediate holding company and consistent with the risk management policies for the combined U.S. operations of the foreign banking organization. The framework must include:
(A) Policies and procedures establishing risk-management governance, risk-management procedures, and risk-control infrastructure for the U.S. intermediate holding company; and
(B) Processes and systems for implementing and monitoring compliance with such policies and procedures, including:
(1) Processes and systems for identifying and reporting risks and risk-management deficiencies at the U.S. intermediate holding company, including regarding emerging risks and ensuring effective and timely implementation of actions to address emerging risks and risk-management deficiencies;
(2) Processes and systems for establishing managerial and employee responsibility for risk management of the U.S. intermediate holding company;
(3) Processes and systems for ensuring the independence of the risk-management function of the U.S. intermediate holding company; and
(4) Processes and systems to integrate risk management and associated controls with management goals and the compensation structure of the U.S. intermediate holding company.
(iii) Corporate governance requirements. The risk committee of the U.S. intermediate holding company must meet at least quarterly and otherwise as needed, and must fully document and maintain records of its proceedings, including risk-management decisions.
(iv) Minimum member requirements. The risk committee must:
(A) Include at least one member having experience in identifying, assessing, and managing risk exposures of large, complex financial firms; and
(B) Have at least one member who:
(1) Is not an officer or employee of the foreign banking organization or its affiliates and has not been an officer or employee of the foreign banking organization or its affiliates during the previous three years; and
(2) Is not a member of the immediate family, as defined in 12 CFR 225.41(b)(3), of a person who is, or has been within the last three years, an executive officer, as defined in 12 CFR 215.2(e)(1), of the foreign banking organization or its affiliates.
(v) The U.S. intermediate holding company must take appropriate measures to ensure that it implements the risk-management policies for the U.S. intermediate holding company and it provides sufficient information to the U.S. risk committee to enable the U.S. risk committee to carry out the responsibilities of this subpart.
(vi) A U.S. intermediate holding company must comply with risk-committee and risk-management requirements beginning on the date that it is required to be established or designated under this subpart or, if the U.S. intermediate holding company is subject to risk-committee and risk-management requirements on the date that the foreign banking organization becomes subject to § 252.153(a)(1)(ii), on the date that the foreign banking organization becomes subject to this subpart.
(4) Liquidity requirements. (i) A U.S. intermediate holding company must comply with the liquidity risk-management requirements in § 252.156 and conduct liquidity stress tests and hold a liquidity buffer pursuant to § 252.157.
(ii) A U.S. intermediate holding company must comply with liquidity risk-management, liquidity stress test, and liquidity buffer requirements beginning on the date that it is required to be established or designated under this subpart.
(5) Stress test requirements. (i)(A) A U.S. intermediate holding company with total consolidated assets of $100 billion or more must comply with the requirements of subpart E of this part in the same manner as a bank holding company;
(B) A U.S. intermediate holding company must comply with the requirements of subpart E beginning the later of:
(1) The stress test cycle of the calendar year after the calendar year in which the U.S. intermediate holding company becomes subject to regulatory capital requirements; or
(2) The transition period provided under subpart E.
(ii)(A) A Category II U.S. intermediate holding company or a Category III U.S. intermediate holding company must comply with the requirements of subpart F of this part in the same manner as a bank holding company;
(B) A Category II U.S. intermediate holding company or Category III U.S. intermediate holding company must comply with the requirements of subpart F beginning the later of:
(1) The stress test cycle of the calendar year after the calendar year in which the U.S. intermediate holding company becomes subject to regulatory capital requirements; or
(2) The transition period provided under subpart F.
§ 252.154 Risk-based and leverage capital requirements for foreign banking organizations with combined U.S. assets of $100 billion or more.
(a) General requirements. (1) A foreign banking organization subject to this subpart more must certify to the Board that it meets capital adequacy standards on a consolidated basis that are established by its home-country supervisor and that are consistent with the regulatory capital framework published by the Basel Committee on Banking Supervision, as amended from time to time (Basel Capital Framework).
(2) In the event that a home-country supervisor has not established capital adequacy standards that are consistent with the Basel Capital Framework, the foreign banking organization must demonstrate to the satisfaction of the Board that it would meet or exceed capital adequacy standards at the consolidated level that are consistent with the Basel Capital Framework were it subject to such standards.
(b) Reporting. A foreign banking organization subject to this subpart must provide to the Board reports relating to its compliance with the capital adequacy measures described in paragraph (a) of this section concurrently with filing the FR Y-7Q.
(c) Noncompliance with the Basel Capital Framework. If a foreign banking organization does not satisfy the requirements of this section, the Board may impose requirements, conditions, or restrictions relating to the activities or business operations of the U.S. operations of the foreign banking organization. The Board will coordinate with any relevant State or Federal regulator in the implementation of such requirements, conditions, or restrictions. If the Board determines to impose one or more requirements, conditions, or restrictions under this paragraph, the Board will notify the organization before it applies any requirement, condition, or restriction, and describe the basis for imposing such requirement, condition, or restriction. Within 14 calendar days of receipt of a notification under this paragraph, the organization may request in writing that the Board reconsider the requirement, condition, or restriction. The Board will respond in writing to the organization’s request for reconsideration prior to applying the requirement, condition, or restriction.
§ 252.155 Risk-management and risk-committee requirements for foreign banking organizations with combined U.S. assets of $100 billion or more.
(a) U.S. risk committee – (1) General. A foreign banking organization subject to this subpart must maintain a U.S. risk committee that approves and periodically reviews the risk-management policies of the combined U.S. operations of the foreign banking organization and oversees the risk-management framework of such combined U.S. operations. The U.S. risk committee’s responsibilities include the liquidity risk-management responsibilities set forth in § 252.156(a).
(2) Risk-management framework. The foreign banking organization’s risk-management framework for its combined U.S. operations must be commensurate with the structure, risk profile, complexity, activities, and size of its combined U.S. operations and consistent with its enterprise-wide risk management policies. The framework must include:
(i) Policies and procedures establishing risk-management governance, risk-management procedures, and risk-control infrastructure for the combined U.S. operations of the foreign banking organization; and
(ii) Processes and systems for implementing and monitoring compliance with such policies and procedures, including:
(A) Processes and systems for identifying and reporting risks and risk-management deficiencies, including regarding emerging risks, on a combined U.S. operations basis and ensuring effective and timely implementation of actions to address emerging risks and risk-management deficiencies;
(B) Processes and systems for establishing managerial and employee responsibility for risk management of the combined U.S. operations;
(C) Processes and systems for ensuring the independence of the risk-management function of the combined U.S. operations; and
(D) Processes and systems to integrate risk management and associated controls with management goals and the compensation structure of the combined U.S. operations.
(3) Placement of the U.S. risk committee. (i) A foreign banking organization that conducts its operations in the United States solely through a U.S. intermediate holding company must maintain its U.S. risk committee as a committee of the board of directors of its U.S. intermediate holding company (or equivalent thereof).
(ii) A foreign banking organization that conducts its operations through U.S. branches or U.S. agencies (in addition to through its U.S. intermediate holding company, if any) may maintain its U.S. risk committee either:
(A) As a committee of the global board of directors (or equivalent thereof), on a standalone basis or as a joint committee with its enterprise-wide risk committee (or equivalent thereof); or
(B) As a committee of the board of directors of its U.S. intermediate holding company (or equivalent thereof), on a standalone basis or as a joint committee with the risk committee of its U.S. intermediate holding company required pursuant to § 252.153(e)(3).
(4) Corporate governance requirements. The U.S. risk committee must meet at least quarterly and otherwise as needed, and must fully document and maintain records of its proceedings, including risk-management decisions.
(5) Minimum member requirements. The U.S. risk committee must:
(i) Include at least one member having experience in identifying, assessing, and managing risk exposures of large, complex financial firms; and
(ii) Have at least one member who:
(A) Is not an officer or employee of the foreign banking organization or its affiliates and has not been an officer or employee of the foreign banking organization or its affiliates during the previous three years; and
(B) Is not a member of the immediate family, as defined in § 225.41(b)(3) of the Board’s Regulation Y (12 CFR 225.41(b)(3)), of a person who is, or has been within the last three years, an executive officer, as defined in § 215.2(e)(1) of the Board’s Regulation O (12 CFR 215.2(e)(1)) of the foreign banking organization or its affiliates.
(b) U.S. chief risk officer – (1) General. A foreign banking organization subject to this subpart or its U.S. intermediate holding company, if any, must appoint a U.S. chief risk officer with experience in identifying, assessing, and managing risk exposures of large, complex financial firms.
(2) Responsibilities. (i) The U.S. chief risk officer is responsible for overseeing:
(A) The measurement, aggregation, and monitoring of risks undertaken by the combined U.S. operations;
(B) The implementation of and ongoing compliance with the policies and procedures for the foreign banking organization’s combined U.S. operations set forth in paragraph (a)(2)(i) of this section and the development and implementation of processes and systems set forth in paragraph (a)(2)(ii) of this section; and
(C) The management of risks and risk controls within the parameters of the risk-control framework for the combined U.S. operations, and the monitoring and testing of such risk controls.
(ii) The U.S. chief risk officer is responsible for reporting risks and risk-management deficiencies of the combined U.S. operations, and resolving such risk-management deficiencies in a timely manner.
(3) Corporate governance and reporting. The U.S. chief risk officer must:
(i) Receive compensation and other incentives consistent with providing an objective assessment of the risks taken by the combined U.S. operations of the foreign banking organization;
(ii) Be employed by and located in the U.S. branch, U.S. agency, U.S. intermediate holding company, if any, or another U.S. subsidiary;
(iii) Report directly to the U.S. risk committee and the global chief risk officer or equivalent management official (or officials) of the foreign banking organization who is responsible for overseeing, on an enterprise-wide basis, the implementation of and compliance with policies and procedures relating to risk-management governance, practices, and risk controls of the foreign banking organization, unless the Board approves an alternative reporting structure based on circumstances specific to the foreign banking organization;
(iv) Regularly provide information to the U.S. risk committee, global chief risk officer, and the Board regarding the nature of and changes to material risks undertaken by the foreign banking organization’s combined U.S. operations, including risk-management deficiencies and emerging risks, and how such risks relate to the global operations of the foreign banking organization; and
(v) Meet regularly and as needed with the Board to assess compliance with the requirements of this section.
(4) Liquidity risk-management requirements. The U.S. chief risk officer must undertake the liquidity risk-management responsibilities set forth in § 252.156(b).
(c) Responsibilities of the foreign banking organization. The foreign banking organization must take appropriate measures to ensure that its combined U.S. operations implement the risk management policies overseen by the U.S. risk committee described in paragraph (a) of this section, and its combined U.S. operations provide sufficient information to the U.S. risk committee to enable the U.S. risk committee to carry out the responsibilities of this subpart.
(d) Noncompliance with this section. If a foreign banking organization does not satisfy the requirements of this section, the Board may impose requirements, conditions, or restrictions relating to the activities or business operations of the combined U.S. operations of the foreign banking organization. The Board will coordinate with any relevant State or Federal regulator in the implementation of such requirements, conditions, or restrictions.
§ 252.156 Liquidity risk-management requirements for foreign banking organizations with combined U.S. assets of $100 billion or more.
(a) Responsibilities of the U.S. risk committee. (1) The U.S. risk committee established by a foreign banking organization pursuant to § 252.155(a) (or a designated subcommittee of such committee composed of members of the board of directors (or equivalent thereof)) of the U.S. intermediate holding company or the foreign banking organization, as appropriate must:
(i) Approve at least annually the acceptable level of liquidity risk that the foreign banking organization may assume in connection with the operating strategies for its combined U.S. operations (liquidity risk tolerance), with concurrence from the foreign banking organization’s board of directors or its enterprise-wide risk committee, taking into account the capital structure, risk profile, complexity, activities, size of the foreign banking organization and its combined U.S. operations and the enterprise-wide liquidity risk tolerance of the foreign banking organization; and
(ii) Receive and review information provided by the senior management of the combined U.S. operations at least semi-annually to determine whether the combined U.S. operations are operating in accordance with the established liquidity risk tolerance and to ensure that the liquidity risk tolerance for the combined U.S. operations is consistent with the enterprise-wide liquidity risk tolerance established for the foreign banking organization.
(iii) Approve the contingency funding plan for the combined U.S. operations described in paragraph (e) of this section at least annually and whenever the foreign banking organization revises its contingency funding plan, and approve any material revisions to the contingency funding plan for the combined U.S. operations prior to the implementation of such revisions.
(b) Responsibilities of the U.S. chief risk officer – (1) Liquidity risk. The U.S. chief risk officer of a foreign banking organization subject to this subpart must review the strategies and policies and procedures established by senior management of the U.S. operations for managing the risk that the financial condition or safety and soundness of the foreign banking organization’s combined U.S. operations would be adversely affected by its inability or the market’s perception of its inability to meet its cash and collateral obligations (liquidity risk).
(2) Liquidity risk tolerance. The U.S. chief risk officer of a foreign banking organization subject to this subpart must review information provided by the senior management of the U.S. operations to determine whether the combined U.S. operations are operating in accordance with the established liquidity risk tolerance. The U.S. chief risk officer must regularly, and, at least semi-annually, report to the foreign banking organization’s U.S. risk committee and enterprise-wide risk committee, or the equivalent thereof (if any) (or a designated subcommittee of such committee composed of members of the relevant board of directors (or equivalent thereof)) on the liquidity risk profile of the foreign banking organization’s combined U.S. operations and whether it is operating in accordance with the established liquidity risk tolerance for the U.S. operations, and must establish procedures governing the content of such reports.
(3) Business lines or products. (i) The U.S. chief risk officer of a foreign banking organization subject to this subpart must approve new products and business lines and evaluate the liquidity costs, benefits, and risks of each new business line and each new product offered, managed or sold through the foreign banking organization’s combined U.S. operations that could have a significant effect on the liquidity risk profile of the U.S. operations of the foreign banking organization. The approval is required before the foreign banking organization implements the business line or offers the product through its combined U.S. operations. In determining whether to approve the new business line or product, the U.S. chief risk officer must consider whether the liquidity risk of the new business line or product (under both current and stressed conditions) is within the foreign banking organization’s established liquidity risk tolerance for its combined U.S. operations.
(ii) The U.S. risk committee must review at least annually significant business lines and products offered, managed or sold through the combined U.S. operations to determine whether each business line or product creates or has created any unanticipated liquidity risk, and to determine whether the liquidity risk of each strategy or product is within the foreign banking organization’s established liquidity risk tolerance for its combined U.S. operations.
(4) Cash-flow projections. The U.S. chief risk officer of a foreign banking organization subject to this subpart must review the cash-flow projections produced under paragraph (d) of this section at least quarterly (or more often, if changes in market conditions or the liquidity position, risk profile, or financial condition of the foreign banking organization or the U.S. operations warrant) to ensure that the liquidity risk of the foreign banking organization’s combined U.S. operations is within the established liquidity risk tolerance.
(5) Liquidity risk limits. The U.S. chief risk officer of a foreign banking organization subject to this subpart must establish liquidity risk limits as set forth in paragraph (f) of this section and review the foreign banking organization’s compliance with those limits at least quarterly (or more often, if changes in market conditions or the liquidity position, risk profile, or financial condition of the U.S. operations of the foreign banking organization warrant).
(6) Liquidity stress testing. The U.S. chief risk officer of a foreign banking organization subject to this subpart must:
(i) Approve the liquidity stress testing practices, methodologies, and assumptions required in § 252.157(a) at least quarterly, and whenever the foreign banking organization materially revises its liquidity stress testing practices, methodologies or assumptions;
(ii) Review the liquidity stress testing results produced under § 252.157(a) of this subpart at least quarterly; and
(iii) Approve the size and composition of the liquidity buffer established under § 252.157(c) of this subpart at least quarterly.
(c) Independent review function. (1) A foreign banking organization subject to this subpart must establish and maintain a review function, which is independent of the management functions that execute funding for its combined U.S. operations, to evaluate the liquidity risk management for its combined U.S. operations.
(2) The independent review function must:
(i) Regularly, but no less frequently than annually, review and evaluate the adequacy and effectiveness of the foreign banking organization’s liquidity risk management processes within the combined U.S. operations, including its liquidity stress test processes and assumptions;
(ii) Assess whether the foreign banking organization’s liquidity risk-management function of its combined U.S. operations complies with applicable laws and regulations, and sound business practices; and
(iii) Report material liquidity risk management issues to the U.S. risk committee and the enterprise-wide risk committee in writing for corrective action, to the extent permitted by applicable law.
(d) Cash-flow projections. (1) A foreign banking organization subject to this subpart must produce comprehensive cash-flow projections for its combined U.S. operations that project cash flows arising from assets, liabilities, and off-balance sheet exposures over, at a minimum, short- and long-term time horizons. The foreign banking organization must update short-term cash-flow projections daily and must update longer-term cash-flow projections at least monthly.
(2) The foreign banking organization must establish a methodology for making cash-flow projections for its combined U.S. operations that results in projections which:
(i) Include cash flows arising from contractual maturities, intercompany transactions, new business, funding renewals, customer options, and other potential events that may impact liquidity;
(ii) Include reasonable assumptions regarding the future behavior of assets, liabilities, and off-balance sheet exposures;
(iii) Identify and quantify discrete and cumulative cash-flow mismatches over these time periods; and
(iv) Include sufficient detail to reflect the capital structure, risk profile, complexity, currency exposure, activities, and size of the foreign banking organization and its combined U.S. operations, and include analyses by business line, currency, or legal entity as appropriate.
(e) Contingency funding plan. (1) A foreign banking organization subject to this subpart must establish and maintain a contingency funding plan for its combined U.S. operations that sets out the foreign banking organization’s strategies for addressing liquidity needs during liquidity stress events. The contingency funding plan must be commensurate with the capital structure, risk profile, complexity, activities, size, and the established liquidity risk tolerance for the combined U.S. operations. The foreign banking organization must update the contingency funding plan for its combined U.S. operations at least annually, and when changes to market and idiosyncratic conditions warrant.
(2) Components of the contingency funding plan – (i) Quantitative assessment. The contingency funding plan for the combined U.S. operations must:
(A) Identify liquidity stress events that could have a significant impact on the liquidity of the foreign banking organization or its combined U.S. operations;
(B) Assess the level and nature of the impact on the liquidity of the foreign banking organization and its combined U.S. operations that may occur during identified liquidity stress events;
(C) Identify the circumstances in which the foreign banking organization would implement its action plan described in paragraph (e)(2)(ii)(A) of this section, which circumstances must include failure to meet any minimum liquidity requirement imposed by the Board on the foreign banking organization’s combined U.S. operations;
(D) Assess available funding sources and needs during the identified liquidity stress events;
(E) Identify alternative funding sources that may be used during the identified liquidity stress events; and
(F) Incorporate information generated by the liquidity stress testing required under § 252.157(a) of this subpart.
(ii) Liquidity event management process. The contingency funding plan for the combined U.S. operations must include an event management process that sets out the foreign banking organization’s procedures for managing liquidity during identified liquidity stress events for the combined U.S. operations. The liquidity event management process must:
(A) Include an action plan that clearly describes the strategies that the foreign banking organization will use to respond to liquidity shortfalls in its combined U.S. operations for identified liquidity stress events, including the methods that the organization or the combined U.S. operations will use to access alternative funding sources;
(B) Identify a liquidity stress event management team that would execute the action plan in paragraph (e)(2)(i) of this section for the combined U.S. operations;
(C) Specify the process, responsibilities, and triggers for invoking the contingency funding plan, describe the decision-making process during the identified liquidity stress events, and describe the process for executing contingency measures identified in the action plan; and
(D) Provide a mechanism that ensures effective reporting and communication within the combined U.S. operations of the foreign banking organization and with outside parties, including the Board and other relevant supervisors, counterparties, and other stakeholders.
(iii) Monitoring. The contingency funding plan for the combined U.S. operations must include procedures for monitoring emerging liquidity stress events. The procedures must identify early warning indicators that are tailored to the capital structure, risk profile, complexity, activities, and size of the foreign banking organization and its combined U.S. operations.
(iv) Testing. A foreign banking organization must periodically test:
(A) The components of the contingency funding plan to assess the plan’s reliability during liquidity stress events;
(B) The operational elements of the contingency funding plan, including operational simulations to test communications, coordination, and decision-making by relevant management; and
(C) The methods it will use to access alternative funding sources for its combined U.S. operations to determine whether these funding sources will be readily available when needed.
(f) Liquidity risk limits – (1) General. A foreign banking organization must monitor sources of liquidity risk and establish limits on liquidity risk that are consistent with the organization’s established liquidity risk tolerance and that reflect the organization’s capital structure, risk profile, complexity, activities, and size.
(2) Liquidity risk limits established by a Category II foreign banking organization or Category III foreign banking organization. If the foreign banking organization is not a Category IV foreign banking organization, liquidity risk limits established under paragraph (f)(1) of this section must include limits on:
(i) Concentrations in sources of funding by instrument type, single counterparty, counterparty type, secured and unsecured funding, and as applicable, other forms of liquidity risk;
(ii) The amount of liabilities that mature within various time horizons; and
(iii) Off-balance sheet exposures and other exposures that could create funding needs during liquidity stress events.
(g) Collateral, legal entity, and intraday liquidity risk monitoring. A foreign banking organization subject to this subpart or more must establish and maintain procedures for monitoring liquidity risk as set forth in this paragraph (g).
(1) Collateral. The foreign banking organization must establish and maintain policies and procedures to monitor assets that have been, or are available to be, pledged as collateral in connection with transactions to which entities in its U.S. operations are counterparties. These policies and procedures must provide that the foreign banking organization:
(i) Calculates all of the collateral positions for its combined U.S. operations according to the frequency specified in paragraph (g)(1)(i)(A) or (B) of this section or as directed by the Board, specifying the value of pledged assets relative to the amount of security required under the relevant contracts and the value of unencumbered assets available to be pledged:
(A) If the foreign banking organization is not a Category IV foreign banking organization, on at least a weekly basis; or
(B) If the foreign banking organization is a Category IV foreign banking organization, on at least a monthly basis;
(ii) Monitors the levels of unencumbered assets available to be pledged by legal entity, jurisdiction, and currency exposure;
(iii) Monitors shifts in the foreign banking organization’s funding patterns, including shifts between intraday, overnight, and term pledging of collateral; and
(iv) Tracks operational and timing requirements associated with accessing collateral at its physical location (for example, the custodian or securities settlement system that holds the collateral).
(2) Legal entities, currencies and business lines. The foreign banking organization must establish and maintain procedures for monitoring and controlling liquidity risk exposures and funding needs of its combined U.S. operations, within and across significant legal entities, currencies, and business lines and taking into account legal and regulatory restrictions on the transfer of liquidity between legal entities.
(3) Intraday exposure. The foreign banking organization must establish and maintain procedures for monitoring intraday liquidity risk exposure for its combined U.S. operations that are consistent with the capital structure, risk profile, complexity, activities, and size of the foreign banking organization and its combined U.S. operations. If the foreign banking organization is not a Category IV banking organization these procedures must address how the management of the combined U.S. operations will:
(i) Monitor and measure expected gross daily inflows and outflows;
(ii) Manage and transfer collateral to obtain intraday credit;
(iii) Identify and prioritize time-specific obligations so that the foreign banking organizations can meet these obligations as expected and settle less critical obligations as soon as possible;
(iv) Manage the issuance of credit to customers where necessary; and
(v) Consider the amounts of collateral and liquidity needed to meet payment systems obligations when assessing the overall liquidity needs of the combined U.S. operations.
§ 252.157 Liquidity stress testing and buffer requirements for foreign banking organizations with combined U.S. assets of $100 billion or more.
(a) Liquidity stress testing requirement – (1) General. (i) A foreign banking organization subject to this subpart must conduct stress tests to separately assess the potential impact of liquidity stress scenarios on the cash flows, liquidity position, profitability, and solvency of:
(A) Its combined U.S. operations as a whole;
(B) Its U.S. branches and agencies on an aggregate basis; and
(C) Its U.S. intermediate holding company, if any.
(ii) Each liquidity stress test required under this paragraph (a)(1) must use the stress scenarios described in paragraph (a)(3) of this section and take into account the current liquidity condition, risks, exposures, strategies, and activities of the combined U.S. operations.
(iii) The liquidity stress tests required under this paragraph (a)(1) must take into consideration the balance sheet exposures, off-balance sheet exposures, size, risk profile, complexity, business lines, organizational structure and other characteristics of the foreign banking organization and its combined U.S. operations that affect the liquidity risk profile of the combined U.S. operations.
(iv) In conducting a liquidity stress test using the scenarios described in paragraphs (a)(3)(i) and (iii) of this section, the foreign banking organization must address the potential direct adverse impact of associated market disruptions on the foreign banking organization’s combined U.S. operations and the related indirect effect such impact could have on the combined U.S. operations of the foreign banking organization and incorporate the potential actions of other market participants experiencing liquidity stresses under the market disruptions that would adversely affect the foreign banking organization or its combined U.S. operations.
(2) Frequency. The foreign banking organization must perform the liquidity stress tests required under paragraph (a)(1) of this section according to the frequency specified in paragraph (a)(2)(i) or (ii) of this section or as directed by the Board:
(i) If the foreign banking organization is not a Category IV foreign banking organization, at least monthly; or
(ii) If the foreign banking organization is a Category IV foreign banking organization, at least quarterly.
(3) Stress scenarios. (i) Each liquidity stress test conducted under paragraph (a)(1) of this section must include, at a minimum:
(A) A scenario reflecting adverse market conditions;
(B) A scenario reflecting an idiosyncratic stress event for the U.S. branches/agencies and the U.S. intermediate holding company, if any; and
(C) a scenario reflecting combined market and idiosyncratic stresses.
(ii) The foreign banking organization must incorporate additional liquidity stress scenarios into its liquidity stress test as appropriate based on the financial condition, size, complexity, risk profile, scope of operations, or activities of the combined U.S. operations, the U.S. branches and agencies, and the U.S. intermediate holding company, as applicable. The Board may require the foreign banking organization to vary the underlying assumptions and stress scenarios.
(4) Planning horizon. Each stress test conducted under paragraph (a)(1) of this section must include an overnight planning horizon, a 30-day planning horizon, a 90-day planning horizon, a 1-year planning horizon, and any other planning horizons that are relevant to the liquidity risk profile of the combined U.S. operations, the U.S. branches and agencies, and the U.S. intermediate holding company, if any. For purposes of this section, a “planning horizon” is the period over which the relevant stressed projections extend. The foreign banking organization must use the results of the stress test over the 30-day planning horizon to calculate the size of the liquidity buffers under paragraph (c) of this section.
(5) Requirements for assets used as cash-flow sources in a stress test. (i) To the extent an asset is used as a cash flow source to offset projected funding needs during the planning horizon in a liquidity stress test, the fair market value of the asset must be discounted to reflect any credit risk and market volatility of the asset.
(ii) Assets used as cash-flow sources during the planning horizon must be diversified by collateral, counterparty, borrowing capacity, or other factors associated with the liquidity risk of the assets.
(iii) A line of credit does not qualify as a cash flow source for purposes of a stress test with a planning horizon of 30 days or less. A line of credit may qualify as a cash flow source for purposes of a stress test with a planning horizon that exceeds 30 days.
(6) Tailoring. Stress testing must be tailored to, and provide sufficient detail to reflect, the capital structure, risk profile, complexity, activities, and size of the combined U.S. operations of the foreign banking organization and, as appropriate, the foreign banking organization as a whole.
(7) Governance – (i) Stress test function. A foreign banking organization subject to this subpart, within its combined U.S. operations and its enterprise-wide risk management, must establish and maintain policies and procedures governing its liquidity stress testing practices, methodologies, and assumptions that provide for the incorporation of the results of liquidity stress tests in future stress testing and for the enhancement of stress testing practices over time.
(ii) Controls and oversight. The foreign banking organization must establish and maintain a system of controls and oversight that is designed to ensure that its liquidity stress testing processes are effective in meeting the requirements of this section. The controls and oversight must ensure that each liquidity stress test appropriately incorporates conservative assumptions with respect to the stress scenario in paragraph (a)(3) of this section and other elements of the stress-test process, taking into consideration the capital structure, risk profile, complexity, activities, size, and other relevant factors of the combined U.S. operations. These assumptions must be approved by U.S. chief risk officer and subject to independent review consistent with the standards set out in § 252.156(c).
(iii) Management information systems. The foreign banking organization must maintain management information systems and data processes sufficient to enable it to effectively and reliably collect, sort, and aggregate data and other information related to the liquidity stress testing of its combined U.S. operations.
(8) Notice and response. If the Board determines that a foreign banking organization must conduct liquidity stress tests according to a frequency other than the frequency provided in paragraphs (a)(2)(i) and (ii) of this section, the Board will notify the foreign banking organization before the change in frequency takes effect, and describe the basis for its determination. Within 14 calendar days of receipt of a notification under this paragraph, the foreign banking organization may request in writing that the Board reconsider the requirement. The Board will respond in writing to the organization’s request for reconsideration prior to requiring the foreign banking organization to conduct liquidity stress tests according to a frequency other than the frequency provided in paragraphs (a)(2)(i) and (ii) of this section.
(b) Reporting of liquidity stress tests required by home-country regulators. A foreign banking organization subject to this subpart must make available to the Board, in a timely manner, the results of any liquidity internal stress tests and establishment of liquidity buffers required by regulators in its home jurisdiction. The report required under this paragraph must include the results of its liquidity stress test and liquidity buffer, if required by the laws or regulations implemented in the home jurisdiction, or expected under supervisory guidance.
(c) Liquidity buffer requirement – (1) General. A foreign banking organization subject to this subpart must maintain a liquidity buffer for its U.S. intermediate holding company, if any, calculated in accordance with paragraph (c)(2) of this section, and a separate liquidity buffer for its U.S. branches and agencies, if any, calculated in accordance with paragraph (c)(3) of this section.
(2) Calculation of U.S. intermediate holding company buffer requirement. (i) The liquidity buffer for the U.S. intermediate holding company must be sufficient to meet the projected net stressed cash-flow need over the 30-day planning horizon of a liquidity stress test conducted in accordance with paragraph (a) of this section under each scenario set forth in paragraphs (a)(3)(i) through (iii) of this section.
(ii) Net stressed cash-flow need. The net stressed cash-flow need for the U.S. intermediate holding company is equal to the sum of its net external stressed cash-flow need (calculated pursuant to paragraph (c)(2)(iii) of this section) and its net internal stressed cash-flow need (calculated pursuant to paragraph (c)(2)(iv) of this section) over the 30-day planning horizon.
(iii) Net external stressed cash-flow need calculation. The net external stressed cash-flow need for a U.S. intermediate holding company equals the difference between:
(A) The projected amount of cash-flow needs that results from transactions between the U.S. intermediate holding company and entities that are not its affiliates; and
(B) The projected amount of cash-flow sources that results from transactions between the U.S. intermediate holding company and entities that are not its affiliates.
(iv) Net internal stressed cash-flow need calculation – (A) General. The net internal stressed cash-flow need for the U.S. intermediate holding company equals the greater of:
(1) The greatest daily cumulative net intragroup cash-flow need over the 30-day planning horizon as calculated under paragraph (c)(2)(iv)(B) of this section; and
(2) Zero.
(B) Daily cumulative net intragroup cash-flow need calculation. The daily cumulative net intragroup cash-flow need for the U.S. intermediate holding company for purposes of paragraph (c)(2)(iv)(A) of this section is calculated as follows:
(1) Daily cumulative net intragroup cash-flow need. For any given day in the stress-test horizon, the daily cumulative net intragroup cash-flow need is a daily cumulative net intragroup cash flow that is greater than zero.
(2) Daily cumulative net intragroup cash flow. For any given day of the planning horizon, the daily cumulative net intragroup cash flow equals the sum of the net intragroup cash flow calculated for that day and the net intragroup cash flow calculated for each previous day of the stress-test horizon, as calculated in accordance with paragraph (c)(2)(iv)(C) of this section.
(C) Net intragroup cash flow. For any given day of the stress-test horizon, the net intragroup cash flow equals the difference between:
(1) The amount of cash-flow needs resulting from transactions between the U.S. intermediate holding company and its affiliates (including any U.S. branch or U.S. agency) for that day of the planning horizon; and
(2) The amount of cash-flow sources resulting from transactions between the U.S. intermediate holding company and its affiliates (including any U.S. branch or U.S. agency) for that day of the planning horizon.
(D) Amounts secured by highly liquid assets. For the purposes of calculating net intragroup cash flow under this paragraph, the amounts of intragroup cash-flow needs and intragroup cash-flow sources that are secured by highly liquid assets (as defined in paragraph (c)(7) of this section) must be excluded from the calculation.
(3) Calculation of U.S. branch and agency liquidity buffer requirement. (i) The liquidity buffer for the foreign banking organization’s U.S. branches and agencies must be sufficient to meet the projected net stressed cash-flow need of the U.S. branches and agencies over the first 14 days of a stress test with a 30-day planning horizon, conducted in accordance with paragraph (a) of this section under the scenarios described in paragraphs (a)(3)(i) through (iii) of this section.
(ii) Net stressed cash-flow need. The net stressed cash-flow need of the U.S. branches and agencies of a foreign banking organization is equal to the sum of its net external stressed cash-flow need (calculated pursuant to paragraph (c)(3)(iii) of this section) and net internal stressed cash-flow need (calculated pursuant to paragraph (c)(3)(iv) of this section) over the first 14 days of the 30-day planning horizon.
(iii) Net external stressed cash-flow need calculation. (A) The net external stressed cash-flow need of the U.S. branches and agencies equals the difference between:
(1) The projected amount of cash-flow needs that results from transactions between the U.S. branches and agencies and entities other than the foreign bank’s non-U.S. offices and its U.S. and non-U.S. affiliates; and
(2) The projected amount of cash-flow sources that results from transactions between the U.S. branches and agencies and entities other than the foreign bank’s non-U.S. offices and its U.S. and non-U.S. affiliates.
(iv) Net internal stressed cash-flow need calculation – (A) General. The net internal stressed cash-flow need of the U.S. branches and agencies of the foreign banking organization equals the greater of:
(1) The greatest daily cumulative net intragroup cash-flow need over the first 14 days of the 30-day planning horizon, as calculated under paragraph (c)(3)(iv)(B) of this section; and
(2) Zero.
(B) Daily cumulative net intragroup cash-flow need calculation. The daily cumulative net intragroup cash-flow need of the U.S. branches and agencies of a foreign banking organization for purposes of paragraph (c)(3)(iv) of this section is calculated as follows:
(1) Daily cumulative net intragroup cash-flow need. For any given day of the stress-test horizon, the daily cumulative net intragroup cash-flow need of the U.S. branches and agencies means a daily cumulative net intragroup cash flow that is greater than zero.
(2) Daily cumulative net intragroup cash flow. For any given day of the planning horizon, the daily cumulative net intragroup cash flow of the U.S. branches and agencies equals the sum of the net intragroup cash flow calculated for that day and the net intragroup cash flow calculated for each previous day of the planning horizon, each as calculated in accordance with this paragraph (c)(3)(iv)(C) of this section.
(C) Net intragroup cash flow. For any given day of the planning horizon, the net intragroup cash flow must equal the difference between:
(1) The amount of projected cash-flow needs resulting from transactions between a U.S. branch or U.S. agency and the foreign bank’s non-U.S. offices and its affiliates; and
(2) The amount of projected cash-flow sources resulting from transactions between a U.S. branch or U.S. agency and the foreign bank’s non-U.S. offices and its affiliates.
(D) Amounts secured by highly liquid assets. For the purposes of calculating net intragroup cash flow of the U.S. branches and agencies under this paragraph, the amounts of intragroup cash-flow needs and intragroup cash-flow sources that are secured by highly liquid assets (as defined in paragraph (c)(7) of this section) must be excluded from the calculation.
(4) Location of liquidity buffer – (i) U.S. intermediate holding companies. A U.S. intermediate holding company must maintain in accounts in the United States the highly liquid assets comprising the liquidity buffer required under this section. To the extent that the assets consist of cash, the cash may not be held in an account located at a U.S. branch or U.S. agency of the affiliated foreign banking organization or other affiliate that is not controlled by the U.S. intermediate holding company.
(ii) U.S. branches and agencies. The U.S. branches and agencies of a foreign banking organization must maintain in accounts in the United States the highly liquid assets comprising the liquidity buffer required under this section. To the extent that the assets consist of cash, the cash may not be held in an account located at the foreign banking organization’s U.S. intermediate holding company or other affiliate.
(7) Asset requirements. The liquidity buffer required in this section for the U.S. intermediate holding company or the U.S. branches and agencies must consist of highly liquid assets that are unencumbered, as set forth below:
(i) Highly liquid assets. The asset must be a highly liquid asset. For these purposes, a highly liquid asset includes:
(A) Cash;
(B) Assets that meet the criteria for high quality liquid assets as defined in 12 CFR 249.20; or
(C) Any other asset that the foreign banking organization demonstrates to the satisfaction of the Board:
(1) Has low credit risk and low market risk;
(2) Is traded in an active secondary two-way market that has committed market makers and independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined within one day and settled at that price within a reasonable time period conforming with trade custom; and
(3) Is a type of asset that investors historically have purchased in periods of financial market distress during which market liquidity has been impaired.
(ii) Unencumbered. The asset must be unencumbered. For these purposes, an asset is unencumbered if it:
(A) Is free of legal, regulatory, contractual or other restrictions on the ability of such company promptly to liquidate, sell or transfer the asset; and
(B) Is either:
(1) Not pledged or used to secure or provide credit enhancement to any transaction; or
(2) Pledged to a central bank or a U.S. government-sponsored enterprise, to the extent potential credit secured by the asset is not currently extended by such central bank or U.S. government-sponsored enterprise or any of its consolidated subsidiaries.
(iii) Calculating the amount of a highly liquid asset. In calculating the amount of a highly liquid asset included in the liquidity buffer, the foreign banking organization must discount the fair market value of the asset to reflect any credit risk and market price volatility of the asset.
(iv) Operational requirements. With respect to the liquidity buffer, the foreign banking organization must:
(A) Establish and implement policies and procedures that require highly liquid assets comprising the liquidity buffer to be under the control of the management function in the foreign banking organization that is charged with managing liquidity risk of its combined U.S. operations; and
(B) Demonstrate the capability to monetize a highly liquid asset under each scenario required under § 252.157(a)(3).
(v) Diversification. The liquidity buffer must not contain significant concentrations of highly liquid assets by issuer, business sector, region, or other factor related to the foreign banking organization’s risk, except with respect to cash and securities issued or guaranteed by the United States, a U.S. government agency, or a U.S. government sponsored enterprise.
§ 252.158 Capital stress testing requirements for foreign banking organizations with combined U.S. assets of $100 billion or more.
(a) Definitions. For purposes of this section, the following definitions apply:
(1) Eligible asset means any asset of the U.S. branch or U.S. agency held in the United States that is recorded on the general ledger of a U.S. branch or U.S. agency of the foreign banking organization (reduced by the amount of any specifically allocated reserves held in the United States and recorded on the general ledger of the U.S. branch or U.S. agency in connection with such assets), subject to the following exclusions, and, for purposes of this definition, as modified by the rules of valuation set forth in paragraph (a)(1)(ii) of this section.
(i) The following assets do not qualify as eligible assets:
(A) Equity securities;
(B) Any assets classified as loss at the preceding examination by a regulatory agency, outside accountant, or the bank’s internal loan review staff;
(C) Accrued income on assets classified loss, doubtful, substandard or value impaired, at the preceding examination by a regulatory agency, outside accountant, or the bank’s internal loan review staff;
(D) Any amounts due from the home office, other offices and affiliates, including income accrued but uncollected on such amounts;
(E) The balance from time to time of any other asset or asset category disallowed at the preceding examination or by direction of the Board for any other reason until the underlying reasons for the disallowance have been removed;
(F) Prepaid expenses and unamortized costs, furniture and fixtures and leasehold improvements; and
(G) Any other asset that the Board determines should not qualify as an eligible asset.
(ii) The following rules of valuation apply:
(A) A marketable debt security is valued at its principal amount or market value, whichever is lower;
(B) An asset classified doubtful or substandard at the preceding examination by a regulatory agency, outside accountant, or the bank’s internal loan review staff, is valued at 50 percent and 80 percent, respectively;
(C) With respect to an asset classified value impaired, the amount representing the allocated transfer risk reserve that would be required for such exposure at a domestically chartered bank is valued at 0 and the residual exposure is valued at 80 percent; and
(D) Real estate located in the United States and carried on the accounting records as an asset are valued at net book value or appraised value, whichever is less.
(2) Liabilities of all U.S. branches and agencies of a foreign banking organization means all liabilities of all U.S. branches and agencies of the foreign banking organization, including acceptances and any other liabilities (including contingent liabilities), but excluding:
(i) Amounts due to and other liabilities to other offices, agencies, branches and affiliates of such foreign banking organization, including its head office, including unremitted profits; and
(ii) Reserves for possible loan losses and other contingencies.
(3) Pre-provision net revenue means revenue less expenses before adjusting for total loan loss provisions.
(4) Stress test cycle has the same meaning as in subpart F of this part.
(5) Total loan loss provisions means the amount needed to make reserves adequate to absorb estimated credit losses, based upon management’s evaluation of the loans and leases that the company has the intent and ability to hold for the foreseeable future or until maturity or payoff, as determined under applicable accounting standards.
(b) In general. (1) A foreign banking organization subject to this subpart and that has a U.S. branch or U.S. agency must:
(i) Be subject on a consolidated basis to a capital stress testing regime by its home-country supervisor that meets the requirements of paragraph (b)(2) of this section;
(ii) Conduct such stress tests or be subject to a supervisory stress test and meet any minimum standards set by its home-country supervisor with respect to the stress tests; and
(iii) Provide to the Board the information required under paragraph (c) of this section.
(2) The capital stress testing regime of a foreign banking organization’s home-country supervisor must include:
(i) A supervisory capital stress test conducted by the foreign banking organization’s home-country supervisor or an evaluation and review by the foreign banking organization’s home-country supervisor of an internal capital adequacy stress test conducted by the foreign banking organization, according to the frequency specified in paragraph (b)(2)(A) or (B):
(A) If the foreign banking organization is not a Category IV foreign banking organization, at least annually; or
(B) If the foreign banking organization is a Category IV foreign banking organization, at least biennially; and
(ii) Requirements for governance and controls of stress testing practices by relevant management and the board of directors (or equivalent thereof) of the foreign banking organization;
(c) Information requirements – (1) In general. A foreign banking organization subject to this subpart must report to the Board by January 5 of each calendar year, unless such date is extended by the Board, summary information about its stress-testing activities and results, including the following quantitative and qualitative information:
(i) A description of the types of risks included in the stress test;
(ii) A description of the conditions or scenarios used in the stress test;
(iii) A summary description of the methodologies used in the stress test;
(iv) Estimates of:
(A) Aggregate losses;
(B) Pre-provision net revenue;
(C) Total loan loss provisions;
(D) Net income before taxes; and
(E) Pro forma regulatory capital ratios required to be computed by the home-country supervisor of the foreign banking organization and any other relevant capital ratios; and
(v) An explanation of the most significant causes for any changes in regulatory capital ratios.
(2) Additional information required for foreign banking organizations in a net due from position. If, on a net basis, the U.S. branches and agencies of a foreign banking organization subject to this subpart provide funding to the foreign banking organization’s non-U.S. offices and non-U.S. affiliates, calculated as the average daily position over a stress test cycle for a given year, the foreign banking organization must report the following information to the Board by January 5 of each calendar year, unless such date is extended by the Board:
(i) A detailed description of the methodologies used in the stress test, including those employed to estimate losses, revenues, and changes in capital positions;
(ii) Estimates of realized losses or gains on available-for-sale and held-to-maturity securities, trading and counterparty losses, if applicable; and loan losses (dollar amount and as a percentage of average portfolio balance) in the aggregate and by material sub-portfolio; and
(iii) Any additional information that the Board requests.
(d) Imposition of additional standards for capital stress tests. (1) Unless the Board otherwise determines in writing, a foreign banking organization that does not meet each of the requirements in paragraph (b)(1) and (2) of this section must:
(i) Maintain eligible assets in its U.S. branches and agencies that, on a daily basis, are not less than 108 percent of the average value over each day of the previous calendar quarter of the total liabilities of all U.S. branches and agencies of the foreign banking organization; and
(ii) To the extent that a foreign banking organization has not established a U.S. intermediate holding company, conduct an annual stress test of its U.S. subsidiaries to determine whether those subsidiaries have the capital necessary to absorb losses as a result of adverse economic conditions; and report to the Board on an annual basis a summary of the results of the stress test that includes the information required under paragraph (b)(1) of this section and any other information specified by the Board.
(2) An enterprise-wide stress test that is approved by the Board may meet the stress test requirement of paragraph (d)(1)(ii) of this section.
(3) Intragroup funding restrictions or liquidity requirements for U.S. operations. If a foreign banking organization does not meet each of the requirements in paragraphs (b)(1) and (2) of this section, the Board may require the U.S. branches and agencies of the foreign banking organization and, if the foreign banking organization has not established a U.S. intermediate holding company, any U.S. subsidiary of the foreign banking organization, to maintain a liquidity buffer or be subject to intragroup funding restrictions.
(e) Notice and response. If the Board determines to impose one or more conditions under paragraph (d)(3) of this section, the Board will notify the company before it applies the condition, and describe the basis for imposing the condition. Within 14 calendar days of receipt of a notification under this paragraph, the company may request in writing that the Board reconsider the requirement. The Board will respond in writing to the company’s request for reconsideration prior to applying the condition.
Subpart P – Covered IHC Long-Term Debt Requirement, Covered IHC Total Loss absorbing Capacity Requirement and Buffer, and Restrictions on Corporate Practices for Intermediate Holding Companies of Global Systemically Important Foreign Banking Organizations
§ 252.160 Applicability.
(a) General applicability. This subpart applies to a U.S. intermediate holding company that is required to be established pursuant to § 252.153 and is controlled by a global systemically important foreign banking organization (Covered IHC).
(b) Initial applicability. A Covered IHC is subject to the requirements of §§ 252.162, 252.163, 252.165, 252.166, and 252.167 beginning on the later of:
(1) January 1, 2019; and
(2) 1095 days (three years) after the later of the date on which:
(i) The U.S. non-branch assets of the global systemically important foreign banking organization that controls the Covered IHC equaled or exceeded $50 billion; and
(ii) The foreign banking organization that controls the Covered IHC became a global systemically important foreign banking organization.
(c) Applicability of § 252.164. Section 252.164 applies to a global systemically important foreign banking organization with U.S. non-branch assets that equal or exceed $50 billion.
§ 252.161 Definitions.
For purposes of this subpart:
Additional tier 1 capital has the same meaning as in 12 CFR 217.20(c).
Average total consolidated assets means the denominator of the leverage ratio as described in 12 CFR 217.10(b)(4).
Common equity tier 1 capital has the same meaning as in 12 CFR 217.20(b).
Common equity tier 1 capital ratio has the same meaning as in 12 CFR 217.10(b)(1) and 12 CFR 217.10(c), as applicable.
Common equity tier 1 minority interest has the same meaning as in 12 CFR 217.2.
Covered IHC is defined in § 252.160.
Covered IHC TLAC buffer means, with respect to a Covered IHC, the sum of 2.5 percent and any applicable countercyclical capital buffer under 12 CFR 217.11(b) (expressed as a percentage).
Covered IHC Total loss-absorbing capacity amount is defined in § 252.165(c).
Default right (1) Means any:
(i) Right of a party, whether contractual or otherwise (including rights incorporated by reference to any other contract, agreement or document, and rights afforded by statute, civil code, regulation and common law), to liquidate, terminate, cancel, rescind, or accelerate such agreement or transactions thereunder, set off or net amounts owing in respect thereto (except rights related to same-day payment netting), exercise remedies in respect of collateral or other credit support or property related thereto (including the purchase and sale of property), demand payment or delivery thereunder or in respect thereof (other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure), suspend, delay or defer payment or performance thereunder, modify the obligations of a party thereunder or any similar rights; and
(ii) Right or contractual provision that alters the amount of collateral or margin that must be provided with respect to an exposure thereunder, including by altering any initial amount, threshold amount, variation margin, minimum transfer amount, the margin value of collateral or any similar amount, that entitles a party to demand the return of any collateral or margin transferred by it to the other party or a custodian or that modifies a transferee’s right to reuse collateral or margin (if such right previously existed), or any similar rights, in each case, other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure; and
(2) Does not include any right under a contract that allows a party to terminate the contract on demand or at its option at a specified time, or from time to time, without the need to show cause.
Discretionary bonus payment has the same meaning as under 12 CFR 217.2.
Distribution has the same meaning as under 12 CFR 217.2.
Eligible Covered IHC debt security with respect to a non-resolution Covered IHC means eligible internal debt securities issued by the non-resolution Covered IHC, and with respect to a resolution Covered IHC means eligible internal debt securities and eligible external debt securities issued by the resolution Covered IHC.
Eligible external debt security means:
(1) A debt instrument that:
(i) Is paid in, and issued by the Covered IHC to, and remains held by, a person that does not directly or indirectly control the Covered IHC and is not a wholly owned subsidiary;
(ii) Is not secured, not guaranteed by the Covered IHC or a subsidiary of the Covered IHC, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to 365 days (one year) from the date of issuance;
(iv) Is governed by the laws of the United States or any State thereof;
(v) Does not provide the holder of the instrument a contractual right to accelerate payment of principal or interest on the instrument, except a right that is exercisable on one or more dates that are specified in the instrument or in the event of:
(A) A receivership, insolvency, liquidation, or similar proceeding of the Covered IHC; or
(B) A failure of the Covered IHC to pay principal or interest on the instrument when due and payable that continues for 30 days or more;
(vi) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the Covered IHC’s credit quality, but may have an interest rate that is adjusted periodically independent of the Covered IHC’s credit quality, in relation to general market interest rates or similar adjustments;
(vii) Is not a structured note; and
(viii) Does not provide that the instrument may be converted into or exchanged for equity of the covered IHC; and
(2) A debt instrument issued prior to December 31, 2016 that:
(i) Is paid in, and issued by the Covered IHC to, and remains held by, a person that does not directly or indirectly control the Covered IHC and is not a wholly owned subsidiary;
(ii) Is not secured, not guaranteed by the Covered IHC or a subsidiary of the Covered IHC, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to 365 days (one year) from the date of issuance;
(iv) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the Covered IHC’s credit quality, but may have an interest rate that is adjusted periodically independent of the Covered IHC’s credit quality, in relation to general market interest rates or similar adjustments;
(v) Is not a structured note; and
(vi) Does not provide that the instrument may be converted into or exchanged for equity of the Covered IHC.
Eligible internal debt security means a debt instrument that:
(i) Is paid in, and issued by the Covered IHC;
(ii) Is not secured, not guaranteed by the Covered IHC or a subsidiary of the Covered IHC, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iii) Has a maturity of greater than or equal to 365 days (one year) from the date of issuance;
(iv) Is governed by the laws of the United States or any State thereof;
(v) Does not provide the holder of the instrument a contractual right to accelerate payment of principal or interest on the instrument, except a right that is exercisable on one or more dates that are specified in the instrument or in the event of:
(A) A receivership, insolvency, liquidation, or similar proceeding of the Covered IHC; or
(B) A failure of the Covered IHC to pay principal or interest on the instrument when due and payable that continues for 30 days or more;
(vi) Is not a structured note;
(vii) Is issued to and remains held by a company that is incorporated or organized outside of the United States, and directly or indirectly controls the Covered IHC or is a wholly owned subsidiary; and
(viii) Has a contractual provision that is approved by the Board that provides for the immediate conversion or exchange of the instrument into common equity tier 1 of the Covered IHC upon issuance by the Board of an internal debt conversion order.
GAAP means generally accepted accounting principles as used in the United States.
Internal debt conversion order means an order by the Board to immediately convert to, or exchange for, common equity tier 1 capital an amount of eligible internal debt securities of the Covered IHC specified by the Board in its discretion, as described in § 252.163.
Non-resolution Covered IHC means a Covered IHC identified as or determined to be a non-resolution Covered IHC pursuant to § 252.164.
Outstanding eligible Covered IHC long-term debt amount is defined in § 252.162(b).
Person has the same meaning as in 12 CFR 225.2.
Qualified financial contract has the same meaning as in section 210(c)(8)(D) of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(c)(8)(D)).
Resolution Covered IHC means a Covered IHC identified as or determined to be a resolution Covered IHC pursuant to § 252.164.
Standardized total risk-weighted assets has the same meaning as in 12 CFR 217.2.
Structured note means a debt instrument that:
(1) Has a principal amount, redemption amount, or stated maturity that is subject to reduction based on the performance of any asset, entity, index, or embedded derivative or similar embedded feature;
(2) Has an embedded derivative or other similar embedded feature that is linked to one or more equity securities, commodities, assets, or entities;
(3) Does not specify a minimum principal amount that becomes due and payable upon acceleration or early termination; or
(4) Is not classified as debt under GAAP, provided that an instrument is not a structured note solely because it is one or both of the following:
(i) A non-dollar-denominated instrument, or
(ii) An instrument whose interest payments are based on an interest rate index.
Supplementary leverage ratio has the same meaning as in 12 CFR 217.10(c)(4).
Tier 1 minority interest has the same meaning as in 12 CFR 217.2.
Tier 2 capital has the same meaning as in 12 CFR 217.20(d).
Total leverage exposure has the same meaning as in 12 CFR 217.10(c)(4)(ii).
Total risk-weighted assets, with respect to a Covered IHC, is equal to the Covered IHC’s standardized total risk-weighted assets.
U.S. non-branch assets has the same meaning as in 12 CFR 252.152(b)(2).
Wholly owned subsidiary means an entity, all of the outstanding ownership interests of which are owned directly or indirectly by a global systemically important foreign banking organization that directly or indirectly controls a Covered IHC, except that up to 0.5 percent of the entity’s outstanding ownership interests may be held by a third party if the ownership interest is acquired or retained by the third party for the purpose of establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns.
§ 252.162 Covered IHC long-term debt requirement.
(a) Covered IHC long-term debt requirement. A Covered IHC must have an outstanding eligible Covered IHC long-term debt amount that is no less than the amount equal to the greatest of:
(1) 6 percent of the Covered IHC’s total risk-weighted assets;
(2) If the Covered IHC is required to maintain a minimum supplementary leverage ratio, 2.5 percent of the Covered IHC’s total leverage exposure; and
(3) 3.5 percent of the Covered IHC’s average total consolidated assets.
(b) Outstanding eligible Covered IHC long-term debt amount. (1) A Covered IHC’s outstanding eligible Covered IHC long-term debt amount is the sum of:
(i) One hundred (100) percent of the amount due to be paid of unpaid principal of the outstanding eligible Covered IHC debt securities issued by the Covered IHC in greater than or equal to 730 days (two years); and
(ii) Fifty (50) percent of the amount due to be paid of unpaid principal of the outstanding eligible Covered IHC debt securities issued by the Covered IHC in greater than or equal to 365 days (one year) and less than 730 days (two years); and
(iii) Zero (0) percent of the amount due to be paid of unpaid principal of the outstanding eligible Covered IHC debt securities issued by the Covered IHC in less than 365 days (one year).
(2) For purposes of paragraph (b)(1) of this section, the date on which principal is due to be paid on an outstanding eligible Covered IHC debt security is calculated from the earlier of:
(i) The date on which payment of principal is required under the terms governing the instrument, without respect to any right of the holder to accelerate payment of principal; and
(ii) The date the holder of the instrument first has the contractual right to request or require payment of the amount of principal, provided that, with respect to a right that is exercisable on one or more dates that are specified in the instrument only on the occurrence of an event (other than an event of a receivership, insolvency, liquidation, or similar proceeding of the Covered IHC, or a failure of the Covered IHC to pay principal or interest on the instrument when due), the date for the outstanding eligible Covered IHC debt security under this paragraph (b)(2)(ii) will be calculated as if the event has occurred.
(3) After notice and response proceedings consistent with 12 CFR part 263, subpart E, the Board may order a Covered IHC to exclude from its outstanding eligible Covered IHC long-term debt amount any debt security with one or more features that would significantly impair the ability of such debt security to take losses.
(c) Redemption and repurchase. Without the prior approval of the Board, a Covered IHC may not redeem or repurchase any outstanding eligible Covered IHC debt security if, immediately after the redemption or repurchase, the Covered IHC would not have an outstanding eligible Covered IHC long-term debt amount that is sufficient to meet its Covered IHC long-term debt requirement under paragraph (a) of this section.
§ 252.163 Internal debt conversion order.
(a) The Board may issue an internal debt conversion order if:
(1) The Board has determined that the Covered IHC is in default or danger of default; and
(2) Any of the following circumstances apply:
(i) A foreign banking organization that directly or indirectly controls the Covered IHC or any subsidiary of the top-tier foreign banking organization has been placed into resolution proceedings (including the application of statutory resolution powers) in its home country;
(ii) The home country supervisor of the top-tier foreign banking organization has consented or not promptly objected after notification by the Board to the conversion or exchange of the eligible internal debt securities of the Covered IHC; or
(iii) The Board has made a written recommendation to the Secretary of the Treasury pursuant to 12 U.S.C. 5383(a) regarding the Covered IHC.
(b) For purposes of paragraph (a) of this section, the Board will consider:
(1) A Covered IHC in default or danger of default if
(i) A case has been, or likely will promptly be, commenced with respect to the Covered IHC under the Bankruptcy Code (11 U.S.C. 101 et seq.);
(ii) The Covered IHC has incurred, or is likely to incur, losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the Covered IHC to avoid such depletion;
(iii) The assets of the Covered IHC are, or are likely to be, less than its obligations to creditors and others; or
(iv) The Covered IHC is, or is likely to be, unable to pay its obligations (other than those subject to a bona fide dispute) in the normal course of business; and
(2) An objection by the home country supervisor to the conversion or exchange of the eligible internal debt securities to be prompt if the Board receives the objection no later than 24 hours after the Board requests such consent or non-objection from the home country supervisor.
§ 252.164 Identification as a resolution Covered IHC or a non-resolution Covered IHC.
(a) Initial certification. The top-tier global systemically important foreign banking organization with U.S. non-branch assets that equal or exceed $50 billion must certify to the Board on the later of June 30, 2017, or one year prior to the date on which a Covered IHC becomes subject to the requirements of this subpart pursuant to § 252.160(b) whether the planned resolution strategy of the top-tier foreign banking organization involves the Covered IHC or the subsidiaries of the Covered IHC entering resolution, receivership, insolvency, or similar proceedings in the United States.
(b) Certification update. The top-tier global systemically important foreign banking organization with U.S. non-branch assets that equal or exceed $50 billion must provide an updated certification to the Board upon a change in the resolution strategy described in the certification provided pursuant to paragraph (a) of this section.
(c) Identification of a resolution Covered IHC. A Covered IHC is a resolution Covered IHC if the most recent certification provided pursuant to paragraphs (a) and (b) of this section indicates that the top-tier foreign banking organization’s planned resolution strategy involves the Covered IHC or the subsidiaries of the Covered IHC entering resolution, receivership, insolvency, or similar proceedings in the United States.
(d) Identification of a non-resolution Covered IHC. A Covered IHC is a non-resolution Covered IHC if the most recent certification provided pursuant to paragraphs (a) and (b) of this section indicates that the top-tier foreign banking organization’s planned resolution strategy involves neither the Covered IHC nor the subsidiaries of the Covered IHC entering resolution, receivership, insolvency, or similar proceedings in the United States.
(e) Board determination. The Board may determine in its discretion that a non-resolution Covered IHC identified pursuant to paragraph (d) of this section is a resolution Covered IHC, or that a resolution Covered IHC identified pursuant to paragraph (c) of this section is a non-resolution Covered IHC.
(f) Transition. (1) A Covered IHC identified as a resolution Covered IHC pursuant to paragraph (b) of this section or determined by the Board to be a resolution Covered IHC pursuant to paragraph (e) of this section must comply with the requirements in this subpart applicable to a resolution Covered IHC within 365 days (one year) after such identification or determination, unless such time period is extended by the Board in its discretion.
(2) A Covered IHC identified as a non-resolution Covered IHC pursuant to paragraph (b) of this section or determined by the Board to be a non-resolution Covered IHC pursuant to paragraph (e) of this section must comply with the requirements in this subpart applicable to a non-resolution Covered IHC 365 days (one year) after such identification or determination, unless such time period is extended by the Board in its discretion.
§ 252.165 Covered IHC total loss-absorbing capacity requirement and buffer.
(a) Covered IHC total loss-absorbing capacity requirement for a resolution Covered IHC. A resolution Covered IHC must have an outstanding Covered IHC total loss-absorbing capacity amount that is no less than the amount equal to the greatest of:
(1) 18 percent of the resolution Covered IHC’s total risk-weighted assets;
(2) If the Board requires the resolution Covered IHC to maintain a minimum supplementary leverage ratio, 6.75 percent of the resolution Covered IHC’s total leverage exposure; and
(3) Nine (9) percent of the resolution Covered IHC’s average total consolidated assets.
(b) Covered IHC total loss-absorbing capacity requirement for a non-resolution Covered IHC. A non-resolution Covered IHC must have an outstanding Covered IHC total loss-absorbing capacity amount that is no less than the amount equal to the greatest of:
(1) 16 percent of the non-resolution Covered IHC’s total risk-weighted assets;
(2) If the Board requires the non-resolution Covered IHC to maintain a minimum supplementary leverage ratio, 6 percent of the non-resolution Covered IHC’s total leverage exposure; and
(3) Eight (8) percent of the non-resolution Covered IHC’s average total consolidated assets.
(c) Covered IHC Total loss-absorbing capacity amount. (1) A non-resolution Covered IHC’s Covered IHC total loss-absorbing capacity amount is equal to the sum of:
(i) The Covered IHC’s common equity tier 1 capital (excluding any common equity tier 1 minority interest) held by a company that is incorporated or organized outside of the United States and that directly or indirectly controls the Covered IHC;
(ii) The Covered IHC’s additional tier 1 capital (excluding any tier 1 minority interest) held by a company that is incorporated or organized outside of the United States and that directly or indirectly controls the Covered IHC; and
(iii) The Covered IHC’s outstanding eligible Covered IHC long-term debt amount, plus 50 percent of the amount of unpaid principal of outstanding eligible Covered IHC debt securities issued by the Covered IHC due to be paid in greater than or equal to 365 days (one year) but less than 730 days (two years).
(2) A resolution Covered IHC’s Covered IHC total loss-absorbing capacity amount is equal to the sum of:
(i) The Covered IHC’s common equity tier 1 capital (excluding any common equity tier 1 minority interest);
(ii) The Covered IHC’s additional tier 1 capital (excluding any tier 1 minority interest); and
(iii) The Covered IHC’s outstanding eligible Covered IHC long-term debt amount, plus 50 percent of the amount of unpaid principal of outstanding eligible Covered IHC debt securities issued by the Covered IHC due to be paid in greater than or equal to 365 days (one year) but less than 730 days (two years).
(d) Covered IHC TLAC buffer – (1) Composition of the Covered IHC TLAC buffer. The Covered IHC TLAC buffer is composed solely of common equity tier 1 capital.
(2) Definitions. For purposes of this paragraph, the following definitions apply:
(i) Eligible retained income. The eligible retained income of a Covered IHC is the greater of:
(A) The Covered IHC’s net income, calculated in accordance with the instructions to the FR Y-9C, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income; and
(B) The average of the Covered IHC’s net income, calculated in accordance with the instructions to the FR Y-9C, for the four calendar quarters preceding the current calendar quarter.
(ii) Maximum Covered IHC TLAC payout ratio. The maximum Covered IHC TLAC payout ratio is the percentage of eligible retained income that a Covered IHC can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter. The maximum Covered IHC TLAC payout ratio is based on the Covered IHC’s Covered IHC TLAC buffer level, calculated as of the last day of the previous calendar quarter, as set forth in Table 1 to § 252.165.
(iii) Maximum Covered IHC TLAC payout amount. A Covered IHC’s maximum Covered IHC TLAC payout amount for the current calendar quarter is equal to the Covered IHC’s eligible retained income, multiplied by the applicable maximum Covered IHC TLAC payout ratio, as set forth in Table 1 to § 252.165.
(3) Calculation of the Covered IHC TLAC buffer level. (i) A Covered IHC’s Covered IHC TLAC buffer level is equal to the Covered IHC’s common equity tier 1 capital ratio (expressed as a percentage) minus the greater of zero and the following amount:
(A) 16 percent for a non-resolution Covered IHC, and 18 percent for a resolution Covered IHC; minus
(B)(1) For a non-resolution Covered IHC, the ratio (expressed as a percentage) of the Covered IHC’s additional tier 1 capital (excluding any tier 1 minority interest) held by a company that is incorporated or organized outside of the United States and that directly or indirectly controls the Covered IHC to the Covered IHC’s total risk-weighted assets;
(2) For a resolution Covered IHC, the ratio (expressed as a percentage of the Covered IHC’s additional tier 1 capital (excluding any tier 1 minority interest) to the Covered IHC’s total-risk weighted assets; and minus
(C) The ratio (expressed as a percentage) of the Covered IHC’s outstanding eligible Covered IHC long-term debt amount plus 50 percent of the amount of unpaid principal of outstanding eligible Covered IHC debt securities issued by the Covered IHC due to be paid in, as calculated in § 252.162(b)(2), greater than or equal to 365 days (one year) but less than 730 days (two years) to total risk-weighted assets.
(ii)(A) Notwithstanding paragraph (d)(3)(i) of this section, with respect to a resolution Covered IHC, if the ratio (expressed as a percentage) of the resolution Covered IHC’s Covered IHC total loss-absorbing capacity amount, as calculated under § 252.165(a), to the resolution Covered IHC’s risk-weighted assets is less than or equal to, 18 percent, the Covered IHC’s Covered IHC TLAC buffer level is zero.
(B) Notwithstanding paragraph (d)(3)(i) of this section, with respect to a non-resolution Covered IHC, if the ratio (expressed as a percentage) of the non-resolution Covered IHC’s Covered IHC total loss-absorbing capacity amount, as calculated under § 252.165(b), to the Covered IHC’s risk-weighted assets is less than or equal to 16 percent, the non-resolution Covered IHC’s Covered IHC TLAC buffer level is zero.
(4) Limits on distributions and discretionary bonus payments. (i) A Covered IHC shall not make distributions or discretionary bonus payments or create an obligation to make such distributions or payments during the current calendar quarter that, in the aggregate, exceed the maximum Covered IHC TLAC payout amount.
(ii) A Covered IHC with a Covered IHC TLAC buffer level that is greater than the Covered IHC TLAC buffer is not subject to a maximum Covered IHC TLAC payout amount.
(iii) Except as provided in paragraph (d)(4)(iv) of this section, a Covered IHC may not make distributions or discretionary bonus payments during the current calendar quarter if the Covered IHC’s:
(A) Eligible retained income is negative; and
(B) Covered IHC TLAC buffer level was less than the Covered IHC TLAC buffer as of the end of the previous calendar quarter.
(iv) Notwithstanding the limitations in paragraphs (d)(4)(i) through (iii) of this section, the Board may permit a Covered IHC to make a distribution or discretionary bonus payment upon a request of the Covered IHC, if the Board determines that the distribution or discretionary bonus payment would not be contrary to the purposes of this section, or to the safety and soundness of the Covered IHC. In making such a determination, the Board will consider the nature and extent of the request and the particular circumstances giving rise to the request.
Table 1 to § 252.165 – Calculation of Maximum Covered IHC TLAC Payout Amount
| Covered IHC TLAC buffer level | Maximum Covered IHC TLAC payout ratio (as a percentage of eligible retained income) |
|---|---|
| Greater than the Covered IHC TLAC buffer | No payout ratio limitation applies. |
| Less than or equal to the Covered IHC TLAC buffer, | 60 percent. |
| Less than or equal to 75 percent of the Covered IHC TLAC buffer, | 40 percent. |
| Less than or equal to 50 percent of the Covered IHC TLAC buffer, | 20 percent. |
| Less than or equal to 25 percent of the Covered IHC TLAC buffer | 0 percent. |
(v)(A) A Covered IHC is subject to the lowest of the maximum payout amounts as determined under 12 CFR 217.11(a)(2) and the maximum Covered IHC TLAC payout amount as determined under this paragraph.
(B) Additional limitations on distributions may apply to a Covered IHC under 12 CFR 225.4, 225.8, and 263.202.
§ 252.166 Restrictions on corporate practices of intermediate holding companies of global systemically important foreign banking organizations.
(a) Prohibited corporate practices. A Covered IHC may not directly:
(1) Issue any debt instrument with an original maturity of less than 365 days (one year), including short term deposits and demand deposits, to any person, unless the person is an affiliate of the Covered IHC;
(2) Issue any instrument, or enter into any related contract, with respect to which the holder of the instrument has a contractual right to offset debt owed by the holder or its affiliates to the Covered IHC or a subsidiary of the Covered IHC against the amount, or a portion of the amount, owed by the Covered IHC under the instrument;
(3) Enter into a qualified financial contract that is not a credit enhancement with a person that is not an affiliate of the Covered IHC;
(4) Enter into an agreement in which the Covered IHC guarantees a liability of an affiliate of the Covered IHC if such liability permits the exercise of a default right that is related, directly or indirectly, to the Covered IHC becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding other than a receivership proceeding under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5381 through 5394) unless the liability is subject to requirements of the Board restricting such default rights or subject to any similar requirements of another U.S. federal banking agency; or
(5) Enter into, or otherwise benefit from, any agreement that provides for its liabilities to be guaranteed by any of its subsidiaries.
(b) Limit on unrelated liabilities. (1) The aggregate amount, on an unconsolidated basis, of unrelated liabilities of a Covered IHC may not exceed 5 percent of the Covered IHC’s Covered IHC total loss-absorbing capacity amount, as calculated under § 252.165(c).
(2) For purposes of paragraph (b)(1) of this section, an unrelated liability includes:
(i) With respect to a non-resolution Covered IHC, any non-contingent liability of the non-resolution Covered IHC owed to a person that is not an affiliate of the non-resolution Covered IHC other than those liabilities specified in paragraph (b)(3) of this section, and
(ii) With respect to a resolution Covered IHC, any non-contingent liability of the resolution Covered IHC owed to a person that is not a subsidiary of the resolution Covered IHC other than those liabilities specified in paragraph (b)(3) of this section.
(3)(i) The instruments that are used to satisfy the Covered IHC’s Covered IHC total loss-absorbing capacity amount, as calculated under § 252.165(a);
(ii) Any dividend or other liability arising from the instruments that are used to satisfy the Covered IHC’s Covered IHC total loss-absorbing capacity amount, as calculated under § 252.165(c)(2);
(iii) An eligible Covered IHC debt security that does not provide the holder of the instrument with a currently exercisable right to require immediate payment of the total or remaining principal amount; and
(iv) A secured liability, to the extent that it is secured, or a liability that otherwise represents a claim that would be senior to eligible Covered IHC debt securities in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(b)) and the Bankruptcy Code (11 U.S.C. 507).
(c) A Covered IHC is not subject to paragraph (b) of this section if all of the eligible Covered IHC debt securities issued by the Covered IHC would represent the most subordinated debt claim in a receivership, insolvency, liquidation, or similar proceeding of the Covered IHC.
§ 252.167 Disclosure requirements for resolution Covered IHCs.
(a) A resolution Covered IHC that has any outstanding eligible external debt securities must publicly disclose a description of the financial consequences to unsecured debtholders of the resolution Covered IHC entering into a resolution proceeding in which the resolution Covered IHC is the only entity in the United States that would be subject to the resolution proceeding.
(b) A resolution Covered IHC must provide the disclosure required by paragraph (a) of this section:
(1) In the offering documents for all of its eligible external debt securities; and
(2) Either:
(i) On the resolution Covered IHC’s Web site; or
(ii) In more than one public financial report or other public regulatory reports, provided that the resolution Covered IHC publicly provides a summary table specifically indicating the location(s) of this disclosure.
Subpart Q – Single-Counterparty Credit Limits
§ 252.170 Applicability and general provisions.
(a) In general. (1) This subpart establishes single counterparty credit limits for a covered foreign entity.
(2) For purposes of this subpart:
(i) Covered foreign entity means:
(A) A Category II foreign banking organization;
(B) A Category III foreign banking organization;
(C) A foreign banking organization with total consolidated assets that equal or exceed $250 billion;
(D) A Category II U.S. intermediate holding company; and
(E) A Category III U.S. intermediate holding company.
(ii) Major foreign banking organization means a foreign banking organization that is a covered foreign entity and meets the requirements of § 252.172(c)(3) through (5).
(b) Credit exposure limits. (1) Section 252.172 establishes credit exposure limits for covered foreign entities and major foreign banking organizations.
(2) A covered foreign entity is required to calculate its aggregate net credit exposure, gross credit exposure, and net credit exposure to a counterparty using the methods in this subpart.
(c) Applicability of this subpart – (1) Foreign banking organizations. (i) A foreign banking organization that is a covered foreign entity as of October 5, 2018, must comply with the requirements of this subpart, including but not limited to § 252.172, beginning on January 1, 2022, unless that time is extended by the Board in writing.
(ii) Notwithstanding paragraph (c)(1)(i) of this section, a foreign banking organization that is a major foreign banking organization as of October 5, 2018, must comply with the requirements of this subpart, including but not limited to § 252.172, beginning on July 1, 2021, unless that time is extended by the Board in writing.
(2) U.S. intermediate holding companies. (i) A U.S. intermediate holding company that is a covered foreign entity as of October 5, 2018, must comply with the requirements of this subpart, including but not limited to § 252.172, beginning on July 1, 2020, unless that time is extended by the Board in writing.
(ii) [Reserved]
(iii) A U.S. intermediate holding company that becomes a covered foreign entity subject to this subpart after October 5, 2018, must comply with the requirements of this subpart beginning on the first day of the ninth calendar quarter after it becomes a covered foreign entity, unless that time is accelerated or extended by the Board in writing.
(d) Cessation of requirements – (1) Foreign banking organizations. (i) Any foreign banking organization that becomes a covered foreign entity will remain subject to the requirements of this subpart unless and until:
(A) The covered foreign entity is not a Category II foreign banking organization;
(B) The covered foreign entity is not a Category III foreign banking organization; and
(C) Its total consolidated assets fall below $250 billion for each of four consecutive quarters, as reported on the covered foreign entity’s FR Y-7Q, effective on the as-of date of the fourth consecutive FR Y-7Q.
(ii) A foreign banking organization that is a covered foreign entity and that has ceased to be a major foreign banking organization for purposes of § 252.172(c) is no longer subject to the requirements of § 252.172(c) beginning on the first day of the calendar quarter following the reporting date on which it ceased to be a major foreign banking organization; provided that the foreign banking organization remains subject to the requirements of this subpart, unless it ceases to be a foreign banking organization that is a covered foreign entity pursuant to paragraph (d)(1)(i) of this section.
(2) U.S. intermediate holding companies. (i) Any U.S. intermediate holding company that becomes a covered foreign entity will remain subject to the requirements of this subpart unless and until:
(A) The covered foreign entity is not a Category II U.S. intermediate holding company; or
(B) The covered foreign entity is not a Category III U.S. intermediate holding company.
§ 252.171 Definitions.
Unless defined in this section, terms that are set forth in § 252.2 of this part and used in this subpart have the definitions assigned in § 252.2. For purposes of this subpart:
(a) Adjusted market value means:
(1) With respect to the value of cash, securities, or other eligible collateral transferred by the covered foreign entity to a counterparty, the sum of:
(i) The market value of the cash, securities, or other eligible collateral; and
(ii) The product of the market value of the securities or other eligible collateral multiplied by the applicable collateral haircut in Table 1 to § 217.132 of the Board’s Regulation Q (12 CFR 217.132); and
(2) With respect to cash, securities, or other eligible collateral received by the covered foreign entity from a counterparty:
(i) The market value of the cash, securities, or other eligible collateral; minus
(ii) The market value of the securities or other eligible collateral multiplied by the applicable collateral haircut in Table 1 to § 217.132 of the Board’s Regulation Q (12 CFR 217.132).
(3) Prior to calculating the adjusted market value pursuant to paragraphs (1) and (2) of this section, with regard to a transaction that meets the definition of “repo-style transaction” in § 217.2 of the Board’s Regulation Q (12 CFR 217.2), the covered foreign entity would first multiply the applicable collateral haircuts in Table 1 to § 217.132 of the Board’s Regulation Q (12 CFR 217.132) by the square root of
(b) Affiliate means, with respect to a company:
(1) Any subsidiary of the company and any other company that is consolidated with the company under applicable accounting standards; or
(2) For a company that is not subject to principles or standards referenced in paragraph (b)(1) of this section, any subsidiary of the company and any other company that would be consolidated with the company, if consolidation would have occurred if such principles or standards had applied.
(c) Aggregate net credit exposure means the sum of all net credit exposures of a covered foreign entity and all of its subsidiaries to a single counterparty as calculated under this subpart.
(d) Bank-eligible investments means investment securities that a national bank is permitted to purchase, sell, deal in, underwrite, and hold under 12 U.S.C. 24 (Seventh) and 12 CFR part 1.
(e) Capital stock and surplus means, with respect to a U.S. intermediate holding company, the sum of the following amounts in each case as reported by the U.S. intermediate holding company on the most recent FR Y-9C on a consolidated basis:
(1) The tier 1 capital and tier 2 capital of the U.S. intermediate holding company, as calculated under the capital adequacy guidelines applicable to that U.S. intermediate holding company under subpart O of the Board’s Regulation YY (12 CFR part 252, subpart O); and
(2) The excess allowance for loan and lease losses of the U.S. intermediate holding company not included in its tier 2 capital, as calculated under the capital adequacy guidelines applicable to that U.S. intermediate holding company under subpart O of the Board’s Regulation YY (12 CFR part 252, subpart O).
(f) Counterparty means with respect to a credit transaction:
(1) With respect to a natural person:
(i) The natural person;
(ii) Except as provided in paragraph (f)(1)(iii) of this section, if the credit exposure of the covered foreign entity to such natural person exceeds 5 percent of tier 1 capital, the natural person and members of the person’s immediate family collectively; and
(iii) Until January 1, 2021, with respect to a U.S. intermediate holding company that is a covered foreign entity and that has less than $250 billion in total consolidated assets as of December 31, 2019, if the credit exposure of the U.S. intermediate holding company to such natural person exceeds 5 percent of its capital stock and surplus, the natural person and member of the person’s immediately family collectively.
(2) With respect to any company that is not an affiliate of the covered foreign entity, the company and its affiliates collectively;
(3) With respect to a State, the State and all of its agencies, instrumentalities, and political subdivisions (including any municipalities) collectively;
(4) With respect to a foreign sovereign entity that is not assigned a zero percent risk weight under the standardized approach in the Board’s Regulation Q (12 CFR part 217, subpart D), other than the home country foreign sovereign entity of a foreign banking organization, the foreign sovereign entity and all of its agencies and instrumentalities (but not including any political subdivision), collectively; and
(5) With respect to a political subdivision of a foreign sovereign entity such as a state, province, or municipality, any political subdivision of the foreign sovereign entity and all of such political subdivision’s agencies and instrumentalities, collectively.
(g) Covered foreign entity is defined in § 252.170(a)(2)(i) of this subpart.
(h) Credit derivative has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(i) Credit transaction means, with respect to a counterparty:
(1) Any extension of credit to the counterparty, including loans, deposits, and lines of credit, but excluding uncommitted lines of credit;
(2) Any repurchase agreement or reverse repurchase agreement with the counterparty;
(3) Any securities lending or securities borrowing transaction with the counterparty;
(4) Any guarantee, acceptance, or letter of credit (including any endorsement, confirmed letter of credit, or standby letter of credit) issued on behalf of the counterparty;
(5) Any purchase of securities issued by or other investment in the counterparty;
(6) Any credit exposure to the counterparty in connection with a derivative transaction between the covered foreign entity and the counterparty;
(7) Any credit exposure to the counterparty in connection with a credit derivative or equity derivative between the covered foreign entity and a third party, the reference asset of which is an obligation or equity security of, or equity investment in, the counterparty; and
(8) Any transaction that is the functional equivalent of the above, and any other similar transaction that the Board, by regulation, determines to be a credit transaction for purposes of this subpart.
(j) Depository institution has the same meaning as in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
(k) Derivative transaction means any transaction that is a contract, agreement, swap, warrant, note, or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices, or other assets.
(l) Eligible collateral means collateral in which, notwithstanding the prior security interest of any custodial agent, the covered foreign entity has a perfected, first priority security interest (or the legal equivalent thereof, if outside of the United States), with the exception of cash on deposit, and is in the form of:
(1) Cash on deposit with the covered foreign entity or an affiliate of the covered foreign entity (including cash in foreign currency or U.S. dollars held for the covered foreign entity by a custodian or trustee, whether inside or outside of the United States);
(2) Debt securities (other than mortgage- or asset-backed securities and resecuritization securities, unless those securities are issued by a U.S. government-sponsored enterprise) that are bank-eligible investments and that are investment grade, except for any debt securities issued by the covered foreign entity or any affiliate of the covered foreign entity;
(3) Equity securities that are publicly traded, except for any equity securities issued by the covered foreign entity or any affiliate of the covered foreign entity;
(4) Convertible bonds that are publicly traded, except for any convertible bonds issued by the covered foreign entity or any affiliate of the covered foreign entity; or
(5) Gold bullion.
(m) Eligible credit derivative means a single-name credit derivative or a standard, non-tranched index credit derivative, provided that:
(1) The contract meets the requirements of an eligible guarantee and has been confirmed by the protection purchaser and the protection provider;
(2) Any assignment of the contract has been confirmed by all relevant parties;
(3) If the credit derivative is a credit default swap, the contract includes the following credit events:
(i) Failure to pay any amount due under the terms of the reference exposure, subject to any applicable minimal payment threshold that is consistent with standard market practice and with a grace period that is closely in line with the grace period of the reference exposure; and
(ii) Receivership, insolvency, liquidation, conservatorship, or inability of the reference exposure issuer to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and similar events;
(4) The terms and conditions dictating the manner in which the contract is to be settled are incorporated into the contract;
(5) If the contract allows for cash settlement, the contract incorporates a robust valuation process to estimate loss reliably and specifies a reasonable period for obtaining post-credit event valuations of the reference exposure;
(6) If the contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of at least one of the exposures that is permitted to be transferred under the contract provide that any required consent to transfer may not be unreasonably withheld; and
(7) If the credit derivative is a credit default swap, the contract clearly identifies the parties responsible for determining whether a credit event has occurred, specifies that this determination is not the sole responsibility of the protection provider, and gives the protection purchaser the right to notify the protection provider of the occurrence of a credit event.
(n) Eligible equity derivative means an equity derivative, provided that:
(1) The derivative contract has been confirmed by all relevant parties;
(2) Any assignment of the derivative contract has been confirmed by all relevant parties; and
(3) The terms and conditions dictating the manner in which the derivative contract is to be settled are incorporated into the contract.
(o) Eligible guarantee has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(p) Eligible guarantor has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2), but does not include the foreign banking organization or any entity that is an affiliate of either the U.S. intermediate holding company or of any part of the foreign banking organization’s combined U.S. operations.
(q) Equity derivative has the same meaning as “equity derivative contract” in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(r) Exempt counterparty means an entity that is identified as exempt from the requirements of this subpart under § 252.177, or that is otherwise excluded from this subpart, including any sovereign entity assigned a zero percent risk weight under the standardized approach in the Board’s Regulation Q (12 CFR part 217, subpart D).
(s) Financial entity means:
(1)(i) A bank holding company or an affiliate thereof; a savings and loan holding company as defined in section 10(n) of the Home Owners’ Loan Act (12 U.S.C. 1467a(n)); a U.S. intermediate holding company established or designated for purposes of compliance with this part; or a nonbank financial company supervised by the Board;
(ii) A depository institution as defined in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States; a federal credit union or state credit union as defined in section 2 of the Federal Credit Union Act (12 U.S.C. 1752(1) and (6)); a national association, state member bank, or state nonmember bank that is not a depository institution; an institution that functions solely in a trust or fiduciary capacity as described in section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(D)); an industrial loan company, an industrial bank, or other similar institution described in section 2(c)(2)(H) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(H));
(iii) An entity that is state-licensed or registered as:
(A) A credit or lending entity, including a finance company; money lender; installment lender; consumer lender or lending company; mortgage lender, broker, or bank; motor vehicle title pledge lender; payday or deferred deposit lender; premium finance company; commercial finance or lending company; or commercial mortgage company; except entities registered or licensed solely on account of financing the entity’s direct sales of goods or services to customers;
(B) A money services business, including a check casher; money transmitter; currency dealer or exchange; or money order or traveler’s check issuer;
(iv) Any person registered with the Commodity Futures Trading Commission as a swap dealer or major swap participant pursuant to the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or an entity that is registered with the U.S. Securities and Exchange Commission as a security-based swap dealer or a major security-based swap participant pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.);
(v) A securities holding company as defined in section 618 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 1850a); a broker or dealer as defined in sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)-(5)); an investment adviser as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or a company that has elected to be regulated as a business development company pursuant to section 54(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-53(a));
(vi) A private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is deemed not to be an investment company under section 3 of the Investment Company Act of 1940 pursuant to Investment Company Act Rule 3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange Commission;
(vii) A commodity pool, a commodity pool operator, or a commodity trading advisor as defined, respectively, in sections 1a(10), 1a(11), and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10), 1a(11), and 1a(12)); a floor broker, a floor trader, or introducing broker as defined, respectively, in sections 1a(22), 1a(23) and 1a(31) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined in section 1a(28) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28));
(viii) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974 (29 U.S.C. 1002);
(ix) An entity that is organized as an insurance company, primarily engaged in writing insurance or reinsuring risks underwritten by insurance companies, or is subject to supervision as such by a State insurance regulator or foreign insurance regulator;
(x) Any designated financial market utility, as defined in section 803 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5462); and
(xi) An entity that would be a financial entity described in paragraphs (s)(1)(i) through (x) of this section, if it were organized under the laws of the United States or any State thereof; and
(2) Provided that, for purposes of this subpart, “financial entity” does not include any counterparty that is a foreign sovereign entity or multilateral development bank.
(t) Foreign sovereign entity means a sovereign entity other than the United States government and the entity’s agencies, departments, ministries, and central bank.
(u) Gross credit exposure means, with respect to any credit transaction, the credit exposure of the covered foreign entity before adjusting, pursuant to § 252.174, for the effect of any qualifying master netting agreement, eligible collateral, eligible guarantee, eligible credit derivative, eligible equity derivative, other eligible hedge, and any unused portion of certain extensions of credit.
(v) Immediate family means the spouse of an individual, the individual’s minor children, and any of the individual’s children (including adults) residing in the individual’s home.
(w) Intraday credit exposure means credit exposure of a covered foreign entity to a counterparty that by its terms is to be repaid, sold, or terminated by the end of its business day in the United States.
(x) Investment grade has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(y) Major counterparty means any counterparty that is or includes:
(1) A U.S. bank holding company identified as a global systemically important BHC pursuant to § 217.402 of the Board’s Regulation Q (12 CFR 217.402);
(2) A top-tier foreign banking organization that meets the requirements of § 252.172(c)(3) through (5); or
(3) Any nonbank financial company supervised by the Board.
(z) Major foreign banking organization is defined in § 252.170(a)(2)(ii) of this subpart.
(aa) Multilateral development bank has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(bb) Net credit exposure means, with respect to any credit transaction, the gross credit exposure of a covered foreign entity and all of its subsidiaries calculated under § 252.173, as adjusted in accordance with § 252.174.
(cc) Qualifying central counterparty has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(dd) Qualifying master netting agreement has the same meaning as in § 217.2 of the Board’s Regulation Q (12 CFR 217.2).
(ee) Securities financing transaction means any repurchase agreement, reverse repurchase agreement, securities borrowing transaction, or securities lending transaction.
(ff) Short sale means any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller.
(gg) Sovereign entity means a central national government (including the U.S. government) or an agency, department, ministry, or central bank, but not including any political subdivision such as a state, province, or municipality.
(hh) Subsidiary. A company is a subsidiary of another company if
(1) The company is consolidated by the other company under applicable accounting standards; or
(2) For a company that is not subject to principles or standards referenced in paragraph (ii)(1) of this definition, consolidation would have occurred if such principles or standards had applied.
(ii) Tier 1 capital means common equity tier 1 capital and additional tier 1 capital, as defined in subpart O of the Board’s Regulation YY(12 CFR part 252, subpart O).
(jj) Tier 2 capital means tier 2 capital as defined in subpart O of the Board’s Regulation YY (12 CFR part 252, subpart O).
(kk) Total consolidated assets. (1) A foreign banking organization’s total consolidated assets are determined based on:
(i) The average of the foreign banking organization’s total consolidated assets in the four most recent consecutive quarters as reported quarterly on the FR Y-7Q; or
(ii) If the foreign banking organization has not filed an FR Y-7Q for each of the four most recent consecutive quarters, the average of the foreign banking organization’s total consolidated assets, as reported on the foreign banking organization’s FR Y-7Q, for the most recent quarter or consecutive quarters, as applicable; or
(iii) If the foreign banking organization has not yet filed an FR Y-7Q, as determined under applicable accounting standards.
(2) A U.S. intermediate holding company’s total consolidated assets are determined based on:
(i) The average of the U.S. intermediate holding company’s total consolidated assets in the four most recent consecutive quarters as reported quarterly on the FR Y-9C; or
(ii) If the U.S. intermediate holding company has not filed an FR Y-9C for each of the four most recent consecutive quarters, the average of the U.S. intermediate holding company’s total consolidated assets, as reported on the company’s FR Y-9C, for the most recent quarter or consecutive quarters, as applicable; or
(iii) If the U.S. intermediate holding company has not yet filed an FR Y-9C, as determined under applicable accounting standards.
§ 252.172 Credit exposure limits.
(a) Transition limit on aggregate credit exposure for certain covered foreign entities. (1) A U.S. intermediate holding company that is a covered foreign entity and that has less than $250 billion in total consolidated assets as of December 31, 2019 is not required to comply with paragraph (b)(1) of this section until January 1, 2021.
(2) Until January 1, 2021, no U.S. intermediate holding company that is a covered foreign entity and that has less than $250 billion in total consolidated assets as of December 31, 2019 may have an aggregate net credit exposure that exceeds 25 percent of the consolidated capital stock and surplus of the U.S. intermediate holding company.
(b) Limit on aggregate net credit exposure for covered foreign entities. (1) Except as provided in paragraph (a) of this section, no U.S. intermediate holding company that is a covered foreign entity may have an aggregate net credit exposure to any counterparty that exceeds 25 percent of the tier 1 capital of the U.S. intermediate holding company.
(2) No foreign banking organization that is a covered foreign entity may permit its combined U.S. operations to have aggregate net credit exposure to any counterparty that exceeds 25 percent of the tier 1 capital of the foreign banking organization.
(c) Limit on aggregate net credit exposure of major foreign banking organizations to major counterparties.
(1) [Reserved]
(2) No major foreign banking organization may permit its combined U.S. operations to have aggregate net credit exposure to any major counterparty that exceeds 15 percent of the tier 1 capital of the major foreign banking organization.
(3) For purposes of this subpart, a top-tier foreign banking organization will be a major counterparty if it meets one of the following conditions:
(i) The top-tier foreign banking organization determines, pursuant to 12 CFR 252.153(b)(6), that the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology; or
(ii) The Board, using information available to the Board, determines:
(A) That the top-tier foreign banking organization would be a global systemically important banking organization under the global methodology;
(B) That the top-tier foreign banking organization, if it were subject to the Board’s Regulation Q, would be identified as a global systemically important BHC under 12 CFR 217.402 of the Board’s Regulation Q; or
(C) That the U.S. intermediate holding company, if it were subject to 12 CFR 217.402 of the Board’s Regulation Q, would be identified as a global systemically important BHC.
(4) Each top-tier foreign banking organization that controls a U.S. intermediate holding company must submit to the Board by January 1 of each calendar year through the U.S. intermediate holding company:
(A) Notice of whether the home country supervisor (or other appropriate home country regulatory authority) of the top-tier foreign banking organization of the U.S. intermediate holding company has adopted standards consistent with the global methodology; and
(B) Notice of whether the top-tier foreign banking organization prepares or reports the indicators used by the global methodology to identify a banking organization as a global systemically important banking organization and, if it does, whether the top-tier foreign banking organization has determined that it has the characteristics of a global systemically important banking organization under the global methodology pursuant to 12 CFR 252.153(b)(6).
(5) A top-tier foreign banking organization that controls a U.S. intermediate holding company and prepares or reports for any purpose the indicator amounts necessary to determine whether the top-tier foreign banking organization is a global systemically important banking organization under the global methodology must use the data to determine whether the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology.
(d) Foreign banking organizations subject on a consolidated basis to a large exposures or single-counterparty credit limit regime by its home-country supervisor. (1) Notwithstanding paragraphs (a) through (c) of this section, a foreign banking organization that is a covered foreign entity is not required to comply with the requirements of this subpart with respect to limits on the aggregate net credit exposure of its combined U.S. operations if the foreign banking organization certifies to the Board that it meets large exposure standards on a consolidated basis established by its home-country supervisor that are consistent with the large exposures framework published by the Basel Committee on Banking Supervision (Basel Large Exposures Framework), unless the Board determines in writing, after notice to the foreign banking organization, that compliance with this subpart is required.
(i) For purposes of this paragraph, home-country large exposure standards that are consistent with the Basel Large Exposures Framework include single-counterparty credit limits and any restrictions set forth in “Supervisory framework for measuring and controlling large exposures” (2014) (Basel LE Standard), as implemented in accordance with the Basel LE Standard.
(ii) [Reserved]
(2) A foreign banking organization that is a covered foreign entity must provide to the Board reports relating to its compliance with the large exposure standards described in paragraph (d)(1) of this section concurrently with filing the FR Y-7Q or any successor report.
§ 252.173 Gross credit exposure.
(a) Calculation of gross credit exposure. The amount of gross credit exposure of a covered foreign entity to a counterparty with respect to a credit transaction is, in the case of:
(1) A deposit of the covered foreign entity held by the counterparty, loan by a covered foreign entity to the counterparty, and lease in which the covered foreign entity is the lessor and the counterparty is the lessee, equal to the amount owed by the counterparty to the covered foreign entity under the transaction.
(2) A debt security or debt investment held by the covered foreign entity that is issued by the counterparty, equal to:
(i) The market value of the securities, for trading and available-for-sale securities; and
(ii) The amortized purchase price of the securities or investments, for securities or investments held to maturity.
(3) An equity security held by the covered foreign entity that is issued by the counterparty, equity investment in a counterparty, and other direct investments in a counterparty, equal to the market value.
(4) A securities financing transaction must be valued using any of the methods that the covered foreign entity is authorized to use under the Board’s Regulation Q (12 CFR part 217, subparts D and E) to value such transactions:
(i)(A) As calculated for each transaction, in the case of a securities financing transaction between the covered foreign entity and the counterparty that is not subject to a bilateral netting agreement or does not meet the definition of “repo-style transaction” in § 217.2 of the Board’s Regulation Q (12 CFR 217.2); or
(B) As calculated for a netting set, in the case of a securities financing transaction between the covered foreign entity and the counterparty that is subject to a bilateral netting agreement with that counterparty and meets the definition of “repo-style transaction” in § 217.2 of the Board’s Regulation Q (12 CFR 217.2);
(ii) For purposes of paragraph (a)(4)(i) of this section, the covered foreign entity must:
(A) Assign a value of zero to any security received from the counterparty that does not meet the definition of “eligible collateral” in § 252.171(l); and
(B) Include the value of securities that are eligible collateral received by the covered foreign entity from the counterparty (including any exempt counterparty), calculated in accordance with paragraphs (a)(4)(i) through (iv) of this section, when calculating its gross credit exposure to the issuer of those securities;
(iii) Notwithstanding paragraph (a)(4)(i) and (ii) of this section and with respect to each credit transaction, a covered foreign entity’s gross credit exposure to a collateral issuer under this paragraph (a)(4) is limited to the covered foreign entity’s gross credit exposure to the counterparty on the credit transaction;
(iv) In cases where the covered foreign entity receives eligible collateral from a counterparty in addition to the cash or securities received from that counterparty, the counterparty may reduce its gross credit exposure to that counterparty in accordance with § 252.174(b).
(5) A committed credit line extended by a covered foreign entity to a counterparty, equal to the face amount of the committed credit line.
(6) A guarantee or letter of credit issued by a covered foreign entity on behalf of a counterparty, equal to the maximum potential loss to the covered foreign entity on the transaction.
(7) A derivative transaction must be valued using any of the methods that the covered foreign entity is authorized to use under the Board’s Regulation Q (12 CFR part 217, subparts D and E) to value such transactions:
(i)(A) As calculated for each transaction, in the case of a derivative transaction between the covered foreign entity and the counterparty, including an equity derivative but excluding a credit derivative described in paragraph (a)(8) of this section, that is not subject to a qualifying master netting agreement; or
(B) As calculated for a netting set, in the case of a derivative transaction between the covered foreign entity and the counterparty, including an equity derivative but excluding a credit derivative described in paragraph (a)(8) of this section, that is subject to a qualifying master netting agreement.
(ii) In cases where a covered foreign entity is required to recognize an exposure to an eligible guarantor pursuant to § 252.174(d), the covered foreign entity must exclude the relevant derivative transaction when calculating its gross exposure to the original counterparty under this section.
(8) A credit derivative between the covered foreign entity and a third party where the covered foreign entity is the protection provider and the reference asset is an obligation or debt security of the counterparty, equal to the maximum potential loss to the covered foreign entity on the transaction.
(b) Investments in and exposures to securitization vehicles, investment funds, and other special purpose vehicles that are not affiliates. Notwithstanding paragraph (a) of this section.
(1) A U.S. intermediate holding company that is a covered foreign entity and that has less than $250 billion in total consolidated assets as of December 31, 2019 is not required to comply with paragraph (b)(3) of this section until January 1, 2021.
(2) Until January 1, 2021, unless the Board applies the requirements of § 252.175 to the transaction pursuant to § 252.175(d), a U.S. intermediate holding company that is a covered foreign entity and that has less than $250 billion in total consolidated assets as of December 31, 2019 must:
(i) Calculate pursuant to paragraph (a) of this section its gross credit exposure due to any investment in the debt or equity of, and any credit derivative or equity derivative between the covered foreign entity and a third party where the covered foreign entity is in the protection provider and the reference asset is an obligation or equity security of, or equity investment in, a securitization vehicle, investment fund, and other special purpose vehicle that is not an affiliate of the covered foreign entity; and
(ii) Attribute that gross credit exposure to the securitization vehicle, investment fund, or other special purpose vehicle for purposes of this subpart.
(3) Except as provided in paragraph (b)(1) of this section, a covered foreign entity must calculate pursuant to § 252.175 its gross credit exposure due to any investment in the debt or equity of, and any credit derivative or equity derivative between the covered foreign entity and a third party where the covered foreign entity is the protection provider and the reference asset is an obligation or equity security of, or equity investment in, a securitization vehicle, investment fund, and other special purpose vehicle that is not an affiliate of the covered foreign entity.
(c) Attribution rule. Notwithstanding paragraph (a) of this section, a covered foreign entity must treat any transaction with any natural person or entity as a credit transaction with another party, to the extent that the proceeds of the transaction are used for the benefit of, or transferred to, the other party.
§ 252.174 Net credit exposure.
(a) In general. For purposes of this subpart, a covered foreign entity must calculate its net credit exposure to a counterparty by adjusting its gross credit exposure to that counterparty in accordance with the rules set forth in this section.
(b) Eligible collateral. (1) In computing its net credit exposure to a counterparty for any credit transaction other than a securities financing transaction, a covered foreign entity must reduce its gross credit exposure on the transaction by the adjusted market value of any eligible collateral.
(2) A covered foreign entity that reduces its gross credit exposure to a counterparty as required under paragraph (b)(1) of this section must include the adjusted market value of the eligible collateral when calculating its gross credit exposure to the collateral issuer.
(3) Notwithstanding paragraph (b)(2) of this section, a covered foreign entity’s gross credit exposure to a collateral issuer under this paragraph (b) is limited to:
(i) Its gross credit exposure to the counterparty on the credit transaction, or
(ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction if valued in accordance with § 252.173(a).
(c) Eligible guarantees. (1) In calculating net credit exposure to a counterparty for any credit transaction, a covered foreign entity must reduce its gross credit exposure to the counterparty by the amount of any eligible guarantee from an eligible guarantor that covers the transaction.
(2) A covered foreign entity that reduces its gross credit exposure to a counterparty as required under paragraph (c)(1) of this section must include the amount of eligible guarantees when calculating its gross credit exposure to the eligible guarantor.
(3) Notwithstanding paragraph (c)(2) of this section, a covered foreign entity’s gross credit exposure to an eligible guarantor with respect to an eligible guarantee under this paragraph (c) is limited to:
(i) Its gross credit exposure to the counterparty on the credit transaction prior to recognition of the eligible guarantee, or
(ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction prior to recognition of the eligible guarantee if valued in accordance with § 252.173(a).
(d) Eligible credit and equity derivatives. (1) In calculating net credit exposure to a counterparty for a credit transaction under this section, a covered foreign entity must reduce its gross credit exposure to the counterparty by:
(i) In the case of any eligible credit derivative from an eligible guarantor, the notional amount of the eligible credit derivative; or
(ii) In the case of any eligible equity derivative from an eligible guarantor, the gross credit exposure amount to the counterparty (calculated in accordance with § 252.173(a)(7)).
(2)(i) A covered foreign entity that reduces its gross credit exposure to a counterparty as provided under paragraph (d)(1) of this section must include, when calculating its net credit exposure to the eligible guarantor, including in instances where the underlying credit transaction would not be subject to the credit limits of § 252.172 (for example, due to an exempt counterparty), either
(A) In the case of any eligible credit derivative from an eligible guarantor, the notional amount of the eligible credit derivative; or
(B) In the case of any eligible equity derivative from an eligible guarantor, the gross credit exposure amount to the counterparty (calculated in accordance with § 252.173(a)(7)).
(ii) Notwithstanding paragraph (d)(2)(i) of this section, in cases where the eligible credit derivative or eligible equity derivative is used to hedge covered positions that are subject to the Board’s market risk rule (12 CFR part 217, subpart F) and the counterparty on the hedged transaction is not a financial entity, the amount of credit exposure that a entity must recognize to the eligible guarantor is the amount that would be calculated pursuant to § 252.173(a).
(3) Notwithstanding paragraph (d)(2) of this section, a covered foreign entity’s gross credit exposure to an eligible guarantor with respect to an eligible credit derivative or an eligible equity derivative under this paragraph (d) is limited to:
(i) Its gross credit exposure to the counterparty on the credit transaction prior to recognition of the eligible credit derivative or the eligible equity derivative, or
(ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction prior to recognition of the eligible credit derivative or the eligible equity derivative if valued in accordance with § 252.173(a).
(e) Other eligible hedges. In calculating net credit exposure to a counterparty for a credit transaction under this section, a covered foreign entity may reduce its gross credit exposure to the counterparty by the face amount of a short sale of the counterparty’s debt security or equity security, provided that:
(1) The instrument in which the covered foreign entity has a short position is junior to, or pari passu with, the instrument in which the covered foreign entity has the long position; and
(2) The instrument in which the covered foreign entity has a short position and the instrument in which the covered foreign entity has the long position are either both treated as trading or available-for-sale exposures or both treated as held-to-maturity exposures.
(f) Unused portion of certain extensions of credit. (1) In computing its net credit exposure to a counterparty for a committed credit line or revolving credit facility under this section, a covered foreign entity may reduce its gross credit exposure by the amount of the unused portion of the credit extension to the extent that the covered foreign entity does not have any legal obligation to advance additional funds under the extension of credit and the used portion of the credit extension has been fully secured by eligible collateral.
(2) To the extent that the used portion of a credit extension has been secured by eligible collateral, the covered foreign entity may reduce its gross credit exposure by the adjusted market value of any eligible collateral received from the counterparty, even if the used portion has not been fully secured by eligible collateral.
(3) To qualify for the reduction in net credit exposure under this paragraph, the credit contract must specify that any used portion of the credit extension must be fully secured by the adjusted market value of any eligible collateral.
(g) Credit transactions involving exempt counterparties. (1) A covered foreign entity’s credit transactions with an exempt counterparty are not subject to the requirements of this subpart, including but not limited to § 252.172.
(2) Notwithstanding paragraph (g)(1) of this section, in cases where a covered foreign entity has a credit transaction with an exempt counterparty and the covered foreign entity has obtained eligible collateral from that exempt counterparty or an eligible guarantee or eligible credit or equity derivative from an eligible guarantor, the covered foreign entity must include (for purposes of this subpart) such exposure to the issuer of such eligible collateral or the eligible guarantor, as calculated in accordance with the rules set forth in this section, when calculating its gross credit exposure to that issuer of eligible collateral or eligible guarantor.
(h) Currency mismatch adjustments. For purposes of calculating its net credit exposure to a counterparty under this section, a covered foreign entity must apply, as applicable:
(1) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible collateral and calculating its gross credit exposure to an issuer of eligible collateral, pursuant to paragraph (b) of this section, the currency mismatch adjustment approach of § 217.37(c)(3)(ii) of the Board’s Regulation Q (12 CFR 217.37(c)(3)(ii)); and
(2) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible guarantee, eligible equity derivative, or eligible credit derivative from an eligible guarantor and calculating its gross credit exposure to an eligible guarantor, pursuant to paragraphs (c) and (d) of this section, the currency mismatch adjustment approach of § 217.36(f) of the Board’s Regulation Q (12 CFR 217.36(f)).
(i) Maturity mismatch adjustments. For purposes of calculating its net credit exposure to a counterparty under this section, a covered foreign entity must apply, as applicable, the maturity mismatch adjustment approach of § 217.36(d) of the Board’s Regulation Q (12 CFR 217.36(d)):
(1) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible collateral or any eligible guarantees, eligible equity derivatives, or eligible credit derivatives from an eligible guarantor, pursuant to paragraphs (b) through (d) of this section, and
(2) In calculating its gross credit exposure to an issuer of eligible collateral, pursuant to paragraph (b) of this section, or to an eligible guarantor, pursuant to paragraphs (c) and (d) of this section; provided that
(3) The eligible collateral, eligible guarantee, eligible equity derivative, or eligible credit derivative subject to paragraph (i)(1) of this section:
(i) Has a shorter maturity than the credit transaction;
(ii) Has an original maturity equal to or greater than one year;
(iii) Has a residual maturity of not less than three months; and
(iv) The adjustment approach is otherwise applicable.
§ 252.175 Investments in and exposures to securitization vehicles, investment funds, and other special purpose vehicles that are not affiliates of the covered foreign entity.
(a) In general. (1) This section applies to a covered foreign entity, except as provided in paragraph (a)(1)(i) of this section.
(i) Until January 1, 2021, this section does not apply to a U.S. intermediate holding company that is a covered foreign entity with less than $250 billion in total consolidated assets as of December 31, 2019, provided that:
(A) In order to avoid evasion of this subpart, the Board may determine, after notice to the covered foreign entity and opportunity for hearing, that a U.S. intermediate holding company with less than $250 billion in total consolidated assets must apply either the approach in this paragraph (a) or the look-through approach in paragraph (b) of this section, or must recognize exposures to a third party that has a contractual obligation to provide credit or liquidity support to a securitization vehicle, investment fund, or other special purpose vehicle that is not an affiliate of the covered foreign entity, as provided in paragraph (c) of this section; and
(B) For purposes of paragraph (a)(1)(i)(A) of this section, the Board, in its discretion and as applicable, may allow a covered foreign entity to measure its capital base using the covered foreign entity’s capital stock and surplus rather than its tier 1 capital.
(ii) [Reserved]
(2) For purposes of this section, the following definitions apply:
(i) SPV means a securitization vehicle, investment fund, or other special purpose vehicle that is not an affiliate of the covered foreign entity.
(ii) SPV exposure means an investment in the debt or equity of an SPV or a credit derivative or equity derivative between the covered foreign entity and a third party where the covered foreign entity is the protection provider and the reference asset is an obligation or equity security of, or equity investment in, an SPV.
(3)(i) A covered foreign entity must determine whether the amount of its gross credit exposure to an issuer of assets in an SPV, due to an SPV exposure, is equal to or greater than 0.25 percent of the covered foreign entity’s tier 1 capital using one of the following two methods:
(A) The sum of all of the issuer’s assets (with each asset valued in accordance with § 252.173(a)) in the SPV; or
(B) The application of the look-through approach described in paragraph (b) of this section.
(ii) With respect to the determination required under paragraph (a)(3)(i) of this section, a covered foreign entity must use the same method to calculate gross credit exposure to each issuer of assets in a particular SPV.
(iii) In making a determination under paragraph (a)(3)(i) of this section, the covered foreign entity must consider only the credit exposure to the issuer arising from the covered foreign entity’s SPV exposure.
(iv) For purposes of this paragraph (a)(3), a covered foreign entity that is unable to identify each issuer of assets in an SPV must attribute to a single unknown counterparty the amount of its gross credit exposure to all unidentified issuers and calculate such gross credit exposure using one method in either paragraph (a)(3)(i)(A) or (B) of this section.
(4)(i) If a covered foreign entity determines pursuant to paragraph (a)(3) of this section that the amount of its gross credit exposure to an issuer of assets in an SPV is less than 0.25 percent of the covered foreign entity’s tier 1 capital, the amount of the covered foreign entity’s gross credit exposure to that issuer may be attributed to either that issuer of assets or the SPV:
(A) If attributed to the issuer of assets, the issuer of assets must be identified as a counterparty, and the gross credit exposure calculated under paragraph (a)(3)(i)(A) of this section to that issuer of assets must be aggregated with any other gross credit exposures (valued in accordance with § 252.173) to that same counterparty; and
(B) If attributed to the SPV, the covered foreign entity’s gross credit exposure is equal to the covered foreign entity’s SPV exposure, valued in accordance with § 252.173(a).
(ii) If a covered foreign entity determines pursuant to paragraph (a)(3) of this section that the amount of its gross credit exposure to an issuer of assets in an SPV is equal to or greater than 0.25 percent of the covered foreign entity’s tier 1 capital or the covered foreign entity is unable to determine that the amount of the gross credit exposure is less than 0.25 percent of the covered foreign entity’s tier 1 capital:
(A) The covered foreign entity must calculate the amount of its gross credit exposure to the issuer of assets in the SPV using the look-through approach in paragraph (b) of this section;
(B) The issuer of assets in the SPV must be identified as a counterparty, and the gross credit exposure calculated in accordance with paragraph (b) must be aggregated with any other gross credit exposures (valued in accordance with § 252.173) to that same counterparty; and
(C) When applying the look-through approach in paragraph (b) of this section, a covered foreign entity that is unable to identify each issuer of assets in an SPV must attribute to a single unknown counterparty the amount of its gross credit exposure, calculated in accordance with paragraph (b) of this section, to all unidentified issuers.
(iii) For purposes of this section, a covered foreign entity must aggregate all gross credit exposures to unknown counterparties for all SPVs as if the exposures related to a single unknown counterparty; this single unknown counterparty is subject to the limits of § 252.172 as if it were a single counterparty.
(b) Look-through approach. A covered foreign entity that is required to calculate the amount of its gross credit exposure with respect to an issuer of assets in accordance with this paragraph (b) must calculate the amount as follows:
(1) Where all investors in the SPV rank pari passu, the amount of the gross credit exposure to the issuer of assets is equal to the covered foreign entity’s pro rata share of the SPV multiplied by the value of the underlying asset in the SPV, valued in accordance with § 252.173(a); and
(2) Where all investors in the SPV do not rank pari passu, the amount of the gross credit exposure to the issuer of assets is equal to:
(i) The pro rata share of the covered foreign entity’s investment in the tranche of the SPV; multiplied by
(ii) The lesser of:
(A) The market value of the tranche in which the covered foreign entity has invested, except in the case of a debt security that is held to maturity, in which case the tranche must be valued at the amortized purchase price of the securities; and
(B) The value of each underlying asset attributed to the issuer in the SPV, each as calculated pursuant to § 252.173(a).
(c) Exposures to third parties. (1) Notwithstanding any other requirement in this section, a covered foreign entity must recognize, for purposes of this subpart, a gross credit exposure to each third party that has a contractual obligation to provide credit or liquidity support to an SPV whose failure or material financial distress would cause a loss in the value of the covered foreign entity’s SPV exposure.
(2) The amount of any gross credit exposure that is required to be recognized to a third party under paragraph (c)(1) of this section is equal to the covered foreign entity’s SPV exposure, up to the maximum contractual obligation of that third party to the SPV, valued in accordance with § 252.173(a). (This gross credit exposure is in addition to the covered foreign entity’s gross credit exposure to the SPV or the issuers of assets of the SPV, calculated in accordance with paragraphs (a) and (b) of this section.)
(3) A covered foreign entity must aggregate the gross credit exposure to a third party recognized in accordance with paragraphs (c)(1) and (2) of this section with its other gross credit exposures to that third party (that are unrelated to the SPV) for purposes of compliance with the limits of § 252.172.
§ 252.176 Aggregation of exposures to more than one counterparty due to economic interdependence or control relationships.
(a) In general. (1) This section applies to a covered foreign entity except as provided in paragraph (a)(1)(i) of this section.
(i) Until January 1, 2021, paragraphs (a)(2) through (d) of this section do not apply to a U.S. intermediate holding company that is a covered foreign entity with less than $250 billion in total consolidated assets as of December 31, 2019.
(ii) [Reserved]
(2)(i) If a covered foreign entity has an aggregate net credit exposure to any counterparty that exceeds 5 percent of its tier 1 capital, the covered foreign entity must assess its relationship with the counterparty under paragraph (b)(2) of this section to determine whether the counterparty is economically interdependent with one or more other counterparties of the covered foreign entity and under paragraph (c)(1) of this section to determine whether the counterparty is connected by a control relationship with one or more other counterparties.
(ii) If, pursuant to an assessment required under paragraph (a)(2)(i) of this section, the covered foreign entity determines that one or more of the factors of paragraph (b)(2) or (c)(1) of this section are met with respect to one or more counterparties, or the Board determines pursuant to paragraph (d) of this section that one or more other counterparties of a covered foreign entity are economically interdependent or that one or more other counterparties of a covered foreign entity are connected by a control relationship, the covered foreign entity must aggregate its net credit exposure to the counterparties for all purposes under this subpart, including, but not limited to, § 252.172.
(iii) In connection with any request pursuant to paragraph (b)(3) or (c)(2) of this section, the Board may require the covered foreign entity to provide additional information.
(b) Aggregation of exposures to more than one counterparty due to economic interdependence. (1) For purposes of this paragraph, two counterparties are economically interdependent if the failure, default, insolvency, or material financial distress of one counterparty would cause the failure, default, insolvency, or material financial distress of the other counterparty, taking into account the factors in paragraph (b)(2) of this section.
(2) A covered foreign entity must assess whether the financial distress of one counterparty (counterparty A) would prevent the ability of the other counterparty (counterparty B) to fully and timely repay counterparty B’s liabilities and whether the insolvency or default of counterparty A is likely to be associated with the insolvency or default of counterparty B and, therefore, these counterparties are economically interdependent, by evaluating the following:
(i) Whether 50 percent or more of one counterparty’s gross revenue is derived from, or gross expenditures are directed to, transactions with the other counterparty;
(ii) Whether counterparty A has fully or partly guaranteed the credit exposure of counterparty B, or is liable by other means, in an amount that is 50 percent or more of the covered foreign entity’s net credit exposure to counterparty A;
(iii) Whether 25 percent or more of one counterparty’s production or output is sold to the other counterparty, which cannot easily be replaced by other customers;
(iv) Whether the expected source of funds to repay the loans of both counterparties is the same and neither counterparty has another independent source of income from which the loans may be serviced and fully repaid;
(v) Whether two or more counterparties rely on the same source for the majority of their funding and, in the event of the common provider’s default, an alternative provider cannot be found.
(3)(i) Notwithstanding paragraph (b)(2) of this section, if a covered foreign entity determines that one or more of the factors in paragraph (b)(2) is met, the covered foreign entity may request in writing a determination from the Board that those counterparties are not economically interdependent and that the covered foreign entity is not required to aggregate those counterparties.
(ii) Upon a request by a covered foreign entity pursuant to paragraph (b)(3) of this section, the Board may grant temporary relief to the covered foreign entity and not require the covered foreign entity to aggregate one counterparty with another counterparty provided that the counterparty could promptly modify its business relationships, such as by reducing its reliance on the other counterparty, to address any economic interdependence concerns, and provided that such relief is in the public interest and is consistent with the purpose of this subpart and 12 U.S.C. 5365(e).
(c) Aggregation of exposures to more than one counterparty due to certain control relationships. (1) For purposes of this subpart, one counterparty (counterparty A) is deemed to control the other counterparty (counterparty B) if:
(i) Counterparty A owns, controls, or holds with the power to vote 25 percent or more of any class of voting securities of counterparty B; or
(ii) Counterparty A controls in any manner the election of a majority of the directors, trustees, or general partners (or individuals exercising similar functions) of counterparty B.
(2)(i) Notwithstanding paragraph (c)(1) of this section, if a covered foreign entity determines that one or more of the factors in paragraph (c)(1) is met, the covered foreign entity may request in writing a determination from the Board that counterparty A does not control counterparty B and that the covered foreign entity is not required to aggregate those counterparties.
(ii) Upon a request by a covered foreign entity pursuant to paragraph (c)(2) of this section, the Board may grant temporary relief to the covered foreign entity and not require the covered foreign entity to aggregate counterparty A with counterparty B provided that, taking into account the specific facts and circumstances, such indicia of control does not result in the entities being connected by control relationships for purposes of this subpart, and provided that such relief is in the public interest and is consistent with the purpose of this subpart and 12 U.S.C. 5365(e).
(d) Board determinations for aggregation of counterparties due to economic interdependence or control relationships. The Board may determine, after notice to the covered foreign entity and opportunity for hearing, that one or more counterparties of a covered foreign entity are:
(1) Economically interdependent for purposes of this subpart, considering the factors in paragraph (b)(2) of this section, as well as any other indicia of economic interdependence that the Board determines in its discretion to be relevant; or
(2) Connected by control relationships for purpose of this subpart, considering the factors in paragraph (c)(1) of this section and whether counterparty A:
(i) Controls the power to vote 25 percent or more of any class of voting securities of Counterparty B pursuant to a voting agreement;
(ii) Has significant influence on the appointment or dismissal of counterparty B’s administrative, management, or governing body, or the fact that a majority of members of such body have been appointed solely as a result of the exercise of counterparty A’s voting rights; or
(iii) Has the power to exercise a controlling influence over the management or policies of counterparty B.
(e) Board determinations for aggregation of counterparties to prevent evasion. Notwithstanding paragraphs (b) and (c) of this section, a covered foreign entity must aggregate its exposures to a counterparty with the covered foreign entity’s exposures to another counterparty if the Board determines in writing after notice and opportunity for hearing, that the exposures to the two counterparties must be aggregated to prevent evasions of the purposes of this subpart, including, but not limited to § 252.176 and 12 U.S.C. 5365(e).
§ 252.177 Exemptions.
(a) Exempted exposure categories. The following categories of credit transactions are exempt from the limits on credit exposure under this subpart:
(1) Any direct claim on, and the portion of a claim that is directly and fully guaranteed as to principal and interest by, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, only while operating under the conservatorship or receivership of the Federal Housing Finance Agency, and any additional obligation issued by a U.S. government-sponsored entity as determined by the Board;
(2) Intraday credit exposure to a counterparty;
(3) Any trade exposure to a qualifying central counterparty related to the covered foreign entity’s clearing activity, including potential future exposure arising from transactions cleared by the qualifying central counterparty and pre-funded default fund contributions;
(4) Any credit transaction with the Bank for International Settlements, the International Monetary Fund, the International Bank for Reconstruction and Development, the International Finance Corporation, the International Development Association, the Multilateral Investment Guarantee Agency, or the International Centre for Settlement of Investment Disputes;
(5) Any credit transaction with the European Commission or the European Central Bank; and
(6) Any transaction that the Board exempts if the Board finds that such exemption is in the public interest and is consistent with the purpose of this subpart.
(b) Additional exemptions by the Board. The Board may, by regulation or order, exempt transactions, in whole or in part, from the definition of the term “credit exposure,” if the Board finds that the exemption is in the public interest and is consistent with the purpose of 12 U.S.C. 5365(e).
§ 252.178 Compliance.
(a) Scope of compliance. (1) Except as provided in paragraph (a)(2) of this section, using all available data, including any data required to be maintained or reported to the Federal Reserve under this subpart, a covered foreign entity must comply with the requirements of this subpart on a daily basis at the end of each business day.
(2) Until December 31, 2020, using all available data, including any data required to be maintained or reported to the Federal Reserve under this subpart, a U.S. intermediate holding company that is a covered foreign entity with less than $250 billion in total consolidated assets as of December 31, 2019 must comply with the requirements of this subpart on a quarterly basis, unless the Board determines and notifies the entity in writing that more frequent compliance is required.
(3) A covered foreign entity must report its compliance to the Federal Reserve as of the end of the quarter, unless the Board determines and notifies that entity in writing that more frequent reporting is required.
(4) In reporting its compliance, a covered foreign entity must calculate and include in its gross credit exposure to an issuer of eligible collateral or eligible guarantor the amounts of eligible collateral, eligible guarantees, eligible equity derivatives, and eligible credit derivatives that were provided to the covered foreign entity in connection with credit transactions with exempt counterparties, valued in accordance with and as required by § 252.174(b) through (d) and (g).
(b) Qualifying Master Netting Agreement. With respect to any qualifying master netting agreement, a covered foreign entity must establish and maintain procedures that meet or exceed the requirements of § 217.3(d) of the Board’s Regulation Q (12 CFR 217.3(d)) to monitor possible changes in relevant law and to ensure that the agreement continues to satisfy these requirements.
(c) Noncompliance. (1) Except as otherwise provided in this section, if a covered foreign entity is not in compliance with this subpart with respect to a counterparty solely due to the circumstances listed in paragraphs (c)(2)(i) through (v) of this section, the covered foreign entity will not be subject to enforcement actions for a period of 90 days (or, with prior notice to the foreign entity, such shorter or longer period determined by the Board, in its sole discretion, to be appropriate to preserve the safety and soundness of the covered foreign entity or U.S. financial stability), if the covered foreign entity uses reasonable efforts to return to compliance with this subpart during this period. The covered foreign entity may not engage in any additional credit transactions with such a counterparty in contravention of this rule during the period of noncompliance, except as provided in paragraph (c)(2) of this section.
(2) A covered foreign entity may request a special temporary credit exposure limit exemption from the Board. The Board may grant approval for such exemption in cases where the Board determines that such credit transactions are necessary or appropriate to preserve the safety and soundness of the covered foreign entity or U.S. financial stability. In acting on a request for an exemption, the Board will consider the following:
(i) A decrease in the covered foreign entity’s capital stock and surplus or tier 1 capital, as applicable;
(ii) The merger of the covered foreign entity with another covered foreign entity;
(iii) A merger of two counterparties; or
(iv) An unforeseen and abrupt change in the status of a counterparty as a result of which the covered foreign entity’s credit exposure to the counterparty becomes limited by the requirements of this section; or
(v) Any other factor(s) the Board determines, in its discretion, is appropriate.
(d) Other measures. The Board may impose supervisory oversight and additional reporting measures that it determines are appropriate to monitor compliance with this subpart. Covered foreign entities must furnish, in the manner and form prescribed by the Board, such information to monitor compliance with this subpart and the limits therein as the Board may require.
Subparts R-T [Reserved]
Subpart U – Debt-to-Equity Limits for U.S. Bank Holding Companies and Foreign Banking Organizations
§ 252.220 Debt-to-equity limits for U.S. bank holding companies.
(a) Definitions – (1) Debt-to-equity ratio means the ratio of a company’s total liabilities to a company’s total equity capital less goodwill.
(2) Debt and equity have the same meaning as “total liabilities” and “total equity capital,” respectively, as reported by a bank holding company on the FR Y-9C.
(b) Notice and maximum debt-to-equity ratio requirement. The Council, or the Board on behalf of the Council, will provide written notice to a bank holding company to the extent that the Council makes a determination, pursuant to section 165(j) of the Dodd-Frank Act, that a bank holding company poses a grave threat to the financial stability of the United States and that the imposition of a debt-to-equity requirement is necessary to mitigate such risk. Beginning no later than 180 days after receiving written notice from the Council or from the Board on behalf of the Council, the bank holding company must achieve and maintain a debt-to-equity ratio of no more than 15-to-1.
(c) Extension. The Board may, upon request by the bank holding company for which the Council has made a determination pursuant to section 165(j) of the Dodd-Frank Act, extend the time period for compliance established under paragraph (b) of this section for up to two additional periods of 90 days each, if the Board determines that the identified company has made good faith efforts to comply with the debt-to-equity ratio requirement and that each extension would be in the public interest. Requests for an extension must be received in writing by the Board not less than 30 days prior to the expiration of the existing time period for compliance and must provide information sufficient to demonstrate that the bank holding company has made good faith efforts to comply with the debt-to-equity ratio requirement and that each extension would be in the public interest.
(d) Termination. The debt-to-equity ratio requirement in paragraph (b) of this section shall cease to apply to a bank holding company as of the date it receives notice from the Council of a determination that the bank holding company no longer poses a grave threat to the financial stability of the United States and that the imposition of a debt-to-equity requirement is no longer necessary.
§ 252.221 Debt-to-equity limits for foreign banking organizations.
(a) Definitions. For purposes of this subpart, the following definitions apply:
(1) Debt and equity have the same meaning as “total liabilities” and “total equity capital,” respectively, as reported by a U.S. intermediate holding company or U.S. subsidiary on the FR Y-9C, or other reporting form prescribed by the Board.
(2) Debt-to-equity ratio means the ratio of total liabilities to total equity capital less goodwill.
(3) Eligible assets and liabilities of all U.S. branches and agencies of a foreign bank have the same meaning as in § 252.158(a).
(b) Notice and maximum debt-to-equity ratio requirement. Beginning no later than 180 days after receiving written notice from the Council or from the Board on behalf of the Council that the Council has made a determination, pursuant to section 165(j) of the Dodd-Frank Act, that the foreign banking organization poses a grave threat to the financial stability of the United States and that the imposition of a debt-to-equity requirement is necessary to mitigate such risk:
(1) The U.S. intermediate holding company, or if the foreign banking organization has not established a U.S. intermediate holding company, and any U.S. subsidiary (excluding any section 2(h)(2) company or DPC branch subsidiary, if applicable), must achieve and maintain a debt-to-equity ratio of no more than 15-to-1; and
(2) The U.S. branches and agencies of the foreign banking organization must maintain eligible assets in its U.S. branches and agencies that, on a daily basis, are not less than 108 percent of the average value over each day of the previous calendar quarter of the total liabilities of all branches and agencies operated by the foreign banking organization in the United States.
(c) Extension. The Board may, upon request by a foreign banking organization for which the Council has made a determination pursuant to section 165(j) of the Dodd-Frank Act, extend the time period for compliance established under paragraph (b) of this section for up to two additional periods of 90 days each, if the Board determines that such company has made good faith efforts to comply with the debt to equity ratio requirement and that each extension would be in the public interest. Requests for an extension must be received in writing by the Board not less than 30 days prior to the expiration of the existing time period for compliance and must provide information sufficient to demonstrate that the foreign banking organization has made good faith efforts to comply with the debt-to-equity ratio requirement and that each extension would be in the public interest.
(d) Termination. The requirements in paragraph (b) of this section cease to apply to a foreign banking organization as of the date it receives notice from the Council of a determination that the company no longer poses a grave threat to the financial stability of the United States and that imposition of the requirements in paragraph (b) of this section are no longer necessary.
Appendix A to Part 252 – Policy Statement on the Scenario Design Framework for Stress Testing
(a) The Board has imposed stress testing requirements through its regulations (stress test rules) implementing section 165(i) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or Act) and section 401(e) of the Economic Growth, Regulatory Relief, and Consumer Protection Act, and through its capital plan rule (12 CFR 225.8). Under the stress test rules, the Board conducts a supervisory stress test of each bank holding company with total consolidated assets of $100 billion or more, intermediate holding company of a foreign banking organization with total consolidated assets of $100 billion or more, and nonbank financial company that the Financial Stability Oversight Council has designated for supervision by the Board (together, covered companies).
(b) The stress test rules provide that the Board will notify covered companies by no later than February 15 of each year of the scenarios it will use to conduct its supervisory stress tests and provide, also by no later than February 15, covered companies and other financial companies subject to the final rules the set of scenarios they must use to conduct their company-run stress tests. Under the stress test rules, the Board may require certain companies to use additional components in the severely adverse scenario or additional scenarios. For example, the Board expects to require large banking organizations with significant trading activities to include a trading and counterparty component (market shock, described in the following sections) in their severely adverse scenario. The Board will provide any additional components or scenario by no later than March 1 of each year.
(c) In addition, § 225.8 of the Board’s Regulation Y (capital plan rule) requires covered companies to submit annual capital plans, including stress test results, to the Board in order to allow the Board to assess whether they have robust, forward-looking capital planning processes and have sufficient capital to continue operations throughout times of economic and financial stress.
(d) Stress tests required under the stress test rules and under the capital plan rule require the Board and financial companies to calculate pro-forma capital levels – rather than “current” or actual levels – over a specified planning horizon under baseline and stressful scenarios. This approach integrates key lessons of the 2007-2009 financial crisis into the Board’s supervisory framework. During the financial crisis, investor and counterparty confidence in the capitalization of financial companies eroded rapidly in the face of changes in the current and expected economic and financial conditions, and this loss in market confidence imperiled companies’ ability to access funding, continue operations, serve as a credit intermediary, and meet obligations to creditors and counterparties. Importantly, such a loss in confidence occurred even when a financial institution’s capital ratios were in excess of regulatory minimums. This is because the institution’s capital ratios were perceived as lagging indicators of its financial condition, particularly when conditions were changing.
(e) The stress tests required under the stress test rules and capital plan rule are a valuable supervisory tool that provide a forward-looking assessment of large financial companies’ capital adequacy under hypothetical economic and financial market conditions. Currently, these stress tests primarily focus on credit risk and market risk – that is, risk of mark-to-market losses associated with companies’ trading and counterparty positions – and not on other types of risk, such as liquidity risk. Pressures stemming from these sources are considered in separate supervisory exercises. No single supervisory tool, including the stress tests, can provide an assessment of a company’s ability to withstand every potential source of risk.
(f) Selecting appropriate scenarios is an especially significant consideration for stress tests required under the capital plan rule, which ties the review of a company’s performance under stress scenarios to its ability to make capital distributions. More severe scenarios, all other things being equal, generally translate into larger projected declines in banks’ capital. Thus, a company would need more capital today to meet its minimum capital requirements in more stressful scenarios and have the ability to continue making capital distributions, such as common dividend payments. This translation is far from mechanical, however; it will depend on factors that are specific to a given company, such as underwriting standards and the company’s business model, which would also greatly affect projected revenue, losses, and capital.
(a) This policy statement provides more detail on the characteristics of the stress test scenarios and explains the considerations and procedures that underlie the approach for formulating these scenarios. The considerations and procedures described in this policy statement apply to the Board’s stress testing framework, including to the stress tests required under 12 CFR part 252, subparts B, E, and F as well as the Board’s capital plan rule (12 CFR 225.8).
(b) Although the Board does not envision that the broad approach used to develop scenarios will change from year to year, the stress test scenarios will reflect changes in the outlook for economic and financial conditions and changes to specific risks or vulnerabilities that the Board, in consultation with the other federal banking agencies, determines should be considered in the annual stress tests. The stress test scenarios should not be regarded as forecasts; rather, they are hypothetical paths of economic variables that will be used to assess the strength and resilience of the companies’ capital in various economic and financial environments.
(c) The remainder of this policy statement is organized as follows. Section 3 provides a broad description of the baseline and severely adverse scenarios and describes the types of variables that the Board expects to include in the macroeconomic scenarios and the market shock component of the stress test scenarios applicable to companies with significant trading activity. Section 4 describes the Board’s approach for developing the macroeconomic scenarios, and section 5 describes the approach for the market shocks. Section 6 describes the relationship between the macroeconomic scenario and the market shock components. Section 7 provides a timeline for the formulation and publication of the macroeconomic assumptions and market shocks.
(a) The Board will publish a minimum of two different scenarios, including baseline and severely adverse conditions, for use in stress tests required in the stress test rules.
(b) While the Board generally expects to use the same scenarios for all companies subject to the final rule, it may require a subset of companies – depending on a company’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy – to include additional scenario components or additional scenarios that are designed to capture different effects of adverse events on revenue, losses, and capital. One example of such components is the market shock that applies only to companies with significant trading activity. Additional components or scenarios may also include other stress factors that may not necessarily be directly correlated to macroeconomic or financial assumptions but nevertheless can materially affect companies’ risks, such as the unexpected default of a major counterparty.
(c) Early in each stress testing cycle, the Board plans to publish the macroeconomic scenarios along with a brief narrative summary that provides a description of the economic situation underlying the scenario and explains how the scenarios have changed relative to the previous year. In addition, to assist companies in projecting the paths of additional variables in a manner consistent with the scenario, the narrative will also provide descriptions of the general path of some additional variables. These descriptions will be general – that is, they will describe developments for broad classes of variables rather than for specific variables – and will specify the intensity and direction of variable changes but not numeric magnitudes. These descriptions should provide guidance that will be useful to companies in specifying the paths of the additional variables for their company-run stress tests. Note that in practice it will not be possible for the narrative to include descriptions on all of the additional variables that companies may need for their company-run stress tests. In cases where scenarios are designed to reflect particular risks and vulnerabilities, the narrative will also explain the underlying motivation for these features of the scenario. The Board also plans to release a broad description of the market shock components.
(a) The macroeconomic scenarios will consist of the future paths of a set of economic and financial variables.
(i) Six measures of economic activity and prices: Real and nominal gross domestic product (GDP) growth, the unemployment rate of the civilian non-institutional population aged 16 and over, real and nominal disposable personal income growth, and the Consumer Price Index (CPI) inflation rate;
(ii) Four measures of developments in equity and property markets: The Core Logic National House Price Index, the National Council for Real Estate Investment Fiduciaries Commercial Real Estate Price Index, the Dow Jones Total Stock Market Index, and the Chicago Board Options Exchange Market Volatility Index; and
(iii) Six measures of interest rates: The rate on the 3-month Treasury bill, the yield on the 5-year Treasury bond, the yield on the 10-year Treasury bond, the yield on a 10-year BBB corporate security, the prime rate, and the interest rate associated with a conforming, conventional, fixed-rate, 30-year mortgage.
(b) The international variables provided for in the 2014 supervisory scenarios included, for the euro area, the United Kingdom, developing Asia, and Japan:
(i) Percent change in real GDP;
(ii) Percent change in the Consumer Price Index or local equivalent; and
(iii) The U.S./foreign currency exchange rate.
(c) The economic variables included in the scenarios influence key items affecting financial companies’ net income, including pre-provision net revenue and credit losses on loans and securities. Moreover, these variables exhibit fairly typical trends in adverse economic climates that can have unfavorable implications for companies’ net income and, thus, capital positions.
(d) The economic variables included in the scenario may change over time. For example, the Board may add variables to a scenario if the international footprint of companies that are subject to the stress testing rules changed notably over time such that the variables already included in the scenario no longer sufficiently capture the material risks of these companies. Alternatively, historical relationships between macroeconomic variables could change over time such that one variable (e.g., disposable personal income growth) that previously provided a good proxy for another (e.g., light vehicle sales) in modeling companies’ pre-provision net revenue or credit losses ceases to do so, resulting in the need to create a separate path, or alternative proxy, for the other variable. However, recognizing the amount of work required for companies to incorporate the scenario variables into their stress testing models, the Board expects to eliminate variables from the scenarios only in rare instances.
(e) The Board expects that the company may not use all of the variables provided in the scenario, if those variables are not appropriate to the company’s line of business, or may add additional variables, as appropriate. The Board expects the companies to ensure that the paths of such additional variables are consistent with the scenarios the Board provided. For example, the companies may use, as part of their internal stress test models, local-level variables, such as state-level unemployment rates or city-level house prices. While the Board does not plan to include local-level macro variables in the stress test scenarios it provides, it expects the companies to evaluate the paths of local-level macro variables as needed for their internal models, and ensure internal consistency between these variables and their aggregate, macro-economic counterparts. The Board will provide the macroeconomic scenario component of the stress test scenarios for a period that spans a minimum of 13 quarters. The scenario horizon reflects the supervisory stress test approach that the Board plans to use. Under the stress test rules, the Board will assess the effect of different scenarios on the consolidated capital of each company over a forward-looking planning horizon of at least nine quarters.
(a) The market shock component of the severely adverse scenario will only apply to companies with significant trading activity and their subsidiaries.
(b) The Board envisions that the market shocks will include shocks to a broad range of risk factors that are similar in granularity to those risk factors that trading companies use internally to produce profit and loss estimates, under stressful market scenarios, for all asset classes that are considered trading assets, including equities, credit, interest rates, foreign exchange rates, and commodities. Examples of risk factors include, but are not limited to:
(i) Equity indices of all developed markets, and of developing and emerging market nations to which companies with significant trading activity may have exposure, along with term structures of implied volatilities;
(ii) Cross-currency FX rates of all major and many minor currencies, along term structures of implied volatilities;
(iii) Term structures of government rates (e.g., U.S. Treasuries), interbank rates (e.g., swap rates) and other key rates (e.g., commercial paper) for all developed markets and for developing and emerging market nations to which companies may have exposure;
(iv) Term structures of implied volatilities that are key inputs to the pricing of interest rate derivatives;
(v) Term structures of futures prices for energy products including crude oil (differentiated by country of origin), natural gas, and power;
(vi) Term structures of futures prices for metals and agricultural commodities;
(vii) “Value-drivers” (credit spreads or instrument prices themselves) for credit-sensitive product segments including: Corporate bonds, credit default swaps, and collateralized debt obligations by risk; non-agency residential mortgage-backed securities and commercial mortgage-backed securities by risk and vintage; sovereign debt; and, municipal bonds; and
(viii) Shocks to the values of private equity positions.
(a) This section describes the Board’s approach for formulating macroeconomic assumptions for each scenario. The methodologies for formulating this part of each scenario differ by scenario, so these methodologies for the baseline and severely adverse scenarios are described separately in each of the following subsections.
(b) In general, the baseline scenario will reflect the most recently available consensus views of the macroeconomic outlook expressed by professional forecasters, government agencies, and other public-sector organizations as of the beginning of the stress-test cycle. The severely adverse scenario will consist of a set of economic and financial conditions that reflect the conditions of post-war U.S. recessions.
(c) Each of these scenarios is described further in sections below as follows: Baseline (subsection 4.1) and severely adverse (subsection 4.2)
(a) The stress test rules define the baseline scenario as a set of conditions that affect the U.S. economy or the financial condition of a banking organization, and that reflect the consensus views of the economic and financial outlook. Projections under a baseline scenario are used to evaluate how companies would perform in more likely economic and financial conditions. The baseline serves also as a point of comparison to the severely adverse scenario, giving some sense of how much of the company’s capital decline could be ascribed to the scenario as opposed to the company’s capital adequacy under expected conditions.
(b) The baseline scenario will be developed around a macroeconomic projection that captures the prevailing views of private-sector forecasters (e.g., Blue Chip Consensus Forecasts and the Survey of Professional Forecasters), government agencies, and other public-sector organizations (e.g., the International Monetary Fund and the Organization for Economic Co-operation and Development) near the beginning of the annual stress-test cycle. The baseline scenario is designed to represent a consensus expectation of certain economic variables over the time period of the tests and it is not the Board’s internal forecast for those economic variables. For example, the baseline path of short-term interest rates is constructed from consensus forecasts and may differ from that implied by the FOMC’s Summary of Economic Projections.
(c) For some scenario variables – such as U.S. real GDP growth, the unemployment rate, and the consumer price index – there will be a large number of different forecasts available to project the paths of these variables in the baseline scenario. For others, a more limited number of forecasts will be available. If available forecasts diverge notably, the baseline scenario will reflect an assessment of the forecast that is deemed to be most plausible. In setting the paths of variables in the baseline scenario, particular care will be taken to ensure that, together, the paths present a coherent and plausible outlook for the U.S. and global economy, given the economic climate in which they are formulated.
The stress test rules define a severely adverse scenario as a set of conditions that affect the U.S. economy or the financial condition of a financial company and that overall are significantly more severe than those associated with the baseline scenario. The financial company will be required to publicly disclose a summary of the results of its stress test under the severely adverse scenario, and the Board intends to publicly disclose the results of its analysis of the financial company under the severely adverse scenario.
(a) The Board intends to use a recession approach to develop the severely adverse scenario. In the recession approach, the Board will specify the future paths of variables to reflect conditions that characterize post-war U.S. recessions, generating either a typical or specific recreation of a post-war U.S. recession. The Board chose this approach because it has observed that the conditions that typically occur in recessions – such as increasing unemployment, declining asset prices, and contracting loan demand – can put significant stress on companies’ balance sheets. This stress can occur through a variety of channels, including higher loss provisions due to increased delinquencies and defaults; losses on trading positions through sharp moves in market prices; and lower bank income through reduced loan originations. For these reasons, the Board believes that the paths of economic and financial variables in the severely adverse scenario should, at a minimum, resemble the paths of those variables observed during a recession.
(b) This approach requires consideration of the type of recession to feature. All post-war U.S. recessions have not been identical: Some recessions have been associated with very elevated interest rates, some have been associated with sizable asset price declines, and some have been relatively more global. The most common features of recessions, however, are increases in the unemployment rate and contractions in aggregate incomes and economic activity. For this and the following reasons, the Board intends to use the unemployment rate as the primary basis for specifying the severely adverse scenario. First, the unemployment rate is likely the most representative single summary indicator of adverse economic conditions. Second, in comparison to GDP, labor market data have traditionally featured more prominently than GDP in the set of indicators that the National Bureau of Economic Research reviews to inform its recession dates.
(c) The Board believes that the severely adverse scenario should also reflect a housing recession. The house prices path set in the severely adverse scenario will reflect developments that have been observed in post-war U.S. housing recessions, measuring severity by the absolute level of and relative decrease in the house prices.
(d) The Board will specify the paths of most other macroeconomic variables based on the paths of unemployment, income, house prices, and activity. Some of these other variables, however, have taken wildly divergent paths in previous recessions (e.g., foreign GDP), requiring the Board to use its informed judgment in selecting appropriate paths for these variables. In general, the path for these other variables will be based on their underlying structure at the time that the scenario is designed (e.g., economic or financial-system vulnerabilities in other countries).
(e) The Board considered alternative methods for scenario design of the severely adverse scenario, including a probabilistic approach. The probabilistic approach constructs a baseline forecast from a large-scale macroeconomic model and identifies a scenario that would have a specific probabilistic likelihood given the baseline forecast. The Board believes that, at this time, the recession approach is better suited for developing the severely adverse scenario than a probabilistic approach because it guarantees a recession of some specified severity. In contrast, the probabilistic approach requires the choice of an extreme tail outcome – relative to baseline – to characterize the severely adverse scenario (e.g., a 5 percent or a 1 percent tail outcome). In practice, this choice is difficult as adverse economic outcomes are typically thought of in terms of how variables evolve in an absolute sense rather than how far away they lie in the probability space away from the baseline. In this sense, a scenario featuring a recession may be somewhat clearer and more straightforward to communicate. Finally, the probabilistic approach relies on estimates of uncertainty around the baseline scenario and such estimates are in practice model-dependent.
(a) The Board anticipates that the severely adverse scenario will feature an unemployment rate that increases between 3 to 5 percentage points from its initial level over the course of 6 to 8 calendar quarters.
(b) This methodology is intended to generate scenarios that feature stressful outcomes but do not induce greater procyclicality in the financial system and macroeconomy. When the economy is in the early stages of a recovery, the unemployment rate in a baseline scenario generally trends downward, resulting in a larger difference between the path of the unemployment rate in the severely adverse scenario and the baseline scenario and a severely adverse scenario that is relatively more intense. Conversely, in a sustained strong expansion – when the unemployment rate may be below the level consistent with full employment – the unemployment in a baseline scenario generally trends upward, resulting in a smaller difference between the path of the unemployment rate in the severely adverse scenario and the baseline scenario and a severely adverse scenario that is relatively less intense. Historically, a 3 to 5 percentage point increase in unemployment rate is reflective of stressful conditions. As illustrated in Table 1, over the last half-century, the U.S. economy has experienced four severe post-war recessions. In all four of these recessions, the unemployment rate increased 3 to 5 percentage points and in the three most recent of these recessions, the unemployment rate reached a level between 9 percent and 11 percent.
(c) Under this method, if the initial unemployment rate was low – as it would be after a sustained long expansion – the unemployment rate in the scenario would increase to a level as high as what has been seen in past severe recessions. However, if the initial unemployment rate was already high – as would be the case in the early stages of a recovery – the unemployment rate would exhibit a change as large as what has been seen in past severe recessions.
(d) The Board believes that the typical increase in the unemployment rate in the severely adverse scenario will be about 4 percentage points. However, the Board will calibrate the increase in unemployment based on its views of the status of cyclical systemic risk. The Board intends to set the unemployment rate at the higher end of the range if the Board believes that cyclical systemic risks are high (as it would be after a sustained long expansion), and to the lower end of the range if cyclical systemic risks are low (as it would be in the earlier stages of a recovery). This may result in a scenario that is slightly more intense than normal if the Board believed that cyclical systemic risks were increasing in a period of robust expansion.
(e) As indicated previously, if a 3 to 5 percentage point increase in the unemployment rate does not raise the level of the unemployment rate to 10 percent – the average level to which it has increased in the most recent three severe recessions – the path of the unemployment rate will be specified so as to raise the unemployment rate to 10 percent. Setting a floor for the unemployment rate at 10 percent recognizes the fact that not only do cyclical systemic risks build up at financial intermediaries during robust expansions but that these risks are also easily obscured by the buoyant environment.
(f) In setting the increase in the unemployment rate, the Board will consider the extent to which analysis by economists, supervisors, and financial market experts finds cyclical systemic risks to be elevated (but difficult to be captured more precisely in one of the scenario’s other variables). In addition, the Board – in light of impending shocks to the economy and financial system – will also take into consideration the extent to which a scenario of some increased severity might be necessary for the results of the stress test and the associated supervisory actions to sustain confidence in financial institutions.
(g) While the approach to specifying the severely adverse scenario is designed to avoid adding sources of procyclicality to the financial system, it is not designed to explicitly offset any existing procyclical tendencies in the financial system. The purpose of the stress test scenarios is to make sure that the companies are properly capitalized to withstand severe economic and financial conditions, not to serve as an explicit countercyclical offset to the financial system.
(h) In developing the approach to the unemployment rate, the Board also considered a method that would increase the unemployment rate to some fairly elevated fixed level over the course of 6 to 8 quarters. This would result in scenarios being more severe in robust expansions (when the unemployment rate is low) and less severe in the early stages of a recovery (when the unemployment rate is high) and so would not result in pro-cyclicality. Depending on the initial level of the unemployment rate, this approach could lead to only a very modest increase in the unemployment rate – or even a decline. As a result, this approach – while not procyclical – could result in scenarios not featuring stressful macroeconomic outcomes.
(a) Generally, all other variables in the severely adverse scenario will be specified to be consistent with the increase in the unemployment rate. The approach for specifying the paths of these variables in the scenario will be a combination of (1) how economic models suggest that these variables should evolve given the path of the unemployment rate, (2) how these variables have typically evolved in past U.S. recessions, and (3) evaluation of these and other factors.
(b) Economic models – such as medium-scale macroeconomic models – should be able to generate plausible paths consistent with the unemployment rate for a number of scenario variables, such as real GDP growth, CPI inflation and short-term interest rates, which have relatively stable (direct or indirect) relationships with the unemployment rate (e.g., Okun’s Law, the Phillips Curve, and interest rate feedback rules). For some other variables, specifying their paths will require a case-by-case consideration.
(c) Declining house prices, which are an important source of stress to a company’s balance sheet, are not a steadfast feature of recessions, and the historical relationship of house prices with the unemployment rate is not strong. Simply adopting their typical path in a severe recession would likely underestimate risks stemming from the housing sector. In specifying the path for nominal house prices, the Board will consider the ratio of the nominal house price index (HPI) to nominal, per capita, disposable income (DPI). The Board believes that the typical decline in the HPI-DPI ratio will be at a minimum 25 percent from its starting value, or enough to bring the ratio down to its Great Recession trough. As illustrated in Table 2, housing recessions have on average featured HPI-DPI ratio declines of about 25 percent and the HPI-DPI ratio fell to its Great Recession trough.
(d) In addition, judgment is necessary in projecting the path of a scenario’s international variables. Recessions that occur simultaneously across countries are an important source of stress to the balance sheets of companies with notable international exposures but are not an invariable feature of the international economy. As a result, simply adopting the typical path of international variables in a severe U.S. recession would likely underestimate the risks stemming from the international economy. Consequently, an approach that uses both judgment and economic models informs the path of international variables.
(a) The severely adverse scenario will be developed to reflect specific risks to the economic and financial outlook that are especially salient but will feature minimally in the scenario if the Board were only to use approaches that looked to past recessions or relied on historical relationships between variables.
(b) There are some important instances when it will be appropriate to augment the recession approach with salient risks. For example, if an asset price were especially elevated and thus potentially vulnerable to an abrupt and potentially destabilizing decline, it would be appropriate to include such a decline in the scenario even if such a large drop were not typical in a severe recession. Likewise, if economic developments abroad were particularly unfavorable, assuming a weakening in international conditions larger than what typically occurs in severe U.S. recessions would likely also be appropriate.
(c) Clearly, while the recession component of the severely adverse scenario is within some predictable range, the salient risk aspect of the scenario is far less so, and therefore, needs an annual assessment. Each year, the Board will identify the risks to the financial system and the domestic and international economic outlooks that appear more elevated than usual, using its internal analysis and supervisory information and in consultation with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). Using the same information, the Board will then calibrate the paths of the macroeconomic and financial variables in the scenario to reflect these risks.
(d) Detecting risks that have the potential to weaken the banking sector is particularly difficult when economic conditions are buoyant, as a boom can obscure the weaknesses present in the system. In sustained robust expansions, therefore, the selection of salient risks to augment the scenario will err on the side of including risks of uncertain significance.
(e) The Board will factor in particular risks to the domestic and international macroeconomic outlook identified by its economists, bank supervisors, and financial market experts and make appropriate adjustments to the paths of specific economic variables. These adjustments will not be reflected in the general severity of the recession and, thus, all macroeconomic variables; rather, the adjustments will apply to a subset of variables to reflect co-movements in these variables that are historically less typical. The Board plans to discuss the motivation for the adjustments that it makes to variables to highlight systemic risks in the narrative describing the scenarios.
(a) This section discusses the approach the Board proposes to adopt for developing the market shock component of the severely adverse scenario appropriate for companies with significant trading activities. The design and specification of the market shock component differs from that of the macroeconomic scenarios because profits and losses from trading are measured in mark-to-market terms, while revenues and losses from traditional banking are generally measured using the accrual method. As noted above, another critical difference is the time-evolution of the market shock component. The market shock component consists of an instantaneous “shock” to a large number of risk factors that determine the mark-to-market value of trading positions, while the macroeconomic scenarios supply a projected path of economic variables that affect traditional banking activities over the entire planning period.
(b) The development of the market shock component that are detailed in this section are as follows: Baseline (subsection 5.1) and severely adverse (subsection 5.2).
By definition, market shocks are large, previously unanticipated moves in asset prices and rates. Because asset prices should, broadly speaking, reflect consensus opinions about the future evolution of the economy, large price movements, as envisioned in the market shock, should not occur along the baseline path. As a result, the market shock will not be included in the baseline scenario.
This section addresses possible approaches to designing the market shock component in the severely adverse scenario, including important considerations for scenario design, possible approaches to designing scenarios, and a development strategy for implementing the preferred approach.
(a) The general market practice for stressing a trading portfolio is to specify market shocks either in terms of extreme moves in observable, broad market indicators and risk factors or directly as large changes to the mark-to-market values of financial instruments. These moves can be specified either in relative terms or absolute terms. Supplying values of risk factors after a “shock” is roughly equivalent to the macroeconomic scenarios, which supply values for a set of economic and financial variables; however, trading stress testing differs from macroeconomic stress testing in several critical ways.
(b) In the past, the Board used one of two approaches to specify market shocks. During SCAP and CCAR in 2011, the Board used a very general approach to market shocks and required companies to stress their trading positions using changes in market prices and rates experienced during the second half of 2008, without specifying risk factor shocks. This broad guidance resulted in inconsistency across companies both in terms of the severity and the application of shocks. In certain areas, companies were permitted to use their own experience during the second half of 2008 to define shocks. This resulted in significant variation in shock severity across companies.
(c) To enhance the consistency and comparability in market shocks for the stress tests in 2012 and 2013, the Board provided to each trading company more than 35,000 specific risk factor shocks, primarily based on market moves in the second half of 2008. While the number of risk factors used in companies’ pricing and stress-testing models still typically exceed that provided in the Board’s scenarios, the greater specificity resulted in more consistency in the scenario across companies. The benefit of the comprehensiveness of risk factor shocks is at least partly offset by the potential difficulty in creating shocks that are coherent and internally consistent, particularly as the framework for developing market shocks deviates from historical events.
(d) Also importantly, the ultimate losses associated with a given market shock will depend on a company’s trading positions, which can make it difficult to rank order, ex ante, the severity of the scenarios. In certain instances, market shocks that include large market moves may not be particularly stressful for a given company. Aligning the market shock with the macroeconomic scenario for consistency may result in certain companies actually benefiting from risk factor moves of larger magnitude in the market scenario if the companies are hedging against salient risks to other parts of their business. Thus, the severity of market shocks must be calibrated to take into account how a complex set of risks, such as directional risks and basis risks, interacts with each other, given the companies’ trading positions at the time of stress. For instance, a large depreciation in a foreign currency would benefit companies with net short positions in the currency while hurting those with net long positions. In addition, longer maturity positions may move differently from shorter maturity positions, adding further complexity.
(e) The instantaneous nature of market shocks and the immediate recognition of mark-to-market losses add another element to the design of market shocks, and to determining the appropriate severity of shocks. For instance, in previous stress tests, the Board assumed that market moves that occurred over the six-month period in late 2008 would occur instantaneously. The design of the market shocks must factor in appropriate assumptions around the period of time during which market events will unfold and any associated market responses.
(a) As an additional component of the severely adverse scenario, the Board plans to use a standardized set of market shocks that apply to all companies with significant trading activity. The market shocks could be based on a single historical episode, multiple historical periods, hypothetical (but plausible) events, or some combination of historical episodes and hypothetical events (hybrid approach). Depending on the type of hypothetical events, a scenario based on such events may result in changes in risk factors that were not previously observed. In the supervisory scenarios for 2012 and 2013, the shocks were largely based on relative moves in asset prices and rates during the second half of 2008, but also included some additional considerations to factor in the widening of spreads for European sovereigns and financial companies based on actual observation during the latter part of 2011.
(b) For the market shock component in the severely adverse scenario, the Board plans to use the hybrid approach to develop shocks. The hybrid approach allows the Board to maintain certain core elements of consistency in market shocks each year while providing flexibility to add hypothetical elements based on market conditions at the time of the stress tests. In addition, this approach will help ensure internal consistency in the scenario because of its basis in historical episodes; however, combining the historical episode and hypothetical events may require small adjustments to ensure mutual consistency of the joint moves. In general, the hybrid approach provides considerable flexibility in developing scenarios that are relevant each year, and by introducing variations in the scenario, the approach will also reduce the ability of companies with significant trading activity to modify or shift their portfolios to minimize expected losses in the severely adverse market shock.
(c) The Board has considered a number of alternative approaches for the design of market shocks. For example, the Board explored an option of providing tailored market shocks for each trading company, using information on the companies’ portfolio gathered through ongoing supervision, or other means. By specifically targeting known or potential vulnerabilities in a company’s trading position, the tailored approach would be useful in assessing each company’s capital adequacy as it relates to the company’s idiosyncratic risk. However, the Board does not believe this approach to be well-suited for the stress tests required by regulation. Consistency and comparability are key features of annual supervisory stress tests and annual company-run stress tests required in the stress test rules. It would be difficult to use the information on the companies’ portfolios to design a common set of shocks that are universally stressful for all covered companies. As a result, this approach would be better suited to more customized, tailored stress tests that are part of the company’s internal capital planning process or to other supervisory efforts outside of the stress tests conducted under the capital rule and the stress test rules.
(a) Consistent with the approach described above, the market shock component for the severely adverse scenario will incorporate key elements of market developments during the second half of 2008, but will also incorporate observations from other periods or price and rate movements in certain markets that the Board deems to be plausible, though such movements may not have been observed historically. Over time, the Board also expects to rely less on market events of the second half of 2008 and more on hypothetical events or other historical episodes to develop the market shock.
(b) The developments in the credit markets during the second half of 2008 were unprecedented, providing a reasonable basis for market shocks in the severely adverse scenario. During this period, key risk factors in virtually all asset classes experienced extremely large shocks; the collective breadth and intensity of the moves have no parallels in modern financial history and, on that basis, it seems likely that this episode will continue to be the most relevant historical scenario, although experience during other historical episodes may also guide the severity of the market shock component of the severely adverse scenario. Moreover, the risk factor moves during this episode are directly consistent with the “recession” approach that underlies the macroeconomic assumptions. However, market shocks based only on historical events could become stale and less relevant over time as the company’s positions change, particularly if more salient features are not added each year.
(c) While the market shocks based on the second half of 2008 are of unparalleled magnitude, the shocks may become less relevant over time as the companies’ trading positions change. In addition, more recent events could highlight the companies’ vulnerability to certain market events. For example, in 2011, Eurozone credit spreads in the sovereign and financial sectors surpassed those observed during the second half of 2008, necessitating the modification of the severely adverse market shock in 2012 and 2013 to reflect a salient source of stress to trading positions. As a result, it is important to incorporate both historical and hypothetical outcomes into market shocks for the severely adverse scenario. For the time being, the development of market shocks in the severely adverse scenario will begin with the risk factor movements in a particular historical period, such as the second half of 2008. The Board will then consider hypothetical but plausible outcomes, based on financial stability reports, supervisory information, and internal and external assessments of market risks and potential flash points. The hypothetical outcomes could originate from major geopolitical, economic, or financial market events with potentially significant impacts on market risk factors. The severity of these hypothetical moves will likely be guided by similar historical events, assumptions embedded in the companies’ internal stress tests or market participants, and other available information.
(d) Once broad market scenarios are agreed upon, specific risk factor groups will be targeted as the source of the trading stress. For example, a scenario involving the failure of a large, interconnected globally active financial institution could begin with a sharp increase in credit default swap spreads and a precipitous decline in asset prices across multiple markets, as investors become more risk averse and market liquidity evaporates. These broad market movements will be extrapolated to the granular level for all risk factors by examining transmission channels and the historical relationships between variables, though in some cases, the movement in particular risk factors may be amplified based on theoretical relationships, market observations, or the saliency to company trading books. If there is a disagreement between the risk factor movements in the historical event used in the scenario and the hypothetical event, the Board will reconcile the differences by assessing a priori expectations based on financial and economic theory and the importance of the risk factors to the trading positions of the covered companies.
(a) As discussed earlier, the market shock comprises a set of movements in a very large number of risk factors that are realized instantaneously. Among the risk factors specified in the market shock are several variables also specified in the macroeconomic scenarios, such as short- and long-maturity interest rates on Treasury and corporate debt, the level and volatility of U.S. stock prices, and exchange rates.
(b) The market shock component is an add-on to the macroeconomic scenarios that is applied to a subset of companies, with no assumed effect on other aspects of the stress tests such as balances, revenues, or other losses. As a result, the market shock component may not be always directionally consistent with the macroeconomic scenario. Because the market shock is designed, in part, to mimic the effects of a sudden market dislocation, while the macroeconomic scenarios are designed to provide a description of the evolution of the real economy over two or more years, assumed economic conditions can move in significantly different ways. In effect, the market shock can simulate a market panic, during which financial asset prices move rapidly in unexpected directions, and the macroeconomic assumptions can simulate the severe recession that follows. Indeed, the pattern of a financial crisis, characterized by a short period of wild swings in asset prices followed by a prolonged period of moribund activity, and a subsequent severe recession is familiar and plausible.
(c) As discussed in section 4.2.4, the Board may feature a particularly salient risk in the macroeconomic assumptions for the severely adverse scenario, such as a fall in an elevated asset price. In such instances, the Board may also seek to reflect the same risk in one of the market shocks. For example, if the macroeconomic scenario were to feature a substantial decline in house prices, it may seem plausible for the market shock to also feature a significant decline in market values of any securities that are closely tied to the housing sector or residential mortgages.
(a) The Board will provide a description of the macroeconomic scenarios by no later than February 15. During the period immediately preceding the publication of the scenarios, the Board will collect and consider information from academics, professional forecasters, international organizations, domestic and foreign supervisors, and other private-sector analysts that regularly conduct stress tests based on U.S. and global economic and financial scenarios, including analysts at the covered companies. In addition, the Board will consult with the FDIC and the OCC on the salient risks to be considered in the scenarios. The Board expects to conduct this process in October and November of each year and to update the scenarios, based on incoming macroeconomic data releases and other information, through the end of January.
(b) The Board expects to provide a broad overview of the market shock component along with the macroeconomic scenarios. The Board will publish the market shock templates by no later than March 1 of each year, and intends to publish the market shock earlier in the stress test and capital plan cycles to allow companies more time to conduct their stress tests.
Table 1 – Classification of U.S. Recessions
| Peak | Trough | Severity | Duration (quarters) | Decline in real GDP | Change in the unemployment rate during the recession | Total change in the unemployment rate (incl. after the recession) |
|---|---|---|---|---|---|---|
| 1957Q3 | 1958Q2 | Severe | 4 (Medium) | −3.6 | 3.2 | 3.2 |
| 1960Q2 | 1961Q1 | Moderate | 4 (Medium) | −1.0 | 1.6 | 1.8 |
| 1969Q4 | 1970Q4 | Moderate | 5 (Medium) | −0.2 | 2.2 | 2.4 |
| 1973Q4 | 1975Q1 | Severe | 6 (Long) | −3.1 | 3.4 | 4.1 |
| 1980Q1 | 1980Q3 | Moderate | 3 (Short) | −2.2 | 1.4 | 1.4 |
| 1981Q3 | 1982Q4 | Severe | 6 (Long) | −2.8 | 3.3 | 3.3 |
| 1990Q3 | 1991Q1 | Mild | 3 (Short) | −1.3 | 0.9 | 1.9 |
| 2001Q1 | 2001Q4 | Mild | 4 (Medium) | 0.2 | 1.3 | 2.0 |
| 2007Q4 | 2009Q2 | Severe | 7 (Long) | −4.3 | 4.5 | 5.1 |
| Average | Severe | 6 | −3.5 | 3.7 | 3.9 | |
| Average | Moderate | 4 | −1.1 | 1.8 | 1.8 | |
| Average | Mild | 3 | −0.6 | 1.1 | 1.9 |
Table 2 – House Prices in Housing Recessions
| Peak | Trough | Severity | Duration (quarters) | %-change in NHPI | %-change in HPI-DPI | HPI-DPI trough level (2000:Q1 = 100) |
|---|---|---|---|---|---|---|
| 1980Q2 | 1985Q2 | Moderate | 20 (long) | 26.6 | −15.9 | 102.1 |
| 1989Q4 | 1997Q1 | Moderate | 29 (long) | 10.5 | −17.0 | 94.9 |
| 2005Q4 | 2012Q1 | Severe | 25 (long) | −29.6 | −41.3 | 86.9 |
| Average | 24.7 | 2.5 | −24.7 | 94.6 |
Note: The date-ranges of housing recessions listed in Table 2 are based on the timing of house-price retrenchments.
Appendix B to Part 252 – Stress Testing Policy Statement
This Policy Statement describes the principles, policies, and procedures that guide the development, implementation, and validation of models used in the Federal Reserve’s supervisory stress test.
The system of models used in the supervisory stress test is designed to result in projections that are (i) from an independent supervisory perspective; (ii) forward-looking; (iii) consistent and comparable across covered companies; (iv) generated from simpler and more transparent approaches, where appropriate; (v) robust and stable; (vi) conservative; and (vii) able to capture the impact of economic stress. These principles are further explained below.
(a) In the supervisory stress test, the Federal Reserve uses supervisory models that are developed internally and independently (i.e., separate from models used by covered companies). The supervisory models rely on detailed portfolio data provided by covered companies but do not rely on models or estimates provided by covered companies to the greatest extent possible.
(b) The Federal Reserve’s stress testing framework is unique among regulators in its use of independent estimates of losses and revenues under stress. These estimates provide a perspective that is not formed in consultation with covered companies or influenced by firm-provided estimates and that is useful to the public in its evaluation of covered companies’ capital adequacy. This perspective is also valuable to covered companies, who may benefit from external assessments of their own losses and revenues under stress, and from the degree of credibility that independence confers upon supervisory stress test results.
(c) The independence of the supervisory stress test allows stress test projections to adhere to the other key principles described in the Policy Statement. The use of independent models allows for consistent treatment across firms. Losses and revenues under stress are estimated using the same modeling assumptions for all covered companies, enabling comparisons across supervisory stress test results. Differences in covered companies’ results reflect differences in firm-specific risks and input data instead of differences in modeling assumptions. The use of independent models also ensures that stress test results are produced by stress-focused models, designed to project the performance of covered companies in adverse economic conditions.
(d) In instances in which it is not possible or appropriate to create a supervisory model for use in the stress test, including when supervisory data are insufficient to support a modeled estimate of losses or revenues, the Federal Reserve may use firm-provided estimates or third-party models or data. For example, in order to project trading and counterparty losses, sensitivities to risk factors and other information generated by covered companies’ internal models are used. In the cases where firm-provided or third-party model estimates are used, the Federal Reserve monitors the quality and performance of the estimates through targeted examination, additional data collection, or benchmarking. The Board releases a list of the providers of third-party models or data used in the stress test exercise in the annual disclosure of quantitative results.
(a) The Federal Reserve has designed the supervisory stress test to be forward-looking. Supervisory models are tools for producing projections of potential losses and revenue effects based on each covered company’s portfolio and circumstances.
(b) While supervisory models are specified using historical data, they should generally avoid relying solely on extrapolation of past trends in order to make projections, and instead should be able to incorporate events or outcomes that have not occurred. As described in Section 2.4, the Federal Reserve implements several supervisory modeling policies to limit reliance on past outcomes in its projections of losses and revenues. The incorporation of the macroeconomic scenario and global market shock component also introduces elements outside of the realm of historical experience into the supervisory stress test.
The Federal Reserve uses the same set of models and assumptions to produce loss projections for all covered companies participating in the supervisory stress test. A standard set of scenarios, assumptions, and models promotes equitable treatment of firms participating in the supervisory stress test and comparability of results, supporting cross-firm analysis and providing valuable information to supervisors and to the public. Adhering to a consistent modeling approach across covered companies means that differences in projected results are due to differences in input data, such as instrument type or portfolio risk characteristics, rather than differences in firm-specific assumptions made by the Federal Reserve.
The Federal Reserve uses simple approaches in supervisory modeling, where possible. Given a range of modeling approaches that are equally conceptually sound, the Federal Reserve will select the least complex modeling approach. In assessing simplicity, the Federal Reserve favors those modeling approaches that allow for a more straightforward interpretation of the drivers of model results and that minimize operational challenges for model implementation.
The Federal Reserve maintains supervisory models that aim to be robust and stable, such that changes in model projections over time reflect underlying risk factors, scenarios, and model enhancements, rather than transitory factors. The estimates of post-stress capital produced by the supervisory stress test provide information regarding a covered company’s capital adequacy to market participants, covered companies, and the public. Adherence to this principle helps to ensure that changes in these model projections over time are not driven by temporary variations in model performance or inputs. Supervisory models are recalibrated with newly available input data each year. These data affect supervisory model projections, particularly in times of evolving risks. However, these changes generally should not be the principal driver of a change in results, year over year.
Given a reasonable set of assumptions or approaches, all else equal, the Federal Reserve will opt to use those that result in larger losses or lower revenue. For example, given a lack of information about the true risk of a portfolio, the Federal Reserve will compensate for the lack of data by using a high percentile loss rate.
In evaluating whether supervisory models are appropriate for use in a stress testing exercise, the Federal Reserve places particular emphasis on supervisory models’ abilities to project outcomes in stressed economic environments. In the supervisory stress test, the Federal Reserve also seeks to capture risks to capital that arise specifically in times of economic stress, and that would not be prevalent in more typical economic environments. For example, the Federal Reserve includes losses stemming from the default of a covered company’s largest counterparty in its projections of post-stress capital for firms with substantial trading or processing and custodian operations. The default of a company’s largest counterparty is more likely to occur in times of severe economic stress than in normal economic conditions.
To be consistent with the seven principles outlined in Section 1, the Federal Reserve has established policies and procedures to guide the development, implementation, and use of all models used in supervisory stress test projections, described in more detail below. Each policy facilitates adherence to at least one of the modeling principles that govern the supervisory stress test, and in most cases facilitates adherence to several modeling principles.
(a) During development, the Federal Reserve (i) subjects supervisory models to extensive review of model theory and logic and general conceptual soundness; (ii) examines and evaluates justifications for modeling assumptions; and (iii) tests models to establish the accuracy and stability of the estimates and forecasts that they produce.
(b) After development, the Federal Reserve continues to subject supervisory models to scrutiny during implementation to ensure that the models remain appropriate for use in the stress test exercise. The Federal Reserve monitors changes in the economic environment, the structure of covered companies and their portfolios, and the structure of the stress testing exercise, if applicable, to verify that a model in use continues to serve the purposes for which it was designed. Generally, the same principles, rigor, and standards for evaluating the suitability of supervisory models that apply in model development and design will apply in ongoing monitoring of supervisory models.
(a) In general, the Board does not disclose information related to the supervisory stress test or firm-specific results to covered companies if that information is not also publicly disclosed.
(b) The Board has increased the breadth of its public disclosure since the inception of the supervisory stress test to include more information about model changes and key risk drivers, in addition to more detail on different components of projected net revenues and losses. Increasing public disclosure can help the public understand and interpret the results of the supervisory stress test, particularly with respect to the condition and capital adequacy of participating firms. Providing additional information about the supervisory stress test allows the public to make an evaluation of the quality of the Board’s assessment. This policy also promotes consistent and equitable treatment of covered companies by ensuring that institutions do not have access to information about the supervisory stress test that is not also accessible publicly, corresponding to the principle of consistency and comparability.
(a) The Federal Reserve may revise its supervisory stress test models to include advances in modeling techniques, enhancements in response to model validation findings, incorporation of richer and more detailed data, public comment, and identification of models with improved performance, particularly under adverse economic conditions. Revisions to supervisory stress models may at times have material impact on modeled outcomes.
(b) In order to mitigate sudden and unexpected changes to the supervisory stress test results, the Federal Reserve follows a general policy of phasing highly material model changes into the supervisory stress test over two years. The Federal Reserve assesses whether a model change would have a highly significant impact on the projections of losses, components of revenue, or post-stress capital ratios for covered companies. In these instances, in the first year when the model change is first implemented, estimates produced by the enhanced model are averaged with estimates produced by the model used in the previous stress test exercise. In the second and subsequent years, the supervisory stress test exercise will reflect only estimates produced by the enhanced model. This policy contributes to the stability of the results of the supervisory stress test. By implementing highly material model changes over the course of two stress test cycles, the Federal Reserve seeks to ensure that changes in model projections primarily reflect changes in underlying risk factors and scenarios, year over year.
(c) In general, phase-in thresholds for highly material model changes apply only to conceptual changes to models. Model changes related to changes in accounting or regulatory capital rules and model parameter re-estimation based on newly available data are implemented with immediate effect.
(d) In assessing the materiality of a model change, the Federal Reserve calculates the impact of using an enhanced model on post-stress capital ratios using data and scenarios from prior years’ supervisory stress test exercises. The use of an enhanced model is considered a highly material change if its use results in a change in the CET1 ratio of 50 basis points or more for one or more firms, relative to the model used in prior years’ supervisory exercises.
(a) Models should not place undue emphasis on historical outcomes in predicting future outcomes. The Federal Reserve aims to produce supervisory stress test results that reflect likely outcomes under the supervisory scenarios. The supervisory scenarios may potentially incorporate events that have not occurred historically. It is not necessarily consistent with the purpose of a stress testing exercise to assume that the future will be like the past.
(b) In order to model potential outcomes outside the realm of historical experience, the Federal Reserve generally does not include variables that would capture unobserved historical patterns in supervisory models. The use of industry-level models, restricted use of firm-specific fixed effects (described below), and minimized use of dummy variables indicating a loan vintage or a specific year, ensure that the outcomes of the supervisory models are forward-looking, consistent and comparable across firms, and robust and stable.
(c) Firm-specific fixed effects are variables that identify a specific firm and capture unobserved differences in the revenues, expenses or losses between firms. Firm-specific fixed effects are generally not incorporated in supervisory models in order to avoid the assumption that unobserved firm-specific historical patterns will continue in the future. Exceptions to this policy are made where appropriate. For example, if granular portfolio-level data on key drivers of a covered company’s performance are limited or unavailable, and firm-specific fixed effects are more predictive of a covered company’s future performance than are industry-level variables, then supervisory models may be specified with firm-specific fixed effects.
(d) Models used in the supervisory stress test are developed according to an industry-level approach, calibrated using data from many institutions. In adhering to an industry-level approach, the Federal Reserve models the response of specific portfolios and instruments to variations in macroeconomic and financial scenario variables. In this way, the Federal Reserve ensures that differences across firms are driven by differences in firm-specific input data, as opposed to differences in model parameters or specifications. The industry approach to modeling is also forward-looking, as the Federal Reserve does not assume that historical patterns will necessarily continue into the future for individual firms. By modeling a portfolio or instrument’s response to changes in economic or financial conditions at the industry level, the Federal Reserve ensures that projected future losses are a function of that portfolio or instrument’s own characteristics, rather than the historical experience of the covered company. This policy helps to ensure that two firms with the same portfolio receive the same results for that portfolio in the supervisory stress test.
(e) The Federal Reserve minimizes the use of vintage or year-specific fixed effects when estimating models and producing supervisory projections. In general, these types of variables are employed only when there are significant structural market shifts or other unusual factors for which supervisory models cannot otherwise account. Similar to the firm-specific fixed effects policy, and consistent with the forward-looking principle, this vintage indicator policy is in place so that projections of future performance under stress do not incorporate assumptions that patterns in unmeasured factors from brief historical time periods persist. For example, the loans originated in a particular year should not be assumed to continue to default at a higher rate in the future because they did so in the past.
(a) Both the global market shock and counterparty default components are exogenous components of the supervisory stress scenarios that are independent of the macroeconomic and financial market environment specified in those scenarios, and do not affect projections of risk-weighted assets or balances. The global market shock, which specifies movements in numerous market factors,
(b) Counterparty credit risk on derivatives and repo-style activities is incorporated in supervisory modeling in part by assuming the default of the single counterparty to which the covered firm would be most exposed in the global market shock event.
(c) The full effect of the global market shock and counterparty default components is realized in net income in the first quarter of the projection horizon in the supervisory stress test. The Board expects covered companies with material trading and counterparty exposures to be sufficiently capitalized to absorb losses stemming from these exposures that could occur during times of general macroeconomic stress.
(a) The supervisory stress test incorporates the assumption that aggregate credit supply does not contract during the stress period. The aim of supervisory stress testing is to assess whether firms are sufficiently capitalized to absorb losses during times of economic stress, while also meeting obligations and continuing to lend to households and businesses. The assumption that a balance sheet of consistent magnitude is maintained allows supervisors to evaluate the health of the banking sector assuming firms continue to lend during times of stress.
(b) In order to implement this policy, the Federal Reserve must make assumptions about new loan balances. To predict losses on new originations over the planning horizon, newly originated loans are assumed to have the same risk characteristics as the existing portfolio, where applicable, with the exception of loan age and delinquency status. These newly originated loans would be part of a covered company’s normal business, even in a stressed economic environment. While an individual firm may assume that it reacts to rising losses by sharply restricting its lending (e.g., by exiting a particular business line), the banking industry as a whole cannot do so without creating a “credit crunch” and substantially increasing the severity and duration of an economic downturn. The assumption that the magnitude of firm balance sheets will be fixed in the supervisory stress test ensures that covered companies cannot assume they will “shrink to health,” and serves the Federal Reserve’s goal of helping to ensure that major financial firms remain sufficiently capitalized to accommodate credit demand in a severe downturn. In addition, by precluding the need to make assumptions about how underwriting standards might tighten or loosen during times of economic stress, the Federal Reserve follows the principle of consistency and comparability and promotes consistency across covered companies.
(c) In projecting the denominator for the calculation of the leverage ratio, the Federal Reserve will account for the effect of changes associated with the calculation of regulatory capital or changes to the Board’s regulations.
(a) The Federal Reserve does not make firm-specific overlays to model results used in the supervisory stress test. This policy ensures that the supervisory stress test results are determined solely by the industry-level supervisory models and by firm-specific input data. The Federal Reserve has instituted a policy of not using additional input data submitted by one or some of the covered companies unless comparable data can be collected from all the firms that have material exposure in a given area. Input data necessary to produce supervisory stress test estimates is collected via the FR Y-14 information collection. The Federal Reserve may request additional information from covered companies, but otherwise will not incorporate additional information provided as part of a firm’s CCAR submission or obtained through other channels into stress test projections.
(b) This policy curbs the use of data only from firms that have incentives to provide it, as in cases in which additional data would support the estimation of a lower loss rate or a higher revenue rate, and promotes consistency across the stress test results of covered companies.
(a) Missing data, or data with deficiencies significant enough to preclude the use of supervisory models, create uncertainty around estimates of losses or components of revenue. If data that are direct inputs to supervisory models are not provided as required by the FR Y-14 information collection or are reported erroneously, then a conservative value will be assigned to the specific data based on all available data reported by covered companies, depending on the extent of data deficiency. If the data deficiency is severe enough that a modeled estimate cannot be produced for a portfolio segment or portfolio, then the Federal Reserve may assign a conservative rate (e.g., 10th or 90th percentile PPNR or loss rate, respectively) to that segment or portfolio.
(b) This policy promotes the principle of conservatism, given a lack of information sufficient to produce a risk-sensitive estimate of losses or revenue components using information on the true characteristics of certain positions. This policy ensures consistent treatment for all covered companies that report data deemed insufficient to produce a modeled estimate. Finally, this policy is simple and transparent.
(a) The Federal Reserve makes a distinction between insufficient data reported by covered companies for material portfolios and immaterial portfolios. To limit regulatory burden, the Federal Reserve allows covered companies not to report detailed loan-level or portfolio-level data for loan types that are not material as defined in the FR Y-14 reporting instructions. In these cases, a loss rate representing the median rates among covered companies for whom the rate is calculated will be applied to the immaterial portfolio. This approach is consistent across covered companies, simple, and transparent, and promotes the principles of consistency and comparability and simplicity.
(a) Independent and comprehensive model validation is key to the credibility of supervisory stress tests. An independent unit of validation staff within the Federal Reserve, with input from an advisory council of academic experts not affiliated with the Federal Reserve, ensures that stress test models are subject to effective challenge, defined as critical analysis by objective, informed parties that can identify model limitations and recommend appropriate changes.
(b) The Federal Reserve’s supervisory model validation program, built upon the principles of independence, technical competence, and stature, is able to subject models to effective challenge, expanding upon efforts made by supervisory modeling teams to manage model risk and confirming that supervisory models are appropriate for their intended uses. The supervisory model validation program produces reviews that are consistent, thorough, and comprehensive. Its structure ensures independence from the Federal Reserve’s model development function, and its prominent role in communicating the state of model risk to the Board of Governors assures its stature within the Federal Reserve.
(a) The management and staff of the internal model validation program are structurally independent from the model development teams. Validators do not report to model developers, and vice versa. This ensures that model validation is conducted and overseen by objective parties. Validation staff’s performance criteria include an ability to review all aspects of the models rigorously, thoroughly, and objectively, and to provide meaningful and clear feedback to model developers and users.
(b) In addition, the Model Validation Council, a council of external academic experts, provides independent advice on the Federal Reserve’s process to assess models used in the supervisory stress test. In biannual meetings with Federal Reserve officials, members of the council discuss selective supervisory models, after being provided with detailed model documentation for and non-public information about those models. The documentation and discussions enable the council to assess the effectiveness of the models used in the supervisory stress tests and of the overarching model validation program.
(a) The model validation program is designed to provide thorough, high-quality reviews that are consistent across supervisory models.
(b) First, the model validation program employs technically expert staff with knowledge across model types. Second, reviews for every supervisory model follow the same set of review guidelines, and take place on an ongoing basis. The model validation program is comprehensive, in the sense that validators assess all models currently in use, expand the scope of validation beyond basic model use, and cover both model soundness and performance.
(c) The model validation program covers three main areas of validation: (1) Conceptual soundness; (2) ongoing monitoring; and (3) outcomes analysis. Validation staff evaluates all aspects of model development, implementation, and use, including but not limited to theory, design, methodology, input data, testing, performance, documentation standards, implementation controls (including access and change controls), and code verification.
(a) The validation program informs the Board of Governors about the state of model risk in the overall stress testing program, along with ongoing practices to control and mitigate model risk.
(b) The model validation program communicates its findings and recommendations regarding model risk to relevant parties within the Federal Reserve System. Validators provide detailed feedback to model developers and provide thematic feedback or observations on the overall system of models to the management of the modeling teams. Model validation feedback is also communicated to the users of supervisory model output for use in their deliberations and decisions about supervisory stress testing. In addition, the Director of the Division of Supervision and Regulation approves all models used in the supervisory stress test in advance of each exercise, based on validators’ recommendations, development responses, and suggestions for risk mitigants. In several cases, models have been modified or implemented differently based on validators’ feedback. The Model Validation Council also contributes to the stature of the Federal Reserve’s validation program, by providing an external point of view on modifications to supervisory models and on validation program governance.
(a) In projecting risk-weighted assets, the Federal Reserve will generally assume that a covered company’s risk-weighted assets remain unchanged over the planning horizon. This assumption allows the Federal Reserve to independently project the risk-weighted assets of covered companies in line with the goal of simplicity (Principle 1.4). In addition, this approach is forward-looking (Principle 1.2), as this assumption removes reliance on historical data and past outcomes from the projection of risk-weighted assets.
(b) In projecting a firm’s risk-weighted assets, the Federal Reserve will account for the effect of changes associated with the calculation of regulatory capital or changes to the Board’s regulations in the calculation of risk-weighted assets.
PART 253 – REGULATIONS IMPLEMENTING THE ADJUSTABLE INTEREST RATE (LIBOR) ACT (REGULATION ZZ)
§ 253.1 Authority, purpose, and scope.
(a) Authority. The Board of Governors of the Federal Reserve System (Board) has issued this part (Regulation ZZ) under the authority of Public Law 117-103, division U (the “Adjustable Interest Rate (LIBOR) Act”), codified at 12 U.S.C. 5801 et seq.
(b) Purpose. The purposes of the Adjustable Interest Rate (LIBOR) Act are to establish a clear and uniform process, on a nationwide basis, for replacing the overnight and one-, three-, six-, and 12-month tenors of U.S. dollar LIBOR in existing contracts that do not provide for the use of a clearly defined or practicable replacement benchmark rate; to preclude litigation related to such existing contracts; to allow existing contracts that reference LIBOR but provide for the use of a clearly defined and practicable replacement rate to operate according to their terms; and to address LIBOR references in Federal law.
(c) Scope. As described in § 253.3, the Adjustable Interest Rate (LIBOR) Act and this part apply by their terms to existing contracts governed by Federal law or the law of any state that reference the overnight and one-, three-, six-, and 12-month tenors of U.S. dollar LIBOR and do not have fallback provisions providing for the use of a clearly defined and practicable replacement benchmark rate following the LIBOR replacement date, unless the parties to that contract agree in writing that the contract is not subject to the Adjustable Interest Rate (LIBOR) Act. This part does not apply to or affect existing or prospective contracts that do not reference the overnight or one-, three-, six-, or 12-month tenors of U.S. dollar LIBOR, and except as provided in § 253.3(a)(1)(iii) and (c), generally does not apply to or affect LIBOR contracts that have fallback provisions providing for the use of a clearly defined and practicable replacement benchmark for LIBOR (either directly or through selection by a determining person), even if that rate differs from the otherwise applicable Board-selected benchmark replacement. Any determining person’s selection of the applicable Board-selected benchmark replacement pursuant to § 253.3(c) is subject to §§ 253.4, 253.5 (including any benchmark replacement conforming changes made by a calculating person), 253.6, and 253.7.
§ 253.2 Definitions.
30-day Average SOFR means the 30-calendar-day compounded average of SOFR, as published by the Federal Reserve Bank of New York or any successor administrator.
90-day Average SOFR means the 90-calendar-day compounded average of SOFR, as published by the Federal Reserve Bank of New York or any successor administrator.
Benchmark means an index of interest rates or dividend rates that is used, in whole or in part, as the basis of or as a reference for calculating or determining any valuation, payment, or other measurement.
Benchmark administrator means a person that publishes a benchmark for use by third parties.
Benchmark replacement means a benchmark, or an interest rate or dividend rate (which may or may not be based in whole or in part on a prior setting of LIBOR) to replace LIBOR or any interest rate or dividend rate based on LIBOR, whether on a temporary, permanent, or indefinite basis, under or with respect to a LIBOR contract.
Benchmark replacement conforming change means any technical, administrative, or operational change, alteration, or modification that:
(1) The Board determines, in its discretion, would address one or more issues affecting the implementation, administration, and calculation of the Board-selected benchmark replacement in LIBOR contracts; or
(2) Solely with respect to a LIBOR contract that is not a consumer loan, in the reasonable judgment of a calculating person, are otherwise necessary or appropriate to permit the implementation, administration, and calculation of the Board-selected benchmark replacement under or with respect to a LIBOR contract after giving due consideration to any benchmark replacement conforming changes determined by the Board under paragraph (1) of this definition.
Board-selected benchmark replacement means the benchmark replacements identified in § 253.4.
Business day means any day except for:
(1) A Saturday;
(2) A Sunday;
(3) A day on which the Securities Industry and Financial Markets Association recommends that the fixed income departments of its members be closed for the entire day for purposes of trading in United States Government securities; or
(4) A day on which the Federal Reserve Bank of New York, with advance notice, chooses not to publish its Treasury repurchase agreement reference rates if participants in the Treasury repurchase agreement market broadly expect to treat that day as a holiday.
Calculating person means, with respect to any LIBOR contract, any person, including the determining person, responsible for calculating or determining any valuation, payment, or other measurement based on a benchmark.
CME Term SOFR means the CME Term SOFR Reference Rates published for one-, three-, six-, and 12-month tenors as administered by CME Group Benchmark Administration, Ltd. (or any successor administrator thereof).
Consumer has the same meaning as in section 103 of the Truth in Lending Act (15 U.S.C. 1602).
Consumer loan means a consumer credit transaction.
Credit has the same meaning as in section 103 of the Truth in Lending Act (15 U.S.C. 1602).
Derivative transaction means a contract that would satisfy the criteria to be a “Protocol Covered Document” under the International Swaps and Derivatives Association (ISDA) protocol (see appendix A to this part) but for the fact that one or more parties to such contract is not an “Adhering Party” as such term is used in the ISDA protocol, provided that, for purposes of this definition, “Protocol Effective Date” as such term is used in the ISDA protocol means the LIBOR replacement date for the relevant LIBOR contract.
Derivative transaction fallback observation day means the day that is two payment business days prior to the payment date for the relevant calculation period.
Determining person means, with respect to any LIBOR contract, any person with the sole authority, right, or obligation, including on a temporary basis (as identified by the LIBOR contract or by the governing law of the LIBOR contract, as appropriate) to determine a benchmark replacement, whether or not the person’s authority, right, or obligation is subject to any contingencies specified in the LIBOR contract or by the governing law of the LIBOR contract.
Fallback provisions means terms in a LIBOR contract for determining a benchmark replacement, including any terms relating to the date on which the benchmark replacement becomes effective.
Federal Housing Finance Agency (FHFA)-regulated entity has the same meaning as “regulated entity” in 12 U.S.C. 4502(20).
Federal Family Education Loan Program (FFELP) asset-backed securitization (ABS) means an asset-backed security for which more than 50 percent of the collateral pool consists of FFELP loans, as reported in the most recent servicer report available on the LIBOR replacement date.
FHFA-regulated-entity contract means a LIBOR contract that is a commercial or multifamily mortgage loan that has been purchased or guaranteed, in whole or in part, by an FHFA-regulated entity, or for which an FHFA-regulated entity is identified as a party in the transaction documents, and that is:
(1) A commercial or multifamily mortgage-backed security (other than a security backed by consumer loans);
(2) A collateralized mortgage obligation;
(3) A credit risk transfer transaction; or
(4) A Federal Home Loan Bank advance.
ISDA protocol means the ISDA 2020 IBOR Fallbacks Protocol published by the International Swaps and Derivatives Association, Inc., on October 23, 2020, and minor or technical amendments thereto (see appendix A to this part).
LIBOR, as used in this part:
(1) Means the overnight and one-, three-, six-, and 12-month tenors of U.S. dollar LIBOR (formerly known as the London interbank offered rate) as administered by ICE Benchmark Administration Limited (or any predecessor or successor administrator thereof); and
(2) Does not include the one-week or two-month tenors of U.S. dollar LIBOR.
LIBOR contract means any contract, agreement, indenture, organizational document, guarantee, mortgage, deed of trust, lease, security (whether representing debt or equity, including any interest in a corporation, a partnership, or a limited liability company), instrument, or other obligation or asset that, by its terms, uses LIBOR as a benchmark.
LIBOR replacement date means the first London banking day after June 30, 2023, unless the Board determines that any LIBOR tenor will cease to be published or cease to be representative on a different date.
Relevant benchmark administrator means:
(1) Bloomberg Index Services Limited with respect to Fallback Rate (SOFR);
(2) CME Group Benchmark Administration, Ltd. with respect to CME Term SOFR;
(3) Refinitiv Limited with respect to the Board-selected benchmark replacement for a LIBOR contract that is a consumer loan; and
(4) The Federal Reserve Bank of New York with respect to 30-day Average SOFR and 90-day Average SOFR.
Security has the same meaning as in section 2(a) of the Securities Act of 1933 (15 U.S.C. 77b(a)).
SOFR means the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York or any successor administrator.
State means any state, commonwealth, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, or the United States Virgin Islands.
§ 253.3 Applicability.
(a) General requirement. On and after the LIBOR replacement date, the applicable Board-selected benchmark replacement shall be the benchmark replacement for the following LIBOR contracts, except to the extent that an exception in paragraph (b) of this section applies:
(1) A LIBOR contract with one of the following characteristics as of the LIBOR replacement date, after giving effect to paragraph (a)(2) of this section:
(i) The LIBOR contract contains no fallback provisions;
(ii) The LIBOR contract contains fallback provisions that identify neither –
(A) A specific benchmark replacement; nor
(B) A determining person; or
(iii) The LIBOR contract contains fallback provisions that identify a determining person, but the determining person has not selected a benchmark replacement by the earlier of the LIBOR replacement date and the latest date for selecting a benchmark replacement according to the terms of the LIBOR contract, for any reason.
(2) For purposes of this part, on the LIBOR replacement date, any reference in any fallback provisions of a LIBOR contract to the following shall be disregarded as if not included in the fallback provisions of such LIBOR contract and shall be deemed null and void and without any force or effect:
(i) A benchmark replacement that is based in any way on any LIBOR value, except to account for the difference between LIBOR and the benchmark replacement; or
(ii) A requirement that a person (other than a benchmark administrator) conduct a poll, survey, or inquiries for quotes or information concerning interbank lending or deposit rates (including, but not limited to, Eurodollar deposit or lending rates).
(b) Exceptions. Notwithstanding paragraph (a) of this section, this part shall not apply to –
(1) Any LIBOR contract that the parties have agreed in writing shall not be subject to the Adjustable Interest Rate (LIBOR) Act;
(2) Any LIBOR contract that contains fallback provisions that identify a benchmark replacement that is not based in any way on any LIBOR value (including the prime rate or the effective Federal Funds rate) after application of paragraph (a)(2) of this section; or
(3) Except as provided in paragraph (a)(2) or (a)(1)(iii) of this section, any LIBOR contract subject to paragraph (c) of this section as to which a determining person does not elect to use a Board-selected benchmark replacement pursuant to paragraph (c).
(c) Selection of Board-selected benchmark replacement by determining person. Except for any LIBOR contract described in paragraph (b)(2) of this section, a determining person may select the Board-selected benchmark replacement specified in § 253.4 as the benchmark replacement for a LIBOR contract. Any such selection shall be –
(1) Irrevocable;
(2) Made by the earlier of the LIBOR replacement date and the latest date for selecting a benchmark replacement according to the terms of the LIBOR contract; and
(3) Used in any determinations of the benchmark under or with respect to the LIBOR contract occurring on and after the LIBOR replacement date.
(d) Other provisions of LIBOR contracts unchanged. Except as provided in paragraph (a)(2) of this section and in § 253.5, where the applicable Board-selected benchmark replacement becomes the benchmark replacement for a LIBOR contract on and after the LIBOR replacement date pursuant to paragraph (a) or (c) of this section, all other provisions of such contract shall not be altered or impaired and shall apply to such contract using the Board-selected benchmark replacement, including but not limited to:
(1) Any provision specifying the date for determining a benchmark, except in the case of derivative transactions, which are subject to § 253.4(a)(2), and Federal Home Loan Bank advances, which are subject to § 253.4(b)(3)(ii)(B);
(2) Any provision specifying rounding conventions for a benchmark;
(3) Any provision referencing LIBOR or any LIBOR value prior to the LIBOR replacement date (including any provision requiring a person to look back to a LIBOR value as of a date preceding the LIBOR replacement date);
(4) Any provision applying any cap, floor, modifier, or spread adjustment to which LIBOR had been subject pursuant to the terms of a LIBOR contract;
(5) Any provision of Federal consumer financial law that –
(i) Requires creditors to notify borrowers regarding a change-in-terms; or
(ii) Governs the reevaluation of rate increases on credit card accounts under open-ended (not home-secured) consumer credit plans; or
(6) Except as provided in 12 U.S.C. 5804(c), the rights or obligations of any person, or the authorities of any agency, under Federal consumer financial law, as defined in 12 U.S.C. 5481.
§ 253.4 Board-selected benchmark replacements.
(a) Derivative transactions. (1) A LIBOR contract subject to the requirements of this part that is a derivative transaction shall use the benchmark replacement identified as the “Fallback Rate (SOFR)” in the ISDA protocol (see appendix A to this part) for each day on which LIBOR would ordinarily be observed occurring on or after the LIBOR replacement date. For clarity, the reference to “spread relating to U.S. dollar LIBOR” in the definition of “Fallback Rate (SOFR)” in the ISDA protocol is equal to the applicable tenor spread adjustment identified in paragraph (c) of this section.
(2) The benchmark replacement used to calculate the payment due for the relevant calculation period shall be determined on the derivative transaction fallback observation day in respect of the day that, under the LIBOR contract, would have been used to determine the LIBOR-based rate that is being replaced or, if the Board-selected benchmark replacement in respect of that day is not available on the derivative transaction fallback observation day, the most recently available publication on the derivative transaction fallback observation day shall be used.
(b) All other transactions. On the LIBOR replacement date, a LIBOR contract subject to the requirements of this part that is not a derivative transaction shall use the following benchmark replacements:
(1) For a LIBOR contract that is not a consumer loan, an FHFA-regulated-entity contract, or a FFELP ABS –
(i) In place of overnight LIBOR, the benchmark replacement shall be SOFR plus the tenor spread adjustment identified in paragraph (c)(1) of this section; and
(ii) In place of one-, three-, six-, or 12-month tenors of LIBOR, the benchmark replacement shall be the corresponding one-, three-, six-, or 12-month CME Term SOFR plus the applicable tenor spread adjustment identified in paragraph (c) of this section.
(2) For a LIBOR contract that is a consumer loan –
(i) During the one-year period beginning on the LIBOR replacement date:
(A) In place of overnight LIBOR, the benchmark replacement shall be SOFR plus an amount that transitions linearly for each business day during that period from:
(1) The difference between SOFR and overnight LIBOR determined as of the day immediately before the LIBOR replacement date; to
(2) The tenor spread adjustment identified in paragraph (c)(1) of this section; or
(B) In place of the one-, three-, six-, or 12-month tenors of LIBOR, the benchmark replacement shall be the corresponding one-, three-, six-, or 12-month CME Term SOFR plus an amount that transitions linearly for each business day during that period from:
(1) The difference between the relevant CME Term SOFR and the relevant LIBOR tenor determined as of the day immediately before the LIBOR replacement date; to
(2) The applicable tenor spread adjustment identified in paragraph (c) of this section.
(ii) On the date one year after the LIBOR replacement date and thereafter:
(A) In place of overnight LIBOR, the benchmark replacement shall be SOFR plus the tenor spread adjustment identified in paragraph (c)(1) of this section; and
(B) In place of one-, three-, six-, or 12-month tenors of LIBOR, the benchmark replacement shall be the corresponding one-, three-, six-, or 12-month CME Term SOFR plus the applicable tenor spread adjustment identified in paragraph (c) of this section.
(iii) The rates published or provided by Refinitiv Limited as “USD IBOR Cash Fallbacks” for “Consumer” products shall be deemed equal to the rates identified in paragraphs (b)(2)(i) and (ii) of this section.
(3) For a LIBOR contract that is an FHFA-regulated-entity contract –
(i) For an FHFA-regulated-entity contract that is not a Federal Home Loan Bank advance –
(A) In place of overnight LIBOR, the benchmark replacement shall be SOFR plus the tenor spread adjustment identified in paragraph (c)(1) of this section; and
(B) In place of one-, three-, six-, or 12-month tenors of LIBOR, the benchmark replacement shall be the 30-day Average SOFR plus the applicable tenor spread adjustment identified in paragraph (c) of this section.
(ii) For an FHFA-regulated-entity contract that is a Federal Home Loan Bank advance –
(A) The benchmark replacement shall be the “Fallback Rate (SOFR)” in the ISDA protocol (see appendix A to this part) for each day on which LIBOR would ordinarily be observed occurring on or after the LIBOR replacement date. For clarity, the reference to “spread relating to U.S. dollar LIBOR” in the definition of “Fallback Rate (SOFR)” in the ISDA protocol is equal to the applicable tenor spread adjustment identified in paragraph (c) of this section.
(B) The benchmark replacement used to calculate the payment due for the relevant calculation period shall be determined on the derivative transaction fallback observation day in respect of the day that, under the LIBOR contract, would have been used to determine the LIBOR-based rate that is being replaced or, if the Board-selected benchmark replacement in respect of that day is not available on the derivative transaction fallback observation day, the most recently available publication on the derivative transaction fallback observation day shall be used.
(4) For a LIBOR contract that is a FFELP ABS –
(i) In place of one-month LIBOR, the benchmark replacement shall be 30-day Average SOFR plus the tenor spread adjustment identified in paragraph (c)(2) of this section;
(ii) In place of three-month LIBOR, the benchmark shall be 90-day Average SOFR plus the tenor spread adjustment identified in paragraph (c)(3) of this section; and
(iii) In place of six- or 12-month tenors of LIBOR, the benchmark replacement shall be 30-day Average SOFR plus the tenor spread adjustment identified in paragraph (c)(4) or (5) of this section, as applicable.
(c) Tenor spread adjustments. The following tenor spread adjustments shall be included as part of the Board-selected benchmark replacements as indicated in paragraphs (a) and (b) of this section:
(1) 0.00644 percent for overnight LIBOR;
(2) 0.11448 percent for one-month LIBOR;
(3) 0.26161 percent for three-month LIBOR;
(4) 0.42826 percent for six-month LIBOR; and
(5) 0.71513 percent for 12-month LIBOR.
§ 253.5 Benchmark replacement conforming changes.
(a) Benchmark replacement conforming changes generally. (1) If the Board-selected benchmark replacement becomes the benchmark replacement for a LIBOR contract pursuant to § 253.3(a) or (c), all applicable benchmark replacement conforming changes shall become an integral part of the LIBOR contract.
(2) Paragraph (b) of this section establishes specific benchmark replacement conforming changes. The Board may, in its discretion, publish additional benchmark replacement conforming changes by regulation or order.
(3) Solely with respect to any LIBOR contract that is not a consumer loan, a calculating person may make any additional technical, administrative, or operational changes, alterations, or modifications that, in that person’s reasonable judgment, would be necessary or appropriate to permit the implementation, administration, and calculation of the Board-selected benchmark replacement under or with respect to a LIBOR contract after giving due consideration to any changes, alterations, or modifications otherwise required by the Board, without any requirement to obtain consent from any other person prior to the adoption of such benchmark replacement conforming changes.
(b) Specified benchmark replacement conforming changes. (1) Any reference to a specified source for LIBOR (such as a particular newspaper, website, or screen) shall be replaced with the publication of the applicable Board-selected benchmark replacement (inclusive or exclusive of the relevant tenor spread adjustment identified in § 253.4(c)) by either the relevant benchmark administrator for the applicable Board-selected benchmark replacement or any third party authorized by the relevant benchmark administrator to publish the applicable Board-selected benchmark replacement.
(2) Any reference to a particular time of day for determining LIBOR (such as 11:00 a.m. London time) shall be replaced with the standard publication time for the applicable Board-selected benchmark replacement (inclusive or exclusive of the relevant tenor spread adjustment identified in § 253.4(c)), as established by the relevant benchmark administrator.
(3) Any provision of a LIBOR contract requiring use of a combination (such as an average) of LIBOR values over a period of time that spans the LIBOR replacement date shall be modified to provide that the combination shall be calculated consistent with that contractual provision using:
(i) The applicable LIBOR for any date prior to the LIBOR replacement date; and
(ii) The applicable Board-selected benchmark replacement rate for any date on or following the LIBOR replacement date, respectively.
(4) Subject to § 253.4(a) and (b)(3)(ii), to the extent a Board-selected benchmark replacement is not available or published on a particular day indicated in the LIBOR contract as the determination date, the most recently available publication of the Board-selected benchmark replacement will apply.
§ 253.6 Preemption.
Pursuant to section 107 of the Adjustable Interest Rate (LIBOR) Act, 12 U.S.C. 5806, this part supersedes any provision of any state or local law, statute, rule, regulation, or standard –
(a) Relating to the selection or use of a benchmark replacement or related conforming changes; or
(b) Expressly limiting the manner of calculating interest, including the compounding of interest, as that provision applies to the selection or use of a Board-selected benchmark replacement or benchmark replacement conforming changes.
§ 253.7 Continuity of contract and safe harbor.
(a) The provisions of section 105(a)-(d) of the Adjustable Interest Rate (LIBOR) Act, 12 U.S.C. 5804(a)-(d), shall apply to any LIBOR contract for which the Board-selected benchmark replacement becomes the benchmark replacement pursuant to § 253.3(a) or (c).
(b) Nothing in this part is intended to alter or modify the availability or effect of the provisions of section 105(e) of the Adjustable Interest Rate (LIBOR) Act, 12 U.S.C. 5804(e).
Appendix A to Part 253 – ISDA Protocol
For ease of reference, the Board is republishing, with permission, the full text of the ISDA 2020 IBOR Fallbacks Protocol (ISDA protocol), published on October 23, 2020, by the International Swaps and Derivatives Association, Inc. The full text of the ISDA protocol follows:
The International Swaps and Derivatives Association, Inc. (ISDA) has published this ISDA 2020 IBOR Fallbacks Protocol (this Protocol) to enable parties to Protocol Covered Documents to amend the terms of each such Protocol Covered Document to (i) in respect of a Protocol Covered Document which incorporates, or references a rate as defined in, a Covered ISDA Definitions Booklet, include in the terms of such Protocol Covered Document either the terms of, or a particular defined term included in, the Supplement to the 2006 ISDA Definitions, finalized on October 23, 2020 and to be published by ISDA and effective on January 25, 2021 (the IBOR Fallbacks Supplement) and (ii) in respect of a Protocol Covered Document which otherwise references a Relevant IBOR, include in the terms of such Protocol Covered Document new fallbacks for that Relevant IBOR.
Accordingly, a party may adhere to this Protocol and be bound by its terms by completing and delivering a letter substantially in the form of Exhibit 1 to this Protocol (an Adherence Letter) to ISDA, as agent, as described below (each such party, an Adhering Party).
(a) By adhering to this Protocol in the manner set forth in this paragraph 1, each Adhering Party agrees, in consideration of the mutual promises and covenants contained herein, that the terms of each Protocol Covered Document between such Adhering Party and any other Adhering Party will be amended in accordance with the terms and subject to the conditions set forth in the Attachment hereto.
(b) Adherence to this Protocol will be evidenced by the execution and online delivery, in accordance with this paragraph, to ISDA, as agent, of an Adherence Letter (in accordance with subparagraphs 1(b)(i) to 1(b)(iii) below). ISDA shall have the right, in its sole and absolute discretion, upon at least thirty calendar days’ notice on the “ISDA 2020 IBOR Fallbacks Protocol” section of its website at www.isda.org (or by other suitable means), to designate a closing date of this Protocol (such closing date, the Cut-off Date). After the Cut-off Date, ISDA will not accept any further Adherence Letters to this Protocol.
(i) Each Adhering Party will access the “Protocols” section of the ISDA website at www.isda.org to enter information online that is required to generate its form of Adherence Letter and will submit payment of any applicable fee. Either by directly downloading the populated Adherence Letter from the Protocol system or upon receipt via email of the populated Adherence Letter, each Adhering Party will sign and upload the signed Adherence Letter as a PDF (portable document format) attachment into the Protocol system. Once the signed Adherence Letter has been approved and accepted by ISDA, such Adhering Party will receive an email confirmation of the Adhering Party’s adherence to this Protocol.
(ii) A conformed copy of each Adherence Letter containing, in place of each signature, the printed or typewritten name of each signatory will be published by ISDA so that it may be viewed by all Adhering Parties. Each Adhering Party agrees that, for evidentiary purposes, a conformed copy of an Adherence Letter certified by the General Counsel (or other appropriate officer) of ISDA will be deemed to be an original.
(iii) Each Adhering Party agrees that the determination of the date and time of acceptance of any Adherence Letter will be determined by ISDA in its absolute discretion. Any Adherence Letter which is dated and delivered to ISDA before the date on which this Protocol is published will be deemed to have been delivered on the date on which this Protocol is published.
(c) As between two Adhering Parties, the agreement to make the amendments contemplated by this Protocol, on the terms and conditions set forth in this Protocol, will be effective on the Implementation Date and that agreement will form part of each Protocol Covered Document from the later of the Implementation Date and the related Protocol Covered Document Date. The amendments contemplated by this Protocol shall be made on the later of (i) the Implementation Date and (ii) the Protocol Effective Date.
(A) The Protocol Effective Date with respect to a Protocol Covered Document shall be January 25, 2021.
(B) The Implementation Date with respect to any two Adhering Parties shall be the date of acceptance by ISDA, as agent, of an Adherence Letter (in accordance with paragraph 1(b) above) from the later of such two Adhering Parties to adhere except that:
(I) In respect of any Protocol Covered Document into which an Agent has entered on behalf of a Client, subject to paragraph 3(m) below, the Implementation Date shall be the date specified in subparagraph 3(g)(i)(A), subparagraph 3(g)(i)(B), subparagraph 3(g)(i)(C), paragraph 3(h), paragraph 3(i) or paragraph 3(j) below, as applicable; and
(II) In respect of any Non-Agent Executed Protocol Covered Document, subject to paragraph 3(m) below, the Implementation Date shall be the day specified in paragraph 3(l) below.
Acceptance by ISDA of a subsequent or revised Adherence Letter from either such Adhering Party will not have the effect of changing such Implementation Date.
(d) This Protocol is intended for use without negotiation, but without prejudice to any amendment, modification or waiver in respect of a Protocol Covered Document that the parties may otherwise effect in accordance with the terms of that Protocol Covered Document.
(i) In adhering to this Protocol, an Adhering Party may not specify additional provisions, conditions or limitations in its Adherence Letter.
(ii) Any purported adherence that ISDA, as agent, determines in good faith is not in compliance with this Protocol will be void and ISDA will inform the relevant party of such fact as soon as reasonably possible after making such determination.
(e) Each Adhering Party acknowledges and agrees that adherence to this Protocol is irrevocable, except that an Adhering Party may, after the Protocol Effective Date, deliver to ISDA, as agent, a notice substantially in the form of Exhibit 2 to this Protocol that is effective (determined pursuant to paragraph 3(f) below) on any Protocol Business Day (a Revocation Notice) to designate the next Revocation Date as the last date on which an Implementation Date can occur in respect of any Protocol Covered Document between the counterparty and such Adhering Party. Following the effective delivery of a Revocation Notice by an Adhering Party, this Protocol will not amend any Protocol Covered Document between that Adhering Party and another Adhering Party for which the Implementation Date would occur after the related Revocation Date.
(i) If an Agent adheres to this Protocol on behalf of a Client, then, if the Client effectively delivers a Revocation Notice in accordance with this paragraph 1(e), this Protocol will not amend any Protocol Covered Document between another Adhering Party and that Client entered into by that Client itself or by the Agent on behalf of that Client or any Non-Agent Executed Protocol Covered Document (if applicable), in each case, for which the Implementation Date would occur after the Revocation Date designated as the last date on which an Implementation Date can occur in the Client’s Revocation Notice.
(ii) If an Agent delivers a Revocation Notice in accordance with this paragraph 1(e) on behalf of a Client and the Client separately adheres to this Protocol directly rather than through the agency of an Agent, then the Revocation Notice delivered by the Agent will not prevent an Implementation Date from occurring after the Revocation Date in respect of any Protocol Covered Document into which the Client has entered with another Adhering Party (including through the Agent).
(iii) Subparagraph 1(e)(i), subparagraph 1(e)(ii) and subparagraph 1(e)(iii) are without prejudice to any amendment effected pursuant to this Protocol to any Protocol Covered Document between two Adhering Parties for which the Implementation Date occurred on or before the day on which that Revocation Date occurs or is deemed to occur, regardless of the date on which such Protocol Covered Document is entered into, and any such amendment shall be effective notwithstanding the occurrence or deemed occurrence of such Revocation Date.
(iv) Each Revocation Notice must be delivered by the means specified in paragraph 3(f) below.
(v) Each Adhering Party agrees that, for evidentiary purposes, a conformed copy of a Revocation Notice certified by the General Counsel or an appropriate officer of ISDA will be deemed to be an original.
(vi) Any purported revocation that ISDA, as agent, determines in good faith is not in compliance with this paragraph 1(e) will be void and ISDA will inform the relevant party of such fact as soon as reasonably possible after making such determination.
(a) As of the later of (i) the date on which an Adhering Party adheres to this Protocol in accordance with paragraph 1 above (which will be the date of acceptance by ISDA of an Adherence Letter from that Adhering Party (in accordance with paragraph 1(b) above)) and (ii) the Protocol Covered Document Date, such Adhering Party represents to each other Adhering Party with which it has entered into a Protocol Covered Document (which representations will be deemed to be repeated on the Protocol Effective Date and the Implementation Date if one or both such dates are later than the date on which such Adhering Party adheres to this Protocol) each of the following matters:
(A) Status. It is, if relevant, duly organized and validly existing under the laws of the jurisdiction of its organization or incorporation and, if relevant under such laws, in good standing or, if it otherwise represents its status in or pursuant to the Protocol Covered Document, has such status.
(B) Powers. It has the power to execute and deliver the Adherence Letter and to perform its obligations under the Adherence Letter and the Protocol Covered Document as amended by the Adherence Letter and this Protocol (including the Attachment hereto), and has taken all necessary action to authorize such execution, delivery and performance.
(C) No Violation or Conflict. Such execution, delivery and performance do not violate or conflict with any law applicable to it, any provision of its constitutional documents, any order or judgment of any court or other agency of government applicable to it or any of its assets or any contractual restriction binding on or affecting it or any of its assets.
(D) Consents. All governmental and other consents that are required to have been obtained by it with respect to the Adherence Letter and the Protocol Covered Document, as amended by the Adherence Letter and this Protocol (including the Attachment hereto), have been obtained and are in full force and effect and all conditions of any such consents have been complied with.
(E) Obligations Binding. Its obligations under the Adherence Letter and the Protocol Covered Document, as amended by the Adherence Letter and this Protocol (including the Attachment hereto), constitute its legal, valid and binding obligations, enforceable in accordance with their respective terms (subject to applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors’ rights generally and subject, as to enforceability, to equitable principles of general application (regardless of whether enforcement is sought in a proceeding in equity or at law)).
(F) Credit Support. Its adherence to this Protocol and any amendment contemplated by this Protocol (including the Attachment hereto) will not, in and of itself, adversely affect the enforceability, effectiveness or validity of any obligations owed, whether by it or by any third party, under any Credit Support Document or Third Party Credit Support Document in respect of its obligations relating to any Protocol Covered Document as amended by the Adherence Letter and this Protocol (including the Attachment hereto).
(b) Each Adhering Party agrees with each other Adhering Party with which it has entered into a Protocol Covered Document that each of the foregoing representations will be deemed, in the case of a Protocol Covered Document that is an ISDA Master Agreement, to be a representation for purposes of Section 5(a)(iv) and in the case of any other Protocol Covered Document, to be a representation for purposes of any analogous provisions of each such Protocol Covered Document, that is made by each Adhering Party as of the later of (i) the date on which such Adhering Party adheres to this Protocol in accordance with paragraph 1 above and (ii) the Protocol Covered Document Date and which is deemed repeated on the Protocol Effective Date and the Implementation Date if one or both such dates are later than the date on which such Adhering Party adheres to this Protocol.
(c) Undertakings in respect of Protocol Covered Documents with Third Party Credit Support Documents. With respect to Protocol Covered Documents with Third Party Credit Support Documents that expressly require the consent, approval, agreement, authorization or other action of a Third Party to be obtained, each Adhering Party whose obligations under such arrangements are secured, guaranteed or otherwise supported by such Third Party undertakes to each other Adhering Party with which it has entered into such arrangements that it has obtained the consent (including by way of paragraph 2(d) below), approval, agreement, authorization or other action of such Third Party and that it will, upon demand, deliver evidence of such consent, approval, agreement, authorization or other action to such other Adhering Party.
(d) Deemed Third Party Consent. Each Adhering Party which is also a Third Party in relation to a Third Party Credit Support Document is hereby deemed to have consented to the amendments imposed by this Protocol on the Protocol Covered Document supported by such Third Party Credit Support Document.
(a) Entire Agreement; Restatement; Survival.
(i) This Protocol constitutes the entire agreement and understanding of the Adhering Parties with respect to its subject matter and supersedes all oral communication and prior writings (except as otherwise provided herein) with respect thereto. Each Adhering Party acknowledges that in adhering to this Protocol it has not relied on any oral or written representation, warranty or other assurance (except as provided for or referred to elsewhere in this Protocol or in the Attachment) and waives all rights and remedies which might otherwise be available to it in respect thereof, except that nothing in this Protocol will limit or exclude any liability of an Adhering Party for fraud.
(ii) Except for any amendment deemed to be made pursuant to this Protocol in respect of any Protocol Covered Document, all terms and conditions of each Protocol Covered Document will continue in full force and effect in accordance with its provisions as in effect immediately prior to the date on which it first becomes subject to this Protocol. Except as explicitly stated in this Protocol, nothing herein shall constitute a waiver or release of any rights of any Adhering Party under any Protocol Covered Document to which such Adhering Party is a party or a provider or recipient of credit support. This Protocol will, with respect to its subject matter, survive, and any amendments made or deemed to be made pursuant to this Protocol will form a part of each Protocol Covered Document between the Adhering Parties, notwithstanding any statements in a Protocol Covered Document to the effect that such Protocol Covered Document constitutes the entire agreement and understanding between the parties to such Protocol Covered Document with respect to the subject of such Protocol Covered Document.
(b) Exclusion of Agreements. Notwithstanding anything in paragraph 1(a) above, with respect to any agreement between Adhering Parties, if the parties to such agreement have expressly stated in such agreement or otherwise agreed in writing that this Protocol shall not apply, then such agreement shall not be a Protocol Covered Document.
(c) Amendments. An amendment, modification or waiver in respect of the matters contemplated by this Protocol (including, for the avoidance of doubt, any amendment, modification or waiver relating to the alignment of a Protocol Covered Document with an instrument for which such Protocol Covered Document is intended to serve as a hedge (or vice versa)) will only be effective in respect of a Protocol Covered Document if made in accordance with the terms of the Protocol Covered Document and then only with effect between the parties to that Protocol Covered Document.
(d) Headings. The headings used in this Protocol and any Adherence Letter are for convenience of reference only and are not to affect the construction of or to be taken into consideration in interpreting this Protocol or any Adherence Letter.
(e) Governing Law. This Protocol and each Adherence Letter will, as between two Adhering Parties and in respect of each Protocol Covered Document between them, be governed by and construed in accordance with the laws of England and Wales, without reference to choice of law doctrine, provided that the amendments to each Protocol Covered Document shall be governed by and construed in accordance with the law specified to govern that Protocol Covered Document and otherwise in accordance with the applicable choice of law doctrine.
(f) Notices. Any Revocation Notice must be in writing and delivered as a locked PDF (portable document format) attachment to an email to ISDA at [email protected] and will be deemed effectively delivered on the date it is delivered unless, on the date of that delivery, ISDA’s London office is closed or that communication is delivered after 5:00 p.m., London time, in which case that communication will be deemed effectively delivered on the next day ISDA’s London office is open.
(g) Ability of an Agent to Adhere to the Protocol on Behalf of a Client.
(i) An Agent may adhere to this Protocol:
(A) On behalf of all Clients represented by such Agent (in which case, such Agent need not identify each Client through an online platform available generally to the industry, including, for example, the ISDA Amend platform provided by IHS Markit (a Platform) and, in respect of any Protocol Covered Document into which the Agent has entered on behalf of those Clients, the Implementation Date shall be the date of acceptance by ISDA of an Adherence Letter (in accordance with paragraph 1(b) above) from the later of the two Adhering Parties to adhere);
(B) On behalf of only those Clients represented by such Agent that such Agent specifically names or identifies through a Platform and, in respect of any Protocol Covered Document into which the Agent has entered on behalf of any such Client, the Implementation Date shall be the date shown on the Platform as the date on which the Agent communicates the name or identity of that Client to the other Adhering Party (or, if later, the date of acceptance by ISDA, as agent, of an Adherence Letter from the other Adhering Party); or
(C) On behalf of all Clients represented by such Agent, excluding any Clients whose name or identity the Agent communicates to the other Adhering Party through a Platform as a Client excluded from adherence, subject to subparagraph 3(h)(i) below, on or before the date of acceptance by ISDA of an Adherence Letter (in accordance with paragraph 1(b) above) from the later of the two Adhering Parties to adhere (in which case, such Agent need not identify each Client on whose behalf it adheres through a Platform). In respect of any Protocol Covered Document into which the Agent has entered on behalf of any Client whose name or identity has not been communicated to the other Adhering Party through a Platform as a Client excluded from adherence, the Implementation Date shall (subject to subparagraph 3(h)(i) below) be the date of acceptance by ISDA of an Adherence Letter (in accordance with paragraph 1(b) above) from the later of the two Adhering Parties to adhere. If the Agent has not communicated the name or identity of any Clients excluded from adherence to the other Adhering Party through a Platform on or before the date of acceptance by ISDA of an Adherence Letter (in accordance with paragraph 1(b) above) from the later of the two Adhering Parties to adhere, then (subject to subparagraph 3(h)(i) below) in respect of any Protocol Covered Document into which the Agent has entered on behalf of any Client, the Implementation Date shall be the date of acceptance by ISDA of an Adherence Letter (in accordance with paragraph 1(b) above) from the later of the two Adhering Parties to adhere, and, in each case, if the Agent elects for Option 2 in its Adherence Letter, on behalf of those Clients whose name or identity the Agent communicates to the other Adhering Party through a Platform as being a Client in respect of which subparagraph 3(g)(ii)(B)(II) below applies (in which case, the Implementation Date in respect of any Non-Agent Executed Protocol Covered Document shall be as specified in subparagraph 3(l) below).
(ii) In each case, the Agent can elect to apply the amendments in this Protocol to either:
(A) In respect of all those Clients on whose behalf the Agent adheres pursuant to subparagraph 3(g)(i)(A), subparagraph 3(g)(i)(B) or subparagraph 3(g)(i)(C) above, each Protocol Covered Document into which the Agent has entered on behalf of those Clients (Option 1); or
(B) In respect of all those Clients on whose behalf the Agent adheres pursuant to subparagraph 3(g)(i)(A), subparagraph 3(g)(i)(B) or subparagraph 3(g)(i)(C) above, each Protocol Covered Document into which the Agent has entered on behalf of those Clients and (II) in respect of those Clients on whose behalf the Agent adheres whose name or identity the Agent communicates to the other Adhering Party through a Platform as being a Client in respect of which this subparagraph 3(g)(ii)(B)(II) applies, each Protocol Covered Document into which the Agent did not enter on behalf of those Clients but which the Agent has the authority from the relevant Client to amend (for the purpose of this Protocol, documents described in this subparagraph 3(g)(ii)(B)(II) being Non-Agent Executed Protocol Covered Documents and the date shown on the Platform as the date on which the Agent communicates the name or identity of the Client to the other Adhering Party for the purposes of this subparagraph 3(g)(ii)(B)(II) being the Identification Date) (Option 2). If an Agent adheres to this Protocol and elects for Option 2, in respect of any Client on whose behalf the Agent adheres pursuant to subparagraph 3(g)(i)(A), subparagraph 3(g)(i)(B) or subparagraph 3(g)(i)(C) above whose name or identity is communicated to the other Adhering Party as being a Client in respect of which subparagraph 3(g)(ii)(B)(II) above applies, Protocol Covered Documents referred to in both subparagraph 3(g)(ii)(B)(I) and subparagraph 3(g)(ii)(B)(II) above will be amended in accordance with the terms of this Protocol. For the avoidance of doubt, any Protocol Covered Document into which the Agent did not enter on behalf of a Client and which the Agent does not have the authority from the relevant Client to amend will not constitute a Non-Agent Executed Protocol Covered Document.
(iii) The election for Option 1 or Option 2 shall be made in the Adherence Letter. Adherence by the Agent shall only be effective with respect to those Protocol Covered Documents described in Option 1 or Option 2, as applicable, and as elected in the Adherence Letter (subject to, if the Agent elects for Option 2 and with respect to Non-Agent Executed Protocol Covered Documents,
(A) Subparagraph 3(g)(iv) and paragraph 3(l) below and (B) the Agent communicating the name or identity of those Clients on behalf of which it is amending Non-Agent Executed Protocol Covered Documents to the other Adhering Party, in accordance with subparagraph 3(g)(ii)(B)(II) above (regardless of whether the Agent adheres to this Protocol using the approach described in subparagraph 3(g)(i)(A), subparagraph 3(g)(i)(B) or subparagraph 3(g)(i)(C) above)).
(iv) If an Agent adheres to this Protocol and elects for Option 2 in its Adherence Letter, then, in respect of any Non-Agent Executed Protocol Covered Document only, the Agent shall, as soon as reasonably practicable following a written request (including by email) from the other Adhering Party, and in any event by no later than the end of the fifteenth calendar day following such request, provide reasonable evidence satisfactory to the other Adhering Party in its sole discretion supporting the Agent’s authority to amend such documents, provided that:
(A) If, prior to the date of acceptance by ISDA of an Adherence Letter (in accordance with paragraph 1(b) above) from the later of the Agent and the other Adhering Party to adhere, the Agent has delivered to the other Adhering Party a copy, or relevant extracts, of the agreement (such as an investment management agreement) pursuant to which the relevant Client appoints the Agent to act on its behalf and authorizes the Agent to make the amendments contemplated by this Protocol to the Non-Agent Executed Protocol Covered Document (whether or not such authority expressly refers to this Protocol), then, subject to the other Adhering Party’s right to request (which request must be in writing (which includes by email)) an additional copy of that agreement or those relevant extracts (which request shall be made no later than the end of the fifteenth calendar day following the later of the Identification Date and the date of acceptance by ISDA, as agent, of an Adherence Letter from that other Adhering Party), the Agent need not provide any further evidence supporting its authority to amend that Non-Agent Executed Protocol Covered Document on behalf of that Client for the purposes of this Protocol and, in respect of that Non-Agent Executed Protocol Covered Document, shall be deemed to have provided reasonable evidence satisfactory to the other Adhering Party on (I) if the other Adhering Party does not request an additional copy of that agreement or those relevant extracts, the end of the fifteenth calendar day following the later of the Identification Date and the date of acceptance by ISDA, as agent, of an Adherence Letter from that other Adhering Party or
(II) If the other Adhering Party does request an additional copy of that agreement or those relevant extracts, the day on which that additional copy is delivered to the other Adhering Party;
(B) If the other Adhering Party does not request such evidence by the end of the fifteenth calendar day following the later of the Identification Date and the date of acceptance by ISDA, as agent, of an Adherence Letter from that other Adhering Party, then the Agent shall be deemed to have provided reasonable evidence satisfactory to the other Adhering Party at the end of that fifteenth calendar day;
(C) Subject to subparagraph 3(g)(iv)(A) above, following the delivery of any such evidence by the Agent to the other Adhering Party, unless the other Adhering Party notifies the Agent to the contrary by the end of the fifteenth calendar day following the day on which such evidence is delivered, the Agent shall be deemed to have provided reasonable evidence satisfactory to the other Adhering Party at the end of that fifteenth calendar day;
(D) If: (I)
(I) following written request from the other Adhering Party, the Agent does not provide the other Adhering Party with any evidence supporting its authority to amend such documents or, if subparagraph 3(g)(iv)(A) above applies, with an additional copy of the relevant agreement or extracts, by the end of the fifteenth calendar day following such written request; or
(II) subject to subparagraph 3(g)(iv)(A) above, the other Adhering Party determines that the evidence provided by the Agent is not satisfactory and notifies the Agent accordingly by the end of the fifteenth calendar day following the day on which such evidence is delivered,
Then request for evidence and the Agent’s right to provide such evidence and, in respect of any such evidence, subject to subparagraph 3(g)(iv)(C) above, the Non-Agent Executed Protocol Covered Document shall not be amended by this Protocol; and
(E) Any failure by the Agent to provide the other Adhering Party with such evidence shall not give rise to a Potential Event of Default or an Event of Default (each as defined in the ISDA Master Agreement), or any similar event, under that Non-Agent Executed Protocol Covered Document or other contractual right of action under this Protocol or that Non-Agent Executed Protocol Covered Document.
(v) If an Agent adheres to this Protocol and specifically names or identifies one or more Clients
(A) On whose behalf it is adhering (as contemplated in subparagraph 3(g)(i)(B) above), (B) which are excluded from adherence (as contemplated in subparagraph 3(g)(i)(C) above), and/or (C) on whose behalf it is amending Non-Agent Executed Protocol Covered Documents (as contemplated in subparagraph 3(g)(ii)(B)(II) above), as applicable, through a Platform, that Agent shall provide the legal entity identifier (LEI) of each such Client through such Platform.
(vi) If an Agent adheres to this Protocol on behalf of a Client by executing and delivering an Adherence Letter on behalf of such Client in accordance with paragraph 1 above and this paragraph 3(g), references to the Adhering Party for purposes of this Protocol (including the Attachment hereto) and the Adherence Letter shall be interpreted to refer to such Client. If, in respect of a Client, more than one Adherence Letter is accepted by ISDA in accordance with paragraph 1(b) above (by virtue of the Client adhering on its own behalf and one or more Agents adhering on behalf of that Client), then:
(A) If ISDA accepts an Adherence Letter from an Agent on behalf of a Client after it accepts an Adherence Letter from that Client, any document entered into by:
(I) That Agent acting on behalf of that Client; or
(II) If the Agent elects for Option 2 in its Adherence Letter, that Client on its own behalf but which the Agent has the authority from the relevant Client to amend, in each case, which has a Protocol Covered Document Date prior to:
(1) The Protocol Effective Date; or
(2) If later, the date of acceptance by ISDA, as agent, of an Adherence Letter from that Agent (or, if later, the date of acceptance by ISDA, as agent, of an Adherence Letter from the other Adhering Party), will be deemed to have “a Protocol Covered Document Date prior to the Protocol Effective Date (or, if later, the date of acceptance by ISDA, as agent, of an Adherence Letter (in accordance with paragraph 1(b) above) from the later of the two Adhering Parties to adhere)” for the purposes of the definitions of Protocol Covered Confirmation, Protocol Covered Credit Support Document and Protocol Covered Master Agreement below; and
(B) If ISDA accepts an Adherence Letter from a Client after it accepts an Adherence Letter from an Agent on behalf of that Client, any document entered into by the Client, whether directly or through the agency of an Agent, which has a Protocol Covered Document Date prior to:
(I) The Protocol Effective Date; or if later, the date of acceptance by ISDA, as agent, of an Adherence Letter from that Client (or, if later, the date of acceptance by ISDA, as agent, of an Adherence Letter from the other Adhering Party), will be deemed to have “a Protocol Covered Document Date prior to the Protocol Effective Date (or, if later, the date of acceptance by ISDA, as agent, of an Adherence Letter (in accordance with paragraph 1(b) above) from the later of the two Adhering Parties to adhere)” for the purposes of the definitions of Protocol Covered Confirmation, Protocol Covered Credit Support Document and Protocol Covered Master Agreement below.
(vii) If an Agent adheres to this Protocol on behalf of a Client, then as of the later of (A) the date on which such Agent adheres to this Protocol in accordance with paragraph 1 above and (B) the Protocol Covered Document Date, such Agent represents to each Adhering Party (I) with which it has entered into a Protocol Covered Document on behalf of such Client or (II) which is a party to any Non-Agent Executed Protocol Covered Document (which representation will be deemed to be repeated on the Protocol Effective Date and on the Implementation Date if one or both such dates are later than the date on which such Agent adheres to this Protocol) that it has, as at the relevant Implementation Date, all necessary authority to enter into the Adherence Letter on behalf of such Client. In respect of any Client referred to in paragraph 3(h), paragraph 3(i), paragraph 3(j) or paragraph 3(k) below, the Agent represents that it has, as at the relevant Implementation Date, all necessary authority to apply the terms of the Adherence Letter to such Client.
(h) Clients Added to an Agent Protocol Covered Document after the date of acceptance by ISDA of an Adherence Letter from the later of the Agent and the other Adhering Party to adhere.
(i) Subject to subparagraph 3(h)(ii) below, in respect of any Client added to an Agent Protocol Covered Document between an Agent and an Adhering Party after the date of acceptance by ISDA of an Adherence Letter (in accordance with paragraph 1(b) above) from the later of the Agent and the other Adhering Party to adhere (a New Client), the Agent and such Adhering Party agree that the terms of such Agent Protocol Covered Document as between such Adhering Party and any New Client will be subject to the amendments effected by this Protocol and as between the Adhering Party and the New Client the Implementation Date shall be the date on which the New Client is added to the Agent Protocol Covered Document, unless otherwise agreed between such Agent and such Adhering Party (which agreement may, if the Agent adheres to this Protocol using the approach in subparagraph 3(g)(i)(C) above, be reached by the Agent communicating to the other Adhering Party through a Platform, at the time the New Client is added to the Agent Protocol Covered Document, that the New Client is excluded from adherence).
(ii) If an Agent adheres to this Protocol using the approach described in subparagraph 3(g)(i)(B) above and therefore specifically names or identifies one or more Clients on whose behalf it is adhering, then in order for the terms of an Agent Protocol Covered Document as between an Adhering Party and any New Client to be subject to the amendments effected by this Protocol, the Agent shall communicate the identity of each New Client (including the legal entity identifier (LEI)) to the other Adhering Party which is a party to the Agent Protocol Covered Document to which the New Client is added through a Platform and, as between the other Adhering Party and that New Client, the Implementation Date shall be the date shown on the Platform as the date on which the Agent communicates the identity of that New Client to the other Adhering Party through that Platform.
(i) Clients Added to an Agent’s List of Identified In-Scope Clients after the date of Acceptance by ISDA of the Agent’s Adherence Letter. If an Agent adheres to this Protocol using the approach described in subparagraph 3(g)(i)(B) above and therefore specifically names or identifies one or more Clients on whose behalf it is adhering, then for the purposes of subparagraph 3(g)(ii)(A) or 3(g)(ii)(B)(I) above, as applicable, it may communicate the name or identity of additional Clients on whose behalf it is adhering (through a Platform) to another Adhering Party after the date of acceptance by ISDA, as agent, of its Adherence Letter and, as between that other Adhering Party and the additional Client, the Implementation Date shall be the date shown on the Platform as the date on which the Agent communicates the identity of that additional Client to the other Adhering Party through that Platform for those purposes (or, if later, the date of acceptance by ISDA, as agent, of an Adherence Letter from that other Adhering Party), unless otherwise agreed between such Agent and such Adhering Party.
(j) Clients Removed from an Agent’s List of Excluded Clients after the date of Acceptance by ISDA of the Agent’s Adherence Letter. If an Agent adheres to this Protocol using the approach described in subparagraph 3(g)(i)(C) above and therefore specifically names or identifies one or more Clients as excluded from adherence, then for the purposes of subparagraph 3(g)(ii)(A) or 3(g)(ii)(B)(I) above, as applicable, the Agent may, after the date of acceptance by ISDA, as agent, of its Adherence Letter, remove one or more of those Clients from its list of excluded Clients through a Platform and, as between any other Adhering Party and that Client, the Implementation Date shall be the date shown on the Platform as the date on which the Agent communicates to the other Adhering Party that the Client is removed from the list of excluded Clients (or, if later, the date of acceptance by ISDA, as agent, of an Adherence Letter from that other Adhering Party), unless otherwise agreed between such Agent and such Adhering Party.
(k) Clients Added to an Agent’s List of Clients in respect of which subparagraph 3(g)(ii)(B)(II) above applies. If an Agent adheres to this Protocol, elects for Option 2 in its Adherence Letter and therefore specifically names or identifies one or more Clients in respect of which subparagraph 3(g)(ii)(B)(II) above applies, then it may name or identify additional Clients in respect of which subparagraph 3(g)(ii)(B)(II) above applies (through a Platform) after the date of acceptance by ISDA, as agent, of its Adherence Letter.
(l) Authority to amend Non-Agent Executed Protocol Covered Documents. If an Agent adheres to this Protocol and elects for Option 2 (as described in subparagraph 3(g)(ii) above), then, in respect of each Non-Agent Executed Protocol Covered Document, the Implementation Date shall be the day on which the Agent is deemed to have provided evidence supporting the Agent’s authority to amend such Non-Agent Executed Protocol Covered Document to the other Adhering Party pursuant to subparagraph 3(g)(iv) above and, for the purposes of subparagraph 3(g)(iii) above, with respect to such Non-Agent Executed Protocol Covered Documents only, the Agent’s adherence will be deemed effective on that day.
(m) Implementation Date if both an Agent and a Client adhere to this Protocol or if more than one Agent adheres for a Client. If an Agent adheres to this Protocol and, in respect of a particular Client and a Protocol Covered Document into which the Agent has entered on behalf of that Client or a Non-Agent Executed Protocol Covered Document, there is, pursuant to the terms of this Protocol, more than one Implementation Date, then, notwithstanding any provision to the contrary in this Protocol, the Implementation Date shall be the first of those dates to occur.
(n) Adhering Party that is an Agent with respect to a Protocol Covered Document. An Adhering Party that executes a Protocol Covered Document (including an annex thereto) as agent with respect to that Protocol Covered Document, shall not for purposes of this Protocol be considered to be a party to or to have entered into such Protocol Covered Document solely by acting as agent with respect to that Protocol Covered Document except as expressly provided therein.
References in this Protocol and the Attachment to the following terms shall have the following meanings:
Additional Credit Support Document means the documents (which, for the avoidance of doubt, shall be deemed to include any annexes or appendices thereto) set out in Part 2 of the Additional Documents Annex to this Protocol.
Additional Master Agreement means the documents (which, for the avoidance of doubt, shall be deemed to include any annexes or appendices thereto) set out in Part 1 of the Additional Documents Annex to this Protocol.
Adherence Letter has the meaning given to such term in the introductory paragraphs hereof.
Adhering Party has the meaning given to such term in the introductory paragraphs hereof, as construed in accordance with subparagraph 3(g)(vi) above where relevant.
Agent means an entity that enters into a Protocol Covered Document (or which has the authority to amend a Non-Agent Executed Protocol Covered Document) and executes and delivers an Adherence Letter with respect to this Protocol on behalf of, and as agent for, one or more Clients. With respect to paragraph 3(h) above, Agent also means an entity that enters into a Protocol Covered Document and executes and delivers an Adherence Letter pursuant to subparagraph 3(g)(i) above solely for purposes of amending such agreements to which New Clients may be added under paragraph 3(h) above.
Agent Protocol Covered Document means any Protocol Covered Document signed by the Agent on behalf of one or more Clients prior to the Protocol Effective Date (or, if later, the date of acceptance by ISDA, as agent, of an Adherence Letter (in accordance with paragraph 1(b) above) from the later of the Agent and the other Adhering Party to adhere), including any agreement that is signed as an umbrella agreement by an Agent and an Adhering Party prior to the Protocol Effective Date (or, if later, the date of acceptance by ISDA, as agent, of an Adherence Letter (in accordance with paragraph 1(b) above) from the later of the Agent and the other Adhering Party to adhere) which would be a Protocol Covered Document but for the absence of any underlying Client which is an Adhering Party.
Client means, with respect to an Agent, a client, investor, fund, account and/or other principal on whose behalf the Agent acts.
Confirmation means, in respect of a transaction, one or more documents or other confirming evidence exchanged between the parties or otherwise effective for the purpose of confirming or evidencing the transaction.
Covered ISDA Definitions Booklet means each of the 2006 ISDA Definitions, the 2000 ISDA Definitions, the 1998 ISDA Euro Definitions, the 1998 Supplement to the 1991 ISDA Definitions and the 1991 ISDA Definitions, each as published by ISDA.
Credit Support Document means, in respect of an Adhering Party and a Protocol Covered Document, any document in effect on the Implementation Date, which by its terms secures, guarantees or otherwise supports such Adhering Party’s obligations under such Protocol Covered Document from time to time, whether or not such document is specified as such therein or in the Protocol Covered Document.
Cut-off Date has the meaning given to such term in paragraph 1(b) above.
IBOR Fallbacks Supplement has the meaning given to such term in the introductory paragraphs hereof.
Identification Date has the meaning given to such term in subparagraph 3(g)(ii)(B)(II) above.
Implementation Date has the meaning given to such term in subparagraph 1(c)(B) above.
ISDA has the meaning given to such term in the introductory paragraphs hereof.
ISDA Credit Support Document means each of the following documents:
(a) 1994 ISDA Credit Support Annex (Bilateral Form; ISDA Agreements Subject to New York Law Only);
(b) 1995 ISDA Credit Support Annex (Bilateral Form – Transfer; ISDA Agreements Subject to English law);
(c) 1995 ISDA Credit Support Deed (Bilateral Form – Security Interest; ISDA Agreements Subject to English Law);
(d) 1995 ISDA Credit Support Annex (Bilateral Form – Loan and Pledge; Security Interest Subject to Japanese Law);
(e) 1995 ISDA Credit Support Annex (Bilateral Form – Transfer; ISDA Agreement Subject to French Law);
(f) 1995 ISDA Credit Support Annex (Bilateral Form – Transfer; ISDA Agreement Subject to Irish Law);
(g) 2008 ISDA Credit Support Annex (Loan/Japanese Pledge);
(h) 2013 Standard Credit Support Annex (New York Law);
(i) 2013 Standard Credit Support Annex (English Law);
(j) 2014 Standard Credit Support Annex (New York Law – Multicurrency Settlement);
(k) 2014 Standard Credit Support Annex (English Law – Multicurrency Settlement);
(l) 2014 ISDA Korean Law Credit Support Annex (Bilateral Form – Loan and Pledge; Credit Support Annex Subject to Korean Law);
(m) 2016 Credit Support Annex for Variation Margin (VM) (Bilateral Form; ISDA Agreements Subject to New York Law Only), including any such form entered into between the Parties pursuant to the ISDA 2016 Variation Margin Protocol;
(n) 2016 Credit Support Annex for Variation Margin (VM) (Bilateral Form – Transfer; ISDA Agreements Subject to English Law), including any such form entered into between the Parties pursuant to the ISDA 2016 Variation Margin Protocol;
(o) 2016 Credit Support Annex for Variation Margin (VM) (Bilateral Form – Loan; ISDA Agreements Subject to Japanese Law), including any such form entered into between the Parties pursuant to the ISDA 2016 Variation Margin Protocol;
(p) 2016 Credit Support Annex for Variation Margin (VM) (Bilateral Form – Transfer; ISDA Agreements Subject to French Law); or
(q) 2016 Credit Support Annex for Variation Margin (VM) (Bilateral Form – Transfer; ISDA Agreements Subject to Irish Law).
ISDA Master Agreement means an ISDA 2002 Master Agreement, an ISDA 2002 Master Agreement (French law), an ISDA 2002 Master Agreement (Irish law), a 1992 ISDA Master Agreement (Multicurrency – Cross Border), a 1992 ISDA Master Agreement (Local Currency – Single Jurisdiction), a 1987 ISDA Interest Rate Swap Agreement or a 1987 ISDA Interest Rate and Currency Exchange Agreement, in each case as published by ISDA.
Master Agreement means an agreement which may be an ISDA Master Agreement or an Additional Master Agreement that has been entered into (a) by execution by the parties thereto (whether directly or through the agency of an Agent) or (b) by execution by the parties thereto (whether directly or through the agency of an Agent) of a Confirmation pursuant to which a party is deemed to have entered into an ISDA Master Agreement or an Additional Master Agreement with the other party.
New Client has the meaning given to such term in paragraph 3(h)(i) above.
Non-Agent Executed Protocol Covered Documents has the meaning given to such term in subparagraph 3(g)(ii)(B)(II) above.
Platform has the meaning given to such term in paragraph 3(g)(i)(A) above.
Protocol has the meaning given to such term in the introductory paragraphs hereof.
Protocol Business Day means a day following the Protocol Effective Date on which commercial banks and foreign exchange markets are generally open to settle payments in both London and New York.
Protocol Covered Confirmation means, subject to subparagraph 3(g)(vi) above, a Confirmation which is entered into between two Adhering Parties (whether directly or through the agency of an Agent and, if through the agency of an Agent, whether executed by that Agent or by an entity on behalf of that Agent), has a Protocol Covered Document Date prior to the Protocol Effective Date (or, if later, the date of acceptance by ISDA, as agent, of an Adherence Letter (in accordance with paragraph 1(b) above) from the later of the two Adhering Parties to adhere) and:
(a) supplements, forms part of and is subject to, or is otherwise governed by, a Master Agreement and incorporates a Covered ISDA Definitions Booklet;
(b) supplements, forms part of and is subject to, or is otherwise governed by, a Master Agreement and references a Relevant IBOR “as defined” in, or otherwise provides that the Relevant IBOR has the meaning given in, a Covered ISDA Definitions Booklet (regardless of whether such Covered ISDA Definitions Booklet is incorporated in full in that Confirmation); and/or
(c) supplements, forms part of and is subject to, or is otherwise governed by, a Master Agreement and references a Relevant IBOR, howsoever defined.
Protocol Covered Credit Support Document
(a) Incorporates a Covered ISDA Definitions Booklet;
(b) References a Relevant IBOR “as defined” in, or otherwise provides that the Relevant IBOR has the meaning given in, a Covered ISDA Definitions Booklet (regardless of whether such Covered ISDA Definitions Booklet is incorporated in full in that ISDA Credit Support Document or Additional Credit Support Document); and/or
(c) References a Relevant IBOR, howsoever defined.
Protocol Covered Document Date means, in respect of any document, the date of such document, howsoever described therein, provided that (a) if such document has different dates specified therein, one of which includes a date specified as an “as of” date, such date shall be the Protocol Covered Document Date, and (b) if such document is a Confirmation (other than a master confirmation agreement, including any related general terms confirmation), the Protocol Covered Document Date shall be the Trade Date.
Protocol Covered Documents means Protocol Covered Confirmations, Protocol Covered Master Agreements and Protocol Covered Credit Support Documents, other than any such documentation governing cleared transactions (including any transactions that are “Client Transactions” (or in substance equivalent) under a 2016 ISDA/FIA Client Cleared OTC Derivatives Addendum or any agreement that in substance relates to the same matters as those contemplated by the 2016 ISDA/FIA Client Cleared OTC Derivatives Addendum between a clearing member and its client).
Protocol Covered Master Agreement means, subject to subparagraph 3(g)(vi) above, a Master Agreement which is entered into (or deemed entered into) between two Adhering Parties (whether directly or through the agency of an Agent and, if through the agency of an Agent, whether executed by that Agent or by an entity on behalf of that Agent), has a Protocol Covered Document Date prior to the Protocol Effective Date (or, if later, the date of acceptance by ISDA, as agent, of an Adherence Letter (in accordance with paragraph 1(b) above) from the later of the two Adhering Parties to adhere) and:
(a) Incorporates a Covered ISDA Definitions Booklet;
(b) References a Relevant IBOR “as defined” in, or otherwise provides that the Relevant IBOR has the meaning given in, a Covered ISDA Definitions Booklet (regardless of whether such Covered ISDA Definitions Booklet is incorporated in full in that Master Agreement); and/or
(c) References a Relevant IBOR, howsoever defined.
Protocol Effective Date has the meaning given to such term in subparagraph 1(c)(A) above.
Relevant IBOR means:
(a) Any of sterling LIBOR (London interbank offered rate), Swiss franc LIBOR (London interbank offered rate), U.S. dollar LIBOR (London interbank offered rate), euro LIBOR (London interbank offered rate), the euro interbank offered rate, Japanese yen LIBOR (London interbank offered rate), the Japanese yen Tokyo interbank offered rate, the euroyen Tokyo interbank offered rate, the bank bill swap rate, the Canadian dollar offered rate, the Hong Kong interbank offered rate, the Singapore dollar swap offer rate and the Thai baht interest rate fixing; and
(b) LIBOR (London interbank offered rate) with no reference to, or indication of, the currency of the relevant LIBOR (London interbank offered rate) (including, for the avoidance of doubt, the reference in Section 7.3 (Corrections to Published Prices) of the 2005 ISDA Commodity Definitions to “the spot offered rate for deposits in the payment currency in the London interbank market as at approximately 11:00 a.m., London time”), in each case, howsoever defined or described (whether in English or in any other language) in the relevant Protocol Covered Document.
Revocation Date means, with respect to a Revocation Notice and an Adhering Party, the last Protocol Business Day of the calendar month following the calendar month in which that Revocation Notice is effectively delivered by that Adhering Party to ISDA.
Revocation Notice has the meaning given to such term in paragraph 1(e) above.
Third Party means, in relation to an agreement supported by a Third Party Credit Support Document, any party to such Third Party Credit Support Document other than either of the Adhering Parties which are parties to the agreement.
Third Party Credit Support Document means, with respect to an Adhering Party and a Protocol Covered Document, any Credit Support Document which is executed by one or more Third Parties (whether or not an Adhering Party is a party thereto), whether or not such document is specified as a Third Party Support Document or as a Credit Support Document therein or in the Protocol Covered Document.
Trade Date means, in respect of a Protocol Covered Confirmation (other than a master confirmation agreement, including any related general terms confirmation), the date on which the parties enter into the related transaction.
The purpose of this letter is to confirm our adherence to the ISDA 2020 IBOR Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc. (ISDA) on October 23, 2020 (the Protocol). By submitting this Adherence Letter, we confirm that we are an Adhering Party to the Protocol. This letter constitutes, as between each other Adhering Party and us, an Adherence Letter as referred to in the Protocol. The definitions and provisions contained in the Protocol are incorporated into this Adherence Letter, which will supplement and form part of each Protocol Covered Document between us and each other Adhering Party.
As between each Adhering Party and us, we acknowledge and agree that the amendments in the Attachment to the Protocol shall apply to each Protocol Covered Document to which we are a party in accordance with the terms of the Protocol and this Adherence Letter.
We hereby appoint ISDA as our agent for the limited purposes of the Protocol and accordingly we waive any rights and hereby release ISDA from any claims, actions or causes of action whatsoever (whether in contract, tort or otherwise) arising out of or in any way relating to this Adherence Letter or our adherence to the Protocol or any actions contemplated as being required by ISDA.
By adhering to the Protocol, we agree that all claims or disputes arising out of or in connection with adherence to the Protocol shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce (the Rules) by three arbitrators, and hereby waive any right to assert any such claims or disputes against ISDA as a representative or member in any class or representative action. The claimant(s) (as defined in the Rules) shall nominate one arbitrator in the `Request for Arbitration’. The respondent(s) (as defined in the Rules) shall nominate one arbitrator in the `Answer to the Request’. The two party-nominated arbitrators shall then have 30 days to agree, in consultation with the parties to the arbitration, upon the nomination of a third arbitrator to act as president of the tribunal, barring which the International Chamber of Commerce Court shall select the third arbitrator (or any arbitrator that claimant(s) or respondent(s) shall fail to nominate in accordance with the foregoing). This agreement to arbitrate shall not be affected by the Revocation Notice as described in the Protocol.
Each Adhering Party or, if such Adhering Party is a Client on whose behalf an Agent adheres to this Protocol, each Agent, that is classified by ISDA for purposes of membership of ISDA as an “ISDA Primary Member” must submit a one-time fee of U.S. $500 to ISDA at or before the submission of this Adherence Letter. Each Adhering Party or, if such Adhering Party is a Client on whose behalf an Agent adheres to this Protocol, each Agent, which is not an “ISDA Primary Member” is not required to submit a fee to ISDA if this Adherence Letter is submitted prior to the Protocol Effective Date. If an Adhering Party or, if such Adhering Party is a Client on whose behalf an Agent adheres to this Protocol, an Agent, which is not an “ISDA Primary Member” submits this Adherence Letter on or after the Protocol Effective Date, such Adhering Party or Agent (as applicable) must submit a one-time fee of U.S. $500 to ISDA at or before the submission of this Adherence Letter.
Our contact details for purposes of this Adherence Letter are:
We consent to the publication of a conformed copy of this letter by ISDA and to the disclosure by ISDA of the contents of this letter.
If you are an Agent, you may sign the Adherence Letter using one of the options below. Please note that, if you would like to adhere on behalf of yourself, as principal, and also on behalf of your Clients, as Agent, you must submit one adherence letter for yourself, as principal, and a second adherence letter on behalf of your Clients, as Agent, in the latter case, in accordance with one of the options set out below.
First, if you have the authority to adhere to this Protocol as Agent on behalf of all Clients, you may indicate the following in the signature block: “acting on behalf of [(a)] each fund, account or other principal (each, a “Client”) on whose behalf we have entered, or will enter, into a Protocol Covered Document and any New Clients added to an Agent Protocol Covered Document in the future [and (b) in respect of any Non-Agent Executed Protocol Covered Documents, each Client which we name or identify through a Platform as being a Client in respect of which subparagraph 3(g)(ii)(B)(II) of the Protocol applies]”. If such a signature block is used, a separate Adherence Letter for each Client does not need to be submitted to ISDA and no specific names of Clients must be identified through a Platform (except if you elect for Option 2 in this Adherence Letter, in which case the Clients on whose behalf you are amending Non-Agent Executed Protocol Covered Documents should be identified through such Platform; you will be responsible for identifying such Clients and providing their LEIs. If you cannot or do not wish to name such Clients, then provided that you can identify the Clients by way of LEIs, you may identify such Clients using LEIs and without including any names). If you do not elect for Option 2 in this Adherence Letter, you should delete the wording in square brackets in the signature block.
Second, if you adhere to this Protocol as an agent on behalf of certain Clients only by specifically identifying such Clients, you may indicate the following in the signature block: “acting on behalf of [(a)] each fund, account or other principal (each a “Client”) which we name or identify through a Platform as being a Client on whose behalf we have entered, or will enter, into a Protocol Covered Document and any New Clients added to an Agent Protocol Covered Document and identified through a Platform as a New Client [and (b) in respect of any Non-Agent Executed Protocol Covered Documents, each Client which we name or identify through a Platform as being a Client in respect of which subparagraph 3(g)(ii)(B)(II) of the Protocol applies]”. You will be responsible for identifying any Clients on whose behalf you have entered into, or will enter into, a Protocol Covered Document, any New Clients and any Clients on whose behalf you amend Non-Agent Executed Protocol Covered Documents and, in each case, providing their LEIs. If you cannot or do not wish to name such Clients, then provided that you can identify the Clients by way of LEIs, you may identify such Clients using LEIs and without including any names. If you do not elect for Option 2 in this Adherence Letter, you should delete the wording in square brackets in the signature block.
Third, if you adhere to this Protocol as an agent on behalf of certain Clients only by excluding certain Clients, you may indicate the following in the signature block: “acting on behalf of [(a)] each fund, account or other principal (each, a “Client”) on whose behalf we have entered, or will enter, into a Protocol Covered Document (except for those Clients which we identify through a Platform as excluded from adherence) and any New Clients added to an Agent Protocol Covered Document (except for any New Clients which we identify through a Platform as excluded from adherence) [and (b) in respect of any Non-Agent Executed Protocol Covered Documents, each Client which we name or identify through a Platform as being a Client in respect of which subparagraph 3(g)(ii)(B)(II) of the Protocol applies]”. You will be responsible for identifying any excluded Clients and any Clients on whose behalf you amend Non-Agent Executed Protocol Covered Documents and, in each case, for providing their LEIs. If you cannot or do not wish to name those excluded Clients or those Clients on whose behalf you are amending Non-Agent Executed Protocol Covered Documents, then provided that you can identify them by way of LEIs, you may identify those Clients using LEIs and without including any names. If you do not elect for Option 2 in this Adherence Letter, you should delete the wording in square brackets in the signature block.
Fourth, if you adhere to this Protocol as an agent on behalf of no current Clients, you may indicate the following in the signature block: “acting to amend each Protocol Covered Document (or other agreement which deems a Protocol Covered Document to have been created) between it (as agent) and each Adhering Party, with respect to New Clients.”
The election for Option 1 or Option 2 below should only be made by an Agent. Any entity which adheres to the Protocol and which is not acting as an Agent should not complete the election below.
As between each Adhering Party and us, we acknowledge and agree that the amendments in the Attachment to the Protocol shall apply to each:
□ Protocol Covered Document into which we have entered on behalf of one or more Clients covered in accordance with the terms of the Protocol and this Adherence Letter (as contemplated by Option 1 in the Protocol); or
□ Protocol Covered Document into (i) which we have entered on behalf of one or more Clients covered in accordance with the terms of the Protocol and this Adherence Letter and (ii) which we did not enter on behalf of one or more Clients but which we otherwise have the authority from the relevant Client to amend in accordance with and subject to the terms of the Protocol and this Adherence Letter (as contemplated by Option 2 in the Protocol).
We agree, in our capacity as Agent for the relevant Client(s), to provide each other Adhering Party, as soon as reasonably practicable following such other Adhering Party’s written request (including by email), and in any event by no later than the end of the fifteenth calendar day following such request (and as required by and in accordance with subparagraph 3(g)(iv) of the Protocol), with reasonable evidence satisfactory to such other Adhering Party in its sole discretion supporting our authority to amend any Protocol Covered Document into which we did not enter on behalf of one or more Clients (whose name or identity we communicate to the other Adhering Party through a Platform as being a Client in respect of which subparagraph 3(g)(ii)(B)(II) of the Protocol applies).
Failure to provide an Adhering Party with such evidence shall (unless the Agent is deemed to have provided such evidence, pursuant to subparagraph 3(g)(iv) of the Protocol), only in respect of those Non-Agent Executed Protocol Covered Documents between the relevant Client(s) and such Adhering Party, result in this Adherence Letter being ineffective unless and until we, in our capacity as Agent for the relevant Client(s), are deemed to have provided that Adhering Party with such evidence pursuant to subparagraph 3(g)(iv) of the Protocol. Failure to provide an Adhering Party with such evidence shall not give rise to a Potential Event of Default or an Event of Default (each as defined in the ISDA Master Agreement), or any similar event, under those Protocol Covered Documents or other contractual right of action under this Protocol or those Protocol Covered Documents.
The purpose of this letter is to notify you that we wish to designate a Revocation Date as the last date on which an Implementation Date can occur pursuant to the terms of the ISDA 2020 IBOR Fallbacks Protocol as published by the International Swaps and Derivatives Association, Inc. (ISDA) on October 23, 2020 (the Protocol) in respect of any Protocol Covered Document between us and any other Adhering Party.
This letter constitutes a Revocation Notice as referred to in the Protocol.
We consent to the publication of the conformed copy of this notice by ISDA on and after the Revocation Date and to the disclosure by ISDA of the contents of this letter.
If you are an Agent and act on behalf of multiple Clients, you may sign a Revocation Notice using one of the methods below. Alternatively, you may submit one Revocation Notice per Client.
First, if you have the authority to deliver a Revocation Notice for this Protocol as Agent on behalf of all Clients, you may indicate the following in the signature block: “acting on behalf of each fund, account or other principal (each, a “Client”) represented by us (as agent)” or such other language which indicates the Clients to which this letter is applicable. If such a signature block is used, a separate Revocation Notice for each Client does not need to be submitted to ISDA and no specific names of Clients must be identified in the Revocation Notice.
Second, if you have the authority to deliver a Revocation Notice for this Protocol as Agent on behalf of certain Clients only, you may indicate the following in the signature block: “acting on behalf of each fund, account or other principal (each, a “Client”) represented by us (as agent) identified in the Revocation Notice or an appendix thereto”. If you cannot or do not wish to name such Clients, then provided that you can identify the revoking Clients by way of specific identifiers which will be known and recognized by allAdhering Parties with which the relevant Clients have entered into Confirmations, Master Agreements and/or credit support documents, you may identify such revoking Clients using specific identifiers and without including any names.
Paragraph 1(e) of the Protocol sets out the consequences of a Revocation Notice where an Agent adheres to the Protocol on behalf of a Client.
(a) 2001 FBF Master Agreement relating to Transactions on Forward Financial Instruments.
(b) 2007 FBF Master Agreement relating to Transactions on Forward Financial Instruments.
(c) 2013 FBF Master Agreement relating to Transactions on Forward Financial Instruments.
(d) 1994 AFB Master Agreement for Foreign Exchange and Derivatives Transactions.
(e) 1997 AFTI/FBF Master Agreement for Loans of Securities.
(f) 2007 AFTI/FBF Master Agreement for Loans of Securities.
(g) 2007 FBF Master Agreement for Repurchase Transactions.
(h) 1994 AFTB Master Agreement for Repurchase Transactions with Delivery of Securities.
(i) Execution Annex with respect to the AFB/FBF 1994/2001/2007/2013 Master Agreements.
(j) 1997 Spanish Master Agreement (Contrato Marco de Operaciones Financieras or CMOF) published by Asociación Española de Banca (Spanish Banking Association) and Confederación Española de Cajas de Ahorros (Spanish Confederation of Savings Banks).
(k) Annex III to the 1997 Spanish Master Agreement (Contrato Marco de Operaciones Financieras or CMOF) published by Asociación Española de Banca (Spanish Banking Association) and Confederación Española de Cajas de Ahorros (Spanish Confederation of Savings Banks).
(l) 2009 Spanish Master Agreement (Contrato Marco de Operaciones Financieras or CMOF) published by Asociación Española de Banca (Spanish Banking Association) and Confederación Española de Cajas de Ahorros (Spanish Confederation of Savings Banks).
(m) Annex III to the 2009 Spanish Master Agreement (Contrato Marco de Operaciones Financieras or CMOF) published by Asociación Española de Banca (Spanish Banking Association) and Confederación Española de Cajas de Ahorros (Spanish Confederation of Savings Banks).
(n) 2013 Spanish Master Agreement (Contrato Marco de Operaciones Financieras or CMOF) published by Asociación Española de Banca (Spanish Banking Association) and Confederación Española de Cajas de Ahorros (Spanish Confederation of Savings Banks).
(o) Annex III to the 2013 Spanish Master Agreement (Contrato Marco de Operaciones Financieras or CMOF) published by Asociación Española de Banca (Spanish Banking Association) and Confederación Española de Cajas de Ahorros (Spanish Confederation of Savings Banks).
(p) 2003 Swiss Master Agreement for OTC Derivative Instruments published by the Swiss Bankers Association.
(q) 2013 Swiss Master Agreement for OTC Derivative Instruments published by the Swiss Bankers Association (for use in connection with certain ISDA definitions).
(r) 2013 Swiss Master Agreement for OTC Derivative Instruments published by the Swiss Bankers Association (non-ISDA version not for use in connection with any ISDA definitions).
(s) 1999 Bilateral Swiss Master Agreement for Repo Transactions published by the Swiss Bankers Association.
(t) 1999 Multilateral Swiss Master Agreement for Repo Transactions published by the Swiss Bankers Association.
(u) 2011 Swiss Master Agreement for Securities Lending and Borrowing prepared by the Swiss Bankers Association.
(v) 2001 Master Agreement for Financial Transactions sponsored by the Banking Federation of the European Union (EBF or FBE) in cooperation with the European Savings Banks Group (ESBG) and the European Association of Cooperative Banks (EACB).
(w) 2004 Master Agreement for Financial Transactions sponsored by the Banking Federation of the European Union (EBF or FBE) in cooperation with the European Savings Banks Group (ESBG) and the European Association of Cooperative Banks (EACB).
(x) 2020 Master Agreement for Financial Transactions sponsored by the Banking Federation of the European Union (EBF or FBE) in cooperation with the European Savings Banks Group (ESBG) and the European Association of Cooperative Banks (EACB).
(y) Austrian Master Agreement for Financial Transactions (Österreichischer Rahmenvertrag für Finanztermingeschäfte or ÖRV).
(z) 1997 International Foreign Exchange and Options Master Agreement (FEOMA).
(aa) 1993 International Foreign Exchange Master Agreement (IFEMA).
(bb) 1997 International Foreign Exchange Master Agreement (IFEMA).
(cc) 1997 International Currency Options Market (ICOM) Master Agreement.
(dd) 2005 International Foreign Exchange and Currency Option Master Agreement (IFXCO).
(ee) 1992 PSA/ISMA Global Master Repurchase Agreement (GMRA).
(ff) 1995 PSA/ISMA Global Master Repurchase Agreement (GMRA).
(gg) 2000 TBMA/ISMA Global Master Repurchase Agreement (GMRA).
(hh) 2011 SIFMA/ICMA Global Master Repurchase Agreement (GMRA).
(ii) 2000 ISLA Global Master Securities Lending Agreement (GMSLA).
(jj) 2010 ISLA Global Master Securities Lending Agreement (GMSLA).
(kk) 2018 ISLA Global Master Securities Lending Agreement (GMSLA) – Security Interest over Collateral.
(ll) 1993 TBMA/SIA Master Securities Loan Agreement (MSLA).
(mm) 2000 TBMA/SIA Master Securities Loan Agreement (MSLA).
(nn) 2017 SIFMA Master Securities Loan Agreement (MSLA).
(oo) 1987 PSA Master Repurchase Agreement (MRA).
(pp) 1996 TBMA Master Repurchase Agreement (MRA).
(qq) 2000 SIFMA Master OTC Options Agreement.
(rr) 1989 TBMA Master Dealer Agreement, OTC Option Transaction – U.S. Treasury Securities.
(ss) Emissions Master LF-IETA Master Agreement.
(tt) WSPP Agreement.
(uu) 2004 FIA Grid Trade Master Agreement.
(vv) EEI Master Power Purchase & Sale Agreement. (ww)
EL Master – Electricity Power Master Agreement.
(xx) 1994 LBMA/FEC International Bullion Master Agreement (English law version).
(yy) 1994 LBMA/FEC International Bullion Master Agreement (New York law version).
(zz) 1997 ASLA Australian Master Securities Lending Agreement (AMSLA).
(aaa) 2002 ASLA Australian Master Securities Lending Agreement (AMSLA).
(bbb) 2003 ASLA Australian Master Securities Lending Agreement (AMSLA).
(ccc) GISB Base Short-Term Contract for Sale and Purchase of Natural Gas.
(ddd) NAESB Base Contract for Sale and Purchase of Natural Gas.
(eee) 1996 Master Gilt Edged Stock Lending Agreement (GESLA).
(fff) 1996 Master Equity and Fixed Interest Stock Lending Agreement (MEFISLA).
(ggg) 1994 Equity and Fixed Interest Stock Lending (Agency) Agreement.
(hhh) 1994 Overseas Securities Lender’s Agreement (OSLA).
(iii) 1995 Overseas Securities Lender’s Agreement (OSLA).
(jjj) globalCOAL Standard Coal Trading Agreement (SCoTA).
(kkk)
KOFIA Agreement on Margin Transactions.
(lll) KOFIA Agreement on Foreign Exchange Margin Trading.
(mmm) KOFIA Agreement on Securities Lending and Borrowing.
(nnn) KOFIA Agreement on Repurchase Agreement (Repo) between Institutions.
(ooo) KOFIA Agreement on Repurchase Agreement (Repo) with Customers.
(ppp) KOFIA best practice Korean language agreement template for OTC derivatives.
(qqq) Investment Industry Regulatory Organization of Canada (IIROC) Repurchase/Reverse Repurchase Transaction Agreement.
(rrr) Master Agreement Concerning Stock Lending Transactions (kabuken tou taishaku torihiki ni kansuru kihon keiyakusho) (including without limitation separate agreements to be executed pursuant to or in connection with that Master Agreement such as Supplemental Memorandum of Understanding (kabuken tou taishaku torihiki ni kansuru kihon keiyakusho fuzoku oboegaki)) published by Japan Securities Dealers Association.
(sss) Master Agreement Concerning Bond Lending Transactions (saiken taishaku torihiki ni kansuru kihon keiyakusho) (including without limitation separate agreements to be executed pursuant to or in connection with that Master Agreement such as Supplemental Memorandum of Understanding (saiken taishaku torihiki ni kansuru kihon keiyakusho fuzoku oboegaki)) published by Japan Securities Dealers Association.
(ttt) Master Agreement Concerning Bond Repo Transactions (saiken tou no gensaki torihiki ni kansuru kihon keiyakusho) (including without limitation separate agreements to be executed pursuant to or in connection with that Master Agreement such as Supplemental Memorandum of Understanding (saiken tou no gensaki torihiki ni kansuru kihon keiyakusho fuzoku oboegaki)) published by Japan Securities Dealers Association.
(uuu) Mexican Master Derivatives Agreement (Contrato Marco para Operaciones Financieras Derivadas) published by Asociación de Bancos de Mexico (ABM) y Asociación Mexicana de Instituciones Bursatiles (AMIB).
(vvv) Mexican Master Securities Purchase and Sale/Repo Agreement (Contrato Marco para Operaciones de Compraventa de Valores y Reporto) published by Asociación de Bancos de Mexico (ABM) y Asociación Mexicana de Instituciones Bursatiles (AMIB).
(a) 2007 FBF Collateral Annex.
(b) 1997 ABF Collateral Annex.
(c) AFB/FBF Addendum to the ISDA 2016 Credit Support Annex for Variation Margin (VM).
(d) 2008 Credit Support Appendix to the Swiss Master Agreement for OTC Derivative Instruments published by the Swiss Bankers Association.
(e) 2015 Credit Support Appendix to the Swiss Master Agreement for OTC Derivative Instruments published by the Swiss Bankers Association.
(f) Credit Support Appendix for Variation Margin to the Swiss Master Agreement for OTC Derivative Instruments published by the Swiss Bankers Association.
(g) Mexican Credit Support Agreement related to Derivatives (Contrato Global para Otorgar Garantías respecto de Operaciones Financieras Derivadas) published by Asociación de Bancos de Mexico (ABM) y Asociación Mexicana de Instituciones Bursatiles (AMIB).
If a Protocol Covered Document incorporates the 2006 ISDA Definitions, the version of the 2006 ISDA Definitions so incorporated shall be amended in accordance with the terms of the IBOR Fallbacks Supplement (and, if that Protocol Covered Document is a Protocol Covered Master Agreement, any reference to a term defined in the 2006 ISDA Definitions in a Confirmation which supplements, forms part of and is subject to that Protocol Covered Master Agreement will be a reference to the term as defined in the 2006 ISDA Definitions as amended in accordance with the IBOR Fallbacks Supplement).
If a Protocol Covered Document incorporates the 2000 ISDA Definitions, the version of the 2000 ISDA Definitions so incorporated shall be amended in accordance with the terms of the IBOR Fallbacks Supplement (and, if that Protocol Covered Document is a Protocol Covered Master Agreement, any reference to a term defined in the 2000 ISDA Definitions in a Confirmation which supplements, forms part of and is subject to that Protocol Covered Master Agreement will be a reference to the term as defined in the 2000 ISDA Definitions as amended in accordance with the IBOR Fallbacks Supplement), provided that the IBOR Fallbacks Supplement shall be deemed amended as follows:
(a) Each of the following sections shall be deleted:
(i) “GBP-LIBOR-BBA-Bloomberg”;
(ii) “CHF-LIBOR-BBA-Bloomberg”;
(iii) “USD-LIBOR-BBA-Bloomberg”;
(iv) “EUR-LIBOR-BBA-Bloomberg”;
(v) “JPY-LIBOR-FRASETT”;
(vi) “JPY-LIBOR-BBA-Bloomberg”;
(vii) “JPY-TIBOR-TIBM-(All Banks)-Bloomberg”;
(viii) “AUD-BBR-BBSW-Bloomberg”;
(ix) “CAD-BA-CDOR-Bloomberg”; and
(x) “HKD-HIBOR-HKAB-Bloomberg”;
(b) The section titled “EUR-EURIBOR-Reuters” will be re-titled “EUR-EURIBOR-Telerate” and references in such section (or in related sections) to “EUR-EURIBOR-Reuters” will be deleted and replaced with “EUR-EURIBOR-Telerate”;
(c) The section titled “AUD-BBR-AUBBSW” will be re-titled “AUD-BBR-ISDC” and references in such section (or in related sections) to “AUD-BBR-AUBBSW” will be deleted and replaced with “AUD- BBR-ISDC”;
(d) The section titled “SGD-SOR-VWAP” will be re-titled “SGD-SOR-Telerate” and references in such section (or in related sections) to “SGD-SOR-VWAP” will be deleted and replaced with “SGD-SOR- Telerate”;
(e) Tn the section titled “THB-THBFIX-Reuters”, the paragraph entitled “No Index Cessation Effective Date” shall be deemed amended as follows:
(i) The words “THB-THBFIX-Reference Banks” as the applicable Floating Rate Option” will be deleted and replaced with the words ““THB-SOR-Reference Banks” as the applicable Floating Rate Option, but with the following variations:” and subparagraphs (a), (b) and (c) of Section 7.1(z)(iii) of the 2000 ISDA Definitions will be inserted immediately thereafter; and
(ii) The last sentence in that paragraph will be deleted; and
(f) All references to section numbers within the 2006 ISDA Definitions will be deemed to be references to the equivalent sections within the 2000 ISDA Definitions.
If a Protocol Covered Document incorporates the 1991 ISDA Definitions and/or the 1998 Supplement to the 1991 ISDA Definitions, the version of the 1991 ISDA Definitions and/or the 1998 Supplement to the 1991 ISDA Definitions (as applicable) so incorporated shall be amended in accordance with the terms of the IBOR Fallbacks Supplement (and, if that Protocol Covered Document is a Protocol Covered Master Agreement, any reference to a term defined in the 1991 ISDA Definitions and/or the 1998 Supplement to the 1991 ISDA Definitions in a Confirmation which supplements, forms part of and is subject to that Protocol Covered Master Agreement will be a reference to the term as defined in the 1991 ISDA Definitions and/or the 1998 Supplement to the 1991 ISDA Definitions as amended in accordance with the IBOR Fallbacks Supplement), provided that the IBOR Fallbacks Supplement shall be deemed amended as follows:
(a) If the Protocol Covered Document incorporates the 1991 ISDA Definitions only, the 1991 ISDA Definitions as supplemented by the 1998 Supplement to the 1991 ISDA Definitions or the 1998 Supplement to the 1991 ISDA Definitions only, each of the following sections shall be deleted:
(i) “GBP-LIBOR-BBA-Bloomberg”;
(ii) “CHF-LIBOR-BBA-Bloomberg”;
(iii) “USD-LIBOR-BBA-Bloomberg”;
(iv) “EUR-LIBOR-BBA-Bloomberg”;
(v) “EUR-EURIBOR-Reuters”;
(vi) “JPY-LIBOR-FRASETT”;
(vii) “JPY-LIBOR-BBA-Bloomberg”;
(viii) “JPY-TIBOR-17097”;
(ix) “JPY-TIBOR-TIBM-(All Banks)-Bloomberg”;
(x) “AUD-BBR-BBSW-Bloomberg”;
(xi) “CAD-BA-CDOR-Bloomberg”;
(xii) “HKD-HIBOR-HKAB-Bloomberg”; and
(xiii) “THB-THBFIX-Reuters”;
(b) If the Protocol Covered Document incorporates the 1991 ISDA Definitions only, each of the following sections shall be deleted:
(i) “JPY-TIBOR-ZTIBOR”; and
(ii) “SGD-SOR-VWAP”;
(c) If the Protocol Covered Document incorporates the 1991 ISDA Definitions as supplemented by the 1998 Supplement to the 1991 ISDA Definitions or the 1998 Supplement to the 1991 ISDA Definitions only, the section titled “SGD-SOR-VWAP” will be re-titled “SGD-SOR-Telerate” and references in such section (or in related sections) to “SGD-SOR-VWAP” will be deleted and replaced with “SGD-SOR- Telerate”;
(d) The section titled “EUR-LIBOR-BBA” will be re-titled “XEU-LIBOR-BBA” and references in such section (or in related sections) to “EUR-LIBOR-BBA” will be deleted and replaced with “XEU- LIBOR-BBA”;
(e) The section titled “AUD-BBR-AUBBSW” will be re-titled “AUD-BBR-ISDC” and references in such section (or in related sections) to “AUD-BBR-AUBBSW” will be deleted and replaced with “AUD-BBR-ISDC”; and
(f) All references to section numbers within the 2006 ISDA Definitions will be deemed to be references to the equivalent sections within the 1991 ISDA Definitions or the 1998 Supplement to the 1991 ISDA Definitions (as applicable).
If a Protocol Covered Document incorporates the 1998 ISDA Euro Definitions:
(a) the version of the 1998 ISDA Euro Definitions so incorporated shall be amended in accordance with the terms of the IBOR Fallbacks Supplement (and, if that Protocol Covered Document is a Protocol Covered Master Agreement, any reference to a term defined in the 1998 ISDA Euro Definitions in a Confirmation which supplements, forms part of and is subject to that Protocol Covered Master Agreement will be a reference to the term as defined in the 1998 ISDA Euro Definitions as amended in accordance with the IBOR Fallbacks Supplement), provided that the IBOR Fallbacks Supplement shall be deemed amended as follows:
(i) Each of the following sections shall be deleted:
(A) “GBP-LIBOR-BBA”;
(B) “GBP-LIBOR-BBA-Bloomberg”;
(C) “CHF-LIBOR-BBA”;
(D) “CHF-LIBOR-BBA-Bloomberg”;
(E) “USD-LIBOR-BBA”;
(F) “USD-LIBOR-BBA-Bloomberg”;
(G) “EUR-LIBOR-BBA-Bloomberg”;
(H) “JPY-LIBOR-FRASETT”;
(I) “JPY-LIBOR-BBA”;
(J) “JPY-LIBOR-BBA-Bloomberg”;
(K) “JPY-TIBOR-17097”;
(L) “JPY-TIBOR-TIBM-(All Banks)-Bloomberg”;
(M) “JPY-TIBOR-ZTIBOR”;
(N) “AUD-BBR-AUBBSW”;
(O) “AUD-BBR-BBSW”;
(P) “AUD-BBR-BBSW-Bloomberg”;
(Q) “CAD-BA-CDOR”;
(R) “CAD-BA-CDOR-Bloomberg”;
(S) “HKD-HIBOR-HKAB”;
(T) “HKD-HIBOR-HKAB-Bloomberg”;
(U) “SGD-SOR-VWAP”; and
(V) “THB-THBFIX-Reuters”;
(ii) the section titled “EUR-EURIBOR-Reuters” will be re-titled “EUR-EURIBOR- Telerate” and references in such section (or in related sections) to “EUR-EURIBOR-Reuters” will be deleted and replaced with “EUR-EURIBOR-Telerate”; and
(iii) all references to section numbers within the 2006 ISDA Definitions will be deemed to be references to the equivalent sections within the 1998 ISDA Euro Definitions.
(b) If a Relevant Rate (as defined in the 1991 ISDA Definitions) is to be determined pursuant to Section 4.3(b) (Price Source Fallbacks) of the 1998 ISDA Euro Definitions and “rates for deposits in euros” referred to in that section are required for any determination but are not available, they shall be deemed to be references to a Relevant IBOR (and, in particular, the euro interbank offered rate) to which paragraph 6 of this Attachment applies.
A Protocol Covered Document of the type described in subparagraph (b) of, respectively, the definition of Protocol Covered Confirmation, Protocol Covered Credit Support Document or Protocol Covered Master Agreement shall be amended so that the reference to the Relevant IBOR “as defined in”, or the reference to the Relevant IBOR as having the meaning given in, the Covered ISDA Definitions Booklet will instead be a reference to the relevant Rate Option in the IBOR Fallbacks Supplement (or, if there is more than one relevant Rate Option, the first relevant Rate Option in the IBOR Fallbacks Supplement) for the Relevant IBOR “as defined in the IBOR Fallbacks Supplement” (and, if that Protocol Covered Document is a Protocol Covered Master Agreement, any reference to the Relevant IBOR (as defined in that Protocol Covered Master Agreement) in a Confirmation which supplements, forms part of and is subject to that Protocol Covered Master Agreement will be a reference to the relevant Rate Option in the IBOR Fallbacks Supplement (or, if there is more than one relevant Rate Option, the first relevant Rate Option in the IBOR Fallbacks Supplement) for the Relevant IBOR “as defined in the IBOR Fallbacks Supplement”), provided that:
(a) If the Relevant IBOR is:
(i) “EUR-EURIBOR-Telerate”, it will be deemed to be a reference to “EUR-EURIBOR- Reuters”;
(ii) “AUD-BBR-ISDC”, it will be deemed to be a reference to “AUD-BBR-AUBBSW”;
(iii) “XEU-LIBOR-BBA”, it will be deemed to be a reference to “EUR-LIBOR-BBA”; and
(iv) “SGD-SOR-Telerate”, it will be deemed to be a reference to “SGD-SOR-VWAP”, in each case, as defined in the IBOR Fallbacks Supplement; and
(b) If the Relevant IBOR is “THB-THBFIX-Reuters” and the Covered ISDA Definitions Booklet is the 2000 ISDA Definitions, the IBOR Fallbacks Supplement shall be deemed amended in accordance with subparagraph 2(e) of this Attachment.
If a Protocol Covered Document is of the type described in subparagraph (c) of, respectively, the definition of Protocol Covered Confirmation, Protocol Covered Credit Support Document or Protocol Covered Master Agreement and, in each case, includes a reference to a Relevant IBOR pursuant to which the Relevant IBOR is required for any determination, and:
(a) (i) the Relevant IBOR which is required for that determination is neither the Singapore dollar swap offer rate nor the Thai baht interest rate fixing, (ii) the Relevant IBOR which is required for that determination has not been published by the source that is specified or otherwise ordinarily used to determine the level of the Relevant IBOR on the day on which it is required, and (iii) an Index Cessation Effective Date with respect to the Relevant IBOR has not occurred, then the reference to the Relevant IBOR will be deemed to be a reference to the rate as provided by the administrator of the Relevant IBOR and published by an authorized distributor of the Relevant IBOR or the administrator of the Relevant IBOR itself in respect of the day on which it is required. If neither an authorized distributor nor the administrator has published or provided the Relevant IBOR in respect of that day and an Index Cessation Effective Date with respect to the Relevant IBOR has not occurred, then, unless otherwise agreed by the parties, the reference to the Relevant IBOR will be deemed to be a reference to:
(A) A rate formally recommended for use by the administrator of the Relevant IBOR; or
(B) A rate formally recommended for use by:
(I) If the Relevant IBOR which is required for that determination is Swiss franc LIBOR, the competent authority responsible for supervising that rate or the administrator of that rate;
(II) If the Relevant IBOR which is required for that determination is sterling LIBOR, euro LIBOR or the euro interbank offered rate, the supervisor which is responsible for supervising the Relevant IBOR or the administrator of the Relevant IBOR;
(III) If the Relevant IBOR which is required for that determination is Japanese yen LIBOR, the Japanese yen Tokyo interbank offered rate or the euroyen Tokyo interbank offered rate, a committee officially endorsed or convened by the Bank of Japan for the purposes of recommending an alternative rate for that Relevant IBOR (which rate may be produced by the Bank of Japan or another administrator) or any other supervisor which is responsible for supervising the Relevant IBOR or the administrator of the Relevant IBOR;
(IV) If the Relevant IBOR which is required for that determination is U.S. dollar LIBOR, the Federal Reserve Board or the Federal Reserve Bank of New York or any other supervisor which is responsible for supervising the Relevant IBOR or the administrator of the Relevant IBOR; and
(V) If the Relevant IBOR which is required for that determination is the bank bill swap rate, the Australian Securities and Investments Commission (or any successor to the Australian Securities and Investments Commission in its role as supervisor of the bank bill swap rate),
In each case, during the period of non-publication of the Relevant IBOR and for so long as an Index Cessation Effective Date has not occurred. If a rate described in subparagraph (A) above is available, that rate shall apply. If no such rate is available but, in respect of the Relevant IBOR, a rate described in subparagraph (B) above, if applicable, is available, that rate shall apply. If neither a rate described in subparagraph (A) above is available nor a rate described in subparagraph (B) above, if applicable, is available, then the Calculation Agent shall determine a commercially reasonable alternative for the Relevant IBOR, taking into account any rate implemented by central counterparties and/or futures exchanges, in each case with trading volumes in derivatives or futures referencing the Relevant IBOR that the Calculation Agent considers sufficient for that rate to be a representative alternative rate.
If the Relevant IBOR is the Hong Kong interbank offered rate and the Protocol Covered Document provides that the Hong Kong Association of Banks’ (or any successor’s) typhoon and rainstorm arrangements (as published on the Hong Kong Association of Banks’ website or on any successor website) apply, then those typhoon and rainstorm arrangements shall continue to apply and shall take precedence over the provisions of this paragraph 6(a);
(b) (i) The Relevant IBOR which is required for that determination is the Singapore dollar swap offer rate, (ii) the Singapore dollar swap offer rate has not been published by the source that is specified or otherwise ordinarily used to determine the level of the Singapore dollar swap offer rate on the day on which it is required and (iii) an Index Cessation Effective Date with respect to U.S. dollar LIBOR has not occurred, then the reference to the Singapore dollar swap offer rate will be deemed to be a reference to the substitute rate announced by ABS Benchmarks Administration Co Pte. Ltd. (or its successor as administrator or sponsor of that rate) in respect of the Singapore dollar swap offer rate.
If ABS Benchmarks Administration Co Pte. Ltd. (or its successor as administrator or sponsor of that rate) has not announced a substitute rate by 9:00 p.m., Singapore time, on the Relevant Original Fixing Date and an Index Cessation Effective Date with respect to U.S. dollar LIBOR has not occurred, then, unless otherwise agreed by the parties, the reference to the Singapore dollar swap offer rate will be deemed to be a reference to:
(A) A rate formally recommended for use by the administrator of the Singapore dollar swap offer rate; or
(B) A rate formally recommended for use by the Monetary Authority of Singapore (or any other supervisor which is responsible for supervising the Singapore dollar swap offer rate or the administrator of the Singapore dollar swap offer rate) or a committee officially endorsed or convened by the Monetary Authority of Singapore (or any other supervisor which is responsible for supervising the Singapore dollar swap offer rate or the administrator of the Singapore dollar swap offer rate), in each case, during the period of non-publication of the Singapore dollar swap offer rate and for so long as an Index Cessation Effective Date with respect to U.S. dollar LIBOR has not occurred. If a rate described in subparagraph (A) above is available, that rate shall apply. If no such rate is available but a rate described in subparagraph (B) above is available, that rate shall apply. If neither a rate described in subparagraph (A) above nor a rate described in subparagraph (B) above is available, then the Calculation Agent shall determine a commercially reasonable alternative for the Singapore dollar swap offer rate, taking into account any rate implemented by central counterparties and/or futures exchanges, in each case with trading volumes in derivatives or futures referencing the Singapore dollar swap offer rate that the Calculation Agent considers sufficient for that rate to be a representative alternative rate;
(c) (i) the Relevant IBOR which is required for that determination is the Thai baht interest rate fixing, (ii) the Thai baht interest rate fixing has not been published by the source that is specified or otherwise ordinarily used to determine the level of the Thai baht interest rate fixing on the day on which it is required and (iii) an Index Cessation Effective Date with respect to U.S. dollar LIBOR has not occurred, then the reference to the Thai baht interest rate fixing will be deemed to be a reference to “THB-THBFIX-Reference Banks” (as defined in the 2006 ISDA Definitions) but with the references to (A) “Reset Date” being replaced by “the day on which the rate is required”; (B) “Designated Maturity” being replaced by “the period of time in respect of which the Thai baht interest rate fixing is to be determined”; (C) “Calculation Period” being replaced by “period”; and (D) “Representative Amount” being replaced by “an amount that is representative for a single transaction in the relevant market at the relevant time”. If the rate cannot be determined pursuant to “THB-THBFIX-Reference Banks” (as defined in the 2006 ISDA Definitions) andan Index Cessation Effective Date with respect to U.S. dollar LIBOR has not occurred, the rate will be determined by the Calculation Agent taking into consideration all available information that in good faith it deems relevant;
(d) Subject to paragraphs 6(e), (f) and (g) below, an Index Cessation Event has occurred with respect to the Relevant IBOR (or, if the Relevant IBOR is either the Singapore dollar swap offer rate or the Thai baht interest rate fixing, with respect to U.S. dollar LIBOR), then the reference to the Relevant IBOR will be deemed to be a reference to the Applicable Fallback Rate from and including either the Index Cessation Effective Date or, if the Relevant IBOR is observed on a day that is a period of time prior to the date for which the Relevant IBOR is set, such period of time following the Index Cessation Effective Date, provided that:
(i) If the Applicable Fallback Rate is Fallback Rate (SONIA), Fallback Rate (SARON), Fallback Rate (SOFR), Fallback Rate (EuroSTR), Fallback Rate (TONA), Fallback Rate (AONIA), Fallback Rate (CORRA), Fallback Rate (HONIA), Fallback Rate (SOR) or Fallback Rate (THBFIX), then the rate for the Relevant Original Fixing Date will be the Applicable Fallback Rate for the `Original IBOR Rate Record Day’ (or, if Fallback Rate (SOR) or Fallback Rate (THBFIX) is the Applicable Fallback Rate, for the `Original SOR Rate Record Day’ or `Original THBFIX Rate Record Day’, as applicable) that corresponds to the Relevant Original Fixing Date, as most recently provided or published as at the Applicable Cut-off Time. If neither the provider of the Applicable Fallback Rate (or a successor provider, which, if the Applicable Fallback Rate is Fallback Rate (SONIA), Fallback Rate (SARON), Fallback Rate (SOFR), Fallback Rate (EuroSTR), Fallback Rate (TONA), Fallback Rate (AONIA), Fallback Rate (CORRA) or Fallback Rate (HONIA), is approved and/or appointed by ISDA from time to time) provides, nor any authorized distributors publish, the Applicable Fallback Rate for that `Original IBOR Rate Record Day’ (or that `Original SOR Rate Record Day’ or `Original THBFIX Rate Record Day’, as applicable) at, or prior to, the Applicable Cut-off Time and a Fallback Index Cessation Effective Date with respect to that Applicable Fallback Rate has not occurred, then the rate for the Relevant Original Fixing Date will be the Applicable Fallback Rate as most recently provided or published at the Applicable Cut-off Time for the most recent `Original IBOR Rate Record Day’ (or `Original SOR Rate Record Day’ or `Original THBFIX Rate Record Day’, as applicable), notwithstanding that such day does not correspond to the Relevant Original Fixing Date;
(ii) If (A) the Applicable Fallback Rate is SONIA, the GBP Recommended Rate, SARON, the NWG Recommended Rate, the Modified SNB Policy Rate, SOFR, the Fed Recommended Rate, OBFR, the FOMC Target Rate, EuroSTR, the ECB Recommended Rate, Modified EDFR, TONA, the JPY Recommended Rate, AONIA, the RBA Recommended Rate, CORRA, the CAD Recommended Rate, the BOC Target Rate, HONIA, the HKD Recommended Rate, the MAS Recommended Rate, SORA, the BOT Recommended Rate or THOR, (B) neither the administrator provides nor authorized distributors publish that Applicable Fallback Rate (or if the Applicable Fallback Rate is the Modified SNB Policy Rate or Modified EDFR, the index, benchmark or other price source that is referred to in the definition thereof) and (C) a Fallback Index Cessation Effective Date with respect to that Applicable Fallback Rate has not occurred, then, in respect of any day for which that Applicable Fallback Rate is required, references to that Applicable Fallback Rate will be deemed to be references to the last provided or published Applicable Fallback Rate. If the Applicable Fallback Rate is the Modified SNB Policy Rate or Modified EDFR, references to that Applicable Fallback Rate in subparagraph 6(d)(ii)(C) above shall be deemed to be references to the index, benchmark or other price source that is referred to in the definition of Modified SNB Policy Rate or Modified EDFR, as applicable; and
(iii) If the Applicable Fallback Rate is UK Bank Rate, in respect of any day for which the UK Bank Rate is required, references to the UK Bank Rate will be deemed to be references to the last provided or published UK Bank Rate as at close of business in London on that day.
If the Relevant IBOR is the Singapore dollar swap offer rate or the Thai baht interest rate fixing, an Index Cessation Event with respect to U.S. dollar LIBOR will also occur if the Relevant IBOR in the relevant tenor (which under the 2006 ISDA Definitions would be equivalent to the “Designated Maturity”) has not been published by the source that is specified or otherwise ordinarily used to determine the level of the Relevant IBOR and, as of the Relevant Original Fixing Date, U.S. dollar LIBOR in the relevant tenor (which under the 2006 ISDA Definitions would be equivalent to the “Designated Maturity”) has been permanently discontinued or is Non-Representative and there is either no U.S. dollar LIBOR which has not been permanently discontinued and which is not Non-Representative for a period which is longer than that relevant tenor or no U.S. dollar LIBOR which has not been permanently discontinued and which is not Non-Representative for a period which is shorter than that relevant tenor. The related Index Cessation Effective Date shall be the first date on which there is no such longer or shorter rate or, if later, the first date on which U.S. dollar LIBOR in the relevant tenor (which under the 2006 ISDA Definitions would be equivalent to the “Designated Maturity”) is permanently unavailable or Non-Representative.
For the purposes of this paragraph 6(d), references to an “Original IBOR Rate Record Day”, “Original SOR Rate Record Day” and “Original THBFIX Rate Record Day” are to that term as used on the Fallback Rate Screen. For the purposes of the immediately preceding paragraph above, (A) references to a rate being “permanently discontinued” or “permanently unavailable” shall be deemed to be references to such rate being permanently discontinued or permanently unavailable following a public statement or publication of information which would constitute an Index Cessation Event in accordance with subparagraphs (a) and (b) of the definition thereof in respect of that rate in the relevant tenor and (B) references to “U.S. dollar LIBOR” in the definition of “Non-Representative” shall be deemed to be references to the relevant tenor of U.S. dollar LIBOR;
(e) If the Relevant IBOR which is required for that determination is neither the Singapore dollar swap offer rate nor the Thai baht interest rate fixing and:
(i) The determination for which the Relevant IBOR is required is ordinarily made by reference to linear interpolation between two rates, each of which is based on the Relevant IBOR, then (notwithstanding paragraph 6(d) above) the provisions of Section 7.9(a) of the 2006 ISDA Definitions shall be deemed to apply, provided that the Calculation Agent shall make such adaptations as are reasonable and necessary to the provisions of Section 7.9(a) of the 2006 ISDA Definitions in order to apply them to the relevant Protocol Covered Document;
(ii) The Relevant IBOR which is required for that determination is to be determined by reference to one or more rates, either (A) at least one of which has been permanently discontinued, or (B) if the Relevant IBOR is a Relevant LIBOR, at least one of which is Non-Representative, and, in either case, at least two Relevant IBOR tenors, at least one of which is shorter than the period of time in respect of which the Relevant IBOR is to be determined and at least one of which is longer than the period of time in respect of which the Relevant IBOR is to be determined, have not been permanently discontinued (and, if the Relevant IBOR is a Relevant LIBOR, are not Non- Representative), then the provisions of Section 8.5 and Section 8.6 of the 2006 ISDA Definitions shall be deemed to apply, provided that the Calculation Agent shall make such adaptations as are reasonable and necessary to the provisions of Sections 8.5 and 8.6 of the 2006 ISDA Definitions in order to apply them to the relevant Protocol Covered Document;
(iii) The Relevant IBOR which is required for that determination is to be determined by reference to a tenor of the Relevant IBOR which has been permanently discontinued (or, if the Relevant IBOR is a Relevant LIBOR, which is Non-Representative), and there are either no shorter or no longer tenors in respect of the Relevant IBOR which have not been permanently discontinued (or, if the Relevant IBOR is a Relevant LIBOR, which are not Non-Representative), then an Index Cessation Event shall be deemed to have occurred with respect to the Relevant IBOR and the Index Cessation Effective Date shall be the first date on which there is either no such shorter or no such longer tenor or, if later, the first date on which the Relevant IBOR in the relevant tenor is permanently unavailable (or, if the Relevant IBOR is a Relevant LIBOR, Non-Representative);
(iv) In the event of any inconsistency between the provisions of subparagraph 6(e)(ii) or subparagraph 6(e)(iii) above and the provisions of subparagraph 6(e)(i) above, subparagraph 6(e)(i) above shall prevail; and
(v) In the event of any inconsistency between the provisions of subparagraph 6(e)(ii) or subparagraph 6(e)(iii) above and paragraph 6(d) above (including any terms used in paragraph 6(d) above and defined below), subparagraph 6(e)(ii) or subparagraph 6(e)(iii) above (as applicable) shall prevail,
For the purposes of this paragraph 6(e), (A) references to a rate being “permanently discontinued” shall be deemed to be references to such rate being permanently discontinued following a public statement or publication of information which would constitute an Index Cessation Event in accordance with subparagraphs (a) and (b) of the definition thereof in respect of that rate in the relevant tenor, (B) references to the “Relevant LIBOR” in the definition of “Non-Representative” shall be deemed to be references to the relevant tenor of the Relevant LIBOR and (C) Section 7.9(a), 8.5 and 8.6 of the 2006 ISDA Definitions shall be construed in accordance with Sections 7.3(r) and 7.3(s) of the 2006 ISDA Definitions;
(f) If the Relevant IBOR which is required for that determination is the Singapore dollar swap offer rate or the Thai baht interest rate fixing and the determination for which the Relevant IBOR is required is ordinarily made by reference to linear interpolation between two rates, each of which is based on the Relevant IBOR, then (notwithstanding paragraph 6(d) above) the provisions of Section 7.10(a) of the 2006 ISDA Definitions shall be deemed to apply, provided that the Calculation Agent shall make such adaptations as are reasonable and necessary to the provisions of Section 7.10(a) of the 2006 ISDA Definitions in order to apply them to the relevant Protocol Covered Document.
For the purposes of this paragraph 6(f), Section 7.10(a) of the 2006 ISDA Definitions shall be construed in accordance with Sections 7.3(r) and 7.3(s) of the 2006 ISDA Definitions;
(g) If (i) the Relevant IBOR which is required for that determination is the Singapore dollar swap offer rate or the Thai baht interest rate fixing and the Applicable Fallback Rate is Fallback Rate (SOR) or Fallback Rate (THBFIX), as applicable, (ii) the determination for which the Relevant IBOR is required is not ordinarily made by reference to linear interpolation between two rates and (iii) the period of time for which the rate is required (which under the 2006 ISDA Definitions would be the “Calculation Period”) is shorter than the Relevant IBOR in the relevant tenor (which under the 2006 ISDA Definitions would be the “Designated Maturity”), then (notwithstanding paragraph 6(d) above) the provisions of Section 7.11(a) of the 2006 ISDA Definitions shall be deemed to apply, provided that the Calculation Agent shall make such adaptations as are reasonable and necessary to the provisions of Section 7.11(a) of the 2006 ISDA Definitions in order to apply them to the relevant Protocol Covered Document; and
(h) If the definition, methodology, formula or other means of calculating the Relevant IBOR or the Applicable Fallback Rate (or, if applicable, the index, benchmark or other price source that is referred to in the Relevant IBOR or the Applicable Fallback Rate) is modified, each party acknowledges that, unless otherwise specified or agreed, references to that Relevant IBOR or the Applicable Fallback Rate (or the index, benchmark or other price source that is referred to in the Relevant IBOR or the Applicable Fallback Rate) shall be to the Relevant IBOR or the Applicable Fallback Rate (or the index, benchmark or other price source that is referred to in the Relevant IBOR or the Applicable Fallback Rate) as modified. In the event of any inconsistency between this paragraph 6(h) and paragraphs 6(a) through 6(d) above (including any terms used in those paragraphs and defined below and including subparagraphs 6(e)(ii) and 6(e)(iii) above as they apply in priority to paragraph 6(d) above), paragraphs 6(a) through 6(d) above including subparagraphs 6(e)(ii) and 6(e)(iii) as they apply in priority to paragraph 6(d) above shall prevail.
If the Relevant IBOR referenced in the Protocol Covered Document is LIBOR with no reference to, or indication of, the currency of the relevant LIBOR (including, for the avoidance of doubt, the reference in Section 7.3 (Corrections to Published Prices) of the 2005 ISDA Commodity Definitions to “the spot offered rate for deposits in the payment currency in the London interbank market as at approximately 11:00 a.m., London time”), then the reference to LIBOR (howsoever defined or described) in the Protocol Covered Document will be deemed to be a reference to LIBOR in the currency of the related payment for which LIBOR is required pursuant to the terms of the Protocol Covered Document and paragraphs 6(a), 6(d) and 6(e) above, and the related definitions below, shall be construed accordingly.
For the purposes of any Protocol Covered Document which does not include a definition of “Calculation Agent”, the term “Calculation Agent” shall be deemed to be a reference to a party or parties who would ordinarily be responsible for calculating or determining any rates or amounts payable under the relevant Protocol Covered Document and performing any associated duties.
If the Protocol Covered Document to which this paragraph 6 applies is a Protocol Covered Master Agreement, the Relevant IBOR is defined in the Protocol Covered Master Agreement and that definition is referenced in a Confirmation that supplements, forms part of and is subject to that Protocol Covered Master Agreement, then the reference in the Protocol Covered Master Agreement to the Relevant IBOR as amended by this paragraph 6 will also apply to the reference to the Relevant IBOR in that Confirmation.
For these purposes:
“Applicable Banking Days” means, if the Relevant IBOR is:
(a) Swiss franc LIBOR, U.S. dollar LIBOR or Japanese yen LIBOR, London Banking Days (as defined in the 2006 ISDA Definitions);
(b) Euro LIBOR or the euro interbank offered rate, TARGET Settlement Days (as defined in the 2006 ISDA Definitions);
(c) The Japanese yen Tokyo interbank offered rate or the euroyen Tokyo interbank offered rate, Tokyo Banking Days (as defined in the 2006 ISDA Definitions);
(d) The Singapore dollar swap offer rate, Singapore and London Banking Days (as defined in the 2006 ISDA Definitions); and
(e) The Thai baht interest rate fixing, Bangkok Banking Days (as defined in the 2006 ISDA Definitions).
“Applicable Cut-off Time” means:
(a) for Fallback Rate (SONIA), 11:30 a.m., London time;
(b) for Fallback Rate (SARON), 8:30 p.m., Zurich time;
(c) for Fallback Rate (SOFR), 10:30 a.m., New York City time;
(d) for Fallback Rate (EuroSTR), 11:30 a.m., Frankfurt time;
(e) for Fallback Rate (TONA), 12:30 p.m., Tokyo time;
(f) for Fallback Rate (AONIA), 11:30 a.m., Sydney time;
(g) for Fallback Rate (CORRA), 11:30 a.m., Toronto time;
(h) for Fallback Rate (HONIA), 7:30 p.m., Hong Kong time;
(i) for Fallback Rate (SOR), 11:30 a.m., New York City time; and
(j) for Fallback Rate (THBFIX), 10:00 a.m., Bangkok time, in each case, on the Fallback Observation Day.
“Applicable Fallback Rate” means, in respect of a Relevant IBOR, for the purposes of:
(a) Sterling LIBOR, Fallback Rate (SONIA) or if a Fallback Index Cessation Event has occurred with respect to Fallback Rate (SONIA), then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (SONIA) will be the Sterling Overnight Index Average (“SONIA”) rate administered by the Bank of England (or any successor administrator), to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (SONIA), referred to in the definition of “Fallback Rate (SONIA)” after making such adjustments to SONIA as are necessary to account for any difference in term structure or tenor of SONIA by comparison to Fallback Rate (SONIA) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book. If a Fallback Index Cessation Effective Date occurs with respect to each of Fallback Rate (SONIA) and SONIA, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (SONIA) (or, if later, the Fallback Index Cessation Effective Date with respect to SONIA) will be the GBP Recommended Rate, to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (SONIA), referred to in the definition of “Fallback Rate (SONIA)” after making such adjustments to the GBP Recommended Rate as are necessary to account for any difference in term structure or tenor of the GBP Recommended Rate by comparison to Fallback Rate (SONIA) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book. If there is no GBP Recommended Rate before the end of the first London Banking Day (as defined in the 2006 ISDA Definitions) following the Fallback Index Cessation Effective Date with respect to Fallback Rate (SONIA) (or, if later, the end of the first London Banking Day following the Fallback Index Cessation Effective Date with respect to SONIA), or there is a GBP Recommended Rate and a Fallback Index Cessation Effective Date subsequently occurs with respect to it, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (SONIA) (or, if later, the Fallback Index Cessation Effective Date with respect to SONIA) or the Fallback Index Cessation Effective Date with respect to the GBP Recommended Rate (as applicable) will be the UK Bank Rate, to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (SONIA), referred to in the definition of “Fallback Rate (SONIA)” after making such adjustments to the UK Bank Rate as are necessary to account for any difference in term structure or tenor of the UK Bank Rate by comparison to Fallback Rate (SONIA) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book;
(b) Swiss franc LIBOR, Fallback Rate (SARON) or if a Fallback Index Cessation Event has occurred with respect to Fallback Rate (SARON), then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (SARON) will be the Swiss Average Rate Overnight (“SARON”) administered by SIX Swiss Exchange AG (or any successor administrator), to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (SARON), referred to in the definition of “Fallback Rate (SARON)” after making such adjustments to SARON as are necessary to account for any difference in term structure or tenor of SARON by comparison to Fallback Rate (SARON) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book.
If a Fallback Index Cessation Effective Date occurs with respect to each of Fallback Rate (SARON) and SARON, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (SARON) (or, if later, the Fallback Index Cessation Effective Date with respect to SARON) will be the NWG Recommended Rate, to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (SARON), referred to in the definition of “Fallback Rate (SARON)” after making such adjustments to the NWG Recommended Rate as are necessary to account for any difference in term structure or tenor of the NWG Recommended Rate by comparison to Fallback Rate (SARON) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book.
If there is no NWG Recommended Rate before the end of the first Zurich Banking Day (as defined in the 2006 ISDA Definitions) following the Fallback Index Cessation Effective Date with respect to Fallback Rate (SARON) (or, if later, the end of the first Zurich Banking Day following the Fallback Index Cessation Effective Date with respect to SARON), then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (SARON) (or, if later, the Fallback Index Cessation Effective Date with respect to SARON) will be the Modified SNB Policy Rate, to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (SARON), referred to in the definition of “Fallback Rate (SARON)” after making such adjustments to the Modified SNB Policy Rate as are necessary to account for any difference in term structure or tenor of the Modified SNB Policy Rate by comparison to Fallback Rate (SARON) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book;
(c) U.S. dollar LIBOR, Fallback Rate (SOFR) or if a Fallback Index Cessation Event has occurred with respect to Fallback Rate (SOFR), then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (SOFR) will be the Secured Overnight Financing Rate (“SOFR”) administered by the Federal Reserve Bank of New York (or any successor administrator), to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (SOFR), referred to in the definition of “Fallback Rate (SOFR)” after making such adjustments to SOFR as are necessary to account for any difference in term structure or tenor of SOFR by comparison to Fallback Rate (SOFR) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book.
If a Fallback Index Cessation Effective Date occurs with respect to each of Fallback Rate (SOFR) and SOFR, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (SOFR) (or, if later, the Fallback Index Cessation Effective Date with respect to SOFR) will be the Fed Recommended Rate, to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (SOFR), referred to in the definition of “Fallback Rate (SOFR)” after making such adjustments to the Fed Recommended Rate as are necessary to account for any difference in term structure or tenor of the Fed Recommended Rate by comparison to Fallback Rate (SOFR) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book. If there is no Fed Recommended Rate before the end of the first U.S. Government Securities Business Day (as defined in the 2006 ISDA Definitions) following the Fallback Index Cessation Effective Date with respect to Fallback Rate (SOFR) (or, if later, the end of the first U.S. Government Securities Business Day following the Fallback Index Cessation Effective Date with respect to SOFR), or there is a Fed Recommended Rate and a Fallback Index Cessation Effective Date subsequently occurs with respect to it, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (SOFR) (or, if later, the Fallback Index Cessation Effective Date with respect to SOFR) or the Fallback Index Cessation Effective Date with respect to the Fed Recommended Rate (as applicable) will be OBFR, to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (SOFR), referred to in the definition of “Fallback Rate (SOFR)” after making such adjustments to OBFR as are necessary to account for any difference in term structure or tenor of OBFR by comparison to Fallback Rate (SOFR) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book.
If there is no Fed Recommended Rate, or there is a Fed Recommended Rate and a Fallback Index Cessation Effective Date subsequently occurs with respect to it, and a Fallback Index Cessation Effective Date also occurs with respect to OBFR, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to OBFR (or, if later, the Fallback Index Cessation Effective Date with respect to the Fed Recommended Rate, SOFR or Fallback Rate (SOFR), as applicable) will be the FOMC Target Rate, to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (SOFR), referred to in the definition of “Fallback Rate (SOFR)” after making such adjustments to the FOMC Target Rate as are necessary to account for any difference in term structure or tenor of the FOMC Target Rate by comparison to Fallback Rate (SOFR) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book;
(d) Euro LIBOR and the euro interbank offered rate, Fallback Rate (EuroSTR) or if a Fallback Index Cessation Event has occurred with respect to Fallback Rate (EuroSTR), then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (EuroSTR) will be the Euro Short-Term Rate (“EuroSTR”) administered by the European Central Bank (or any successor administrator), to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (EuroSTR), referred to in the definition of “Fallback Rate (EuroSTR)” after making such adjustments to EuroSTR as are necessary to account for any difference in term structure or tenor of EuroSTR by comparison to Fallback Rate (EuroSTR) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book. If a Fallback Index Cessation Effective Date occurs with respect to each of Fallback Rate (EuroSTR) and EuroSTR, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (EuroSTR) (or, if later, the Fallback Index Cessation Effective Date with respect to EuroSTR) will be the ECB Recommended Rate, to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (EuroSTR), referred to in the definition of “Fallback Rate (EuroSTR)” after making such adjustments to the ECB Recommended Rate as are necessary to account for any difference in term structure or tenor of the ECB Recommended Rate by comparison to Fallback Rate (EuroSTR) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book.
If no ECB Recommended Rate is recommended before the end of the first TARGET Settlement Day (as defined in the 2006 ISDA Definitions) following the Fallback Index Cessation Effective Date with respect to Fallback Rate (EuroSTR) (or, if later, the end of the first TARGET Settlement Day following the Fallback Index Cessation Effective Date with respect to EuroSTR), or a Fallback Index Cessation Effective Date with respect to the ECB Recommended Rate subsequently occurs, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (EuroSTR) (or, if later, the Fallback IndexCessation Effective Date with respect to EuroSTR) or the Fallback Index Cessation Effective Date with respect to the ECB Recommended Rate (as applicable) will be Modified EDFR, to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (EuroSTR), referred to in the definition of “Fallback Rate (EuroSTR)” after making such adjustments to Modified EDFR as are necessary to account for any difference in term structure or tenor of Modified EDFR by comparison to Fallback Rate (EuroSTR) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book;
(e) Japanese yen LIBOR, the Japanese yen Tokyo interbank offered rate and the euroyen Tokyo interbank offered rate, Fallback Rate (TONA) or if a Fallback Index Cessation Event has occurred with respect to Fallback Rate (TONA), then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (TONA) will be the Tokyo Overnight Average Rate (“TONA”) administered by the Bank of Japan (or any successor administrator), to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (TONA), referred to in the definition of “Fallback Rate (TONA)” after making such adjustments to TONA as are necessary to account for any difference in term structure or tenor of TONA by comparison to Fallback Rate (TONA) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book. If a Fallback Index Cessation Effective Date occurs with respect to each of Fallback Rate (TONA) and TONA, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (TONA) (or, if later, the Fallback Index Cessation Effective Date with respect to TONA) will be the JPY Recommended Rate, to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (TONA), referred to in the definition of “Fallback Rate (TONA)” after making such adjustments to the JPY Recommended Rate as are necessary to account for any difference in term structure or tenor of the JPY Recommended Rate by comparison to Fallback Rate (TONA) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book;
(f) The bank bill swap rate, Fallback Rate (AONIA) or if a Fallback Index Cessation Event has occurred with respect to Fallback Rate (AONIA), then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (AONIA) will be the interbank overnight cash rate (“AONIA”) administered by the Reserve Bank of Australia (or any successor administrator), to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (AONIA), referred to in the definition of “Fallback Rate (AONIA)” after making such adjustments to AONIA as are necessary to account for any difference in term structure or tenor of AONIA by comparison to Fallback Rate (AONIA) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book. If a Fallback Index Cessation Effective Date occurs with respect to each of Fallback Rate (AONIA) and AONIA, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (AONIA) (or, if later, the Fallback Index Cessation Effective Date with respect to AONIA) will be the RBA Recommended Rate, to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (AONIA), referred to in the definition of “Fallback Rate (AONIA)” after making such adjustments to the RBA Recommended Rate as are necessary to account for any difference in term structure or tenor of the RBA Recommended Rate by comparison to Fallback Rate (AONIA) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book;
(g) The Canadian dollar offered rate, Fallback Rate (CORRA) or if a Fallback Index Cessation Event has occurred with respect to Fallback Rate (CORRA), then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (CORRA) will be the Canadian Overnight Repo Rate Average (“CORRA”) administered by the Bank of Canada (or any successor administrator), to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (CORRA), referred to in the definition of “Fallback Rate (CORRA)” after making such adjustments to CORRA as are necessary to account for any difference in term structure or tenor of CORRA by comparison to Fallback Rate (CORRA) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book. If a Fallback Index Cessation Effective Date occurs with respect to each of Fallback Rate (CORRA) and CORRA, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (CORRA) (or, if later, the Fallback Index Cessation Effective Date with respect to CORRA) will be the CAD Recommended Rate, to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (CORRA), referred to in the definition of “Fallback Rate (CORRA)” after making such adjustments to the CAD Recommended Rate as are necessary to account for any difference in term structure or tenor of the CAD Recommended Rate by comparison to Fallback Rate (CORRA) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book. If there is no CAD Recommended Rate before the end of the first Toronto Banking Day (as defined in the 2006 ISDA Definitions) following the Fallback Index Cessation Effective Date with respect to Fallback Rate (CORRA) (or, if later, the end of the first Toronto Banking Day following the Fallback Index Cessation Effective Date with respect to CORRA), or there is a CAD Recommended Rate and a Fallback Index Cessation Effective Date subsequently occurs with respect to it, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (CORRA) (or, if later, the Fallback Index Cessation Effective Date with respect to CORRA) or the Fallback Index Cessation Effective Date with respect to the CAD Recommended Rate (as applicable) will be the BOC Target Rate, to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (CORRA), referred to in the definition of “Fallback Rate (CORRA)” after making such adjustments to the BOC Target Rate as are necessary to account for any difference in term structure or tenor of the BOC Target Rate by comparison to Fallback Rate (CORRA) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book;
(h) The Hong Kong interbank offered rate, Fallback Rate (HONIA) or if a Fallback Index Cessation Event has occurred with respect to Fallback Rate (HONIA), then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (HONIA) will be the Hong Kong Dollar Overnight Index Average (“HONIA”) rate administered by the Treasury Markets Association (or any successor administrator), to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (HONIA), referred to in the definition of “Fallback Rate (HONIA)” after making such adjustments to HONIA as are necessary to account for any difference in term structure or tenor of HONIA by comparison to Fallback Rate (HONIA) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book. If a Fallback Index Cessation Effective Date occurs with respect to each of Fallback Rate (HONIA) and HONIA, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (HONIA) (or, if later, the Fallback Index Cessation Effective Date with respect to HONIA) will be the HKD Recommended Rate, to which the Calculation Agent shall apply the most recently published spread, as at the Fallback Index Cessation Effective Date with respect to Fallback Rate (HONIA), referred to in the definition of “Fallback Rate (HONIA)” after making such adjustments to the HKD Recommended Rate as are necessary to account for any difference in term structure or tenor of the HKD Recommended Rate by comparison to Fallback Rate (HONIA) and by reference to the Bloomberg IBOR Fallback Rate Adjustments Rule Book; the Singapore dollar swap offer rate, Fallback Rate (SOR) or if a Fallback Index Cessation Event has occurred with respect to Fallback Rate (SOR), then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (SOR) will be the MAS Recommended Rate or, if there is no MAS Recommended Rate before the end of the first Singapore Banking Day (as defined in the 2006 ISDA Definitions) following the Fallback Index Cessation Effective Date with respect to Fallback Rate (SOR), or there is a MAS Recommended Rate and a Fallback Index Cessation Effective Date subsequently occurs with respect to it, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (SOR) or the Fallback Index Cessation Effective Date with respect to the MAS Recommended Rate (as applicable) will be SORA, to which the Calculation Agent shall make such adjustments as are necessary to account for any difference in term structure or tenor of SORA by comparison to Fallback Rate (SOR) and by reference to the Calculation Methodology for Fallback Rate (SOR); and
(i) The Thai baht interest rate fixing, Fallback Rate (THBFIX) or if a Fallback Index Cessation Event has occurred with respect to Fallback Rate (THBFIX), then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (THBFIX) will be the BOT Recommended Rate or, if there is no BOT Recommended Rate before the end of the first Bangkok Banking Day (as defined in the 2006 ISDA Definitions) following the Fallback Index Cessation Effective Date with respect to Fallback Rate (THBFIX), or there is a BOT Recommended Rate and a Fallback Index Cessation Effective Date subsequently occurs with respect to it, then the Applicable Fallback Rate for any Fallback Observation Day that occurs on or after the Fallback Index Cessation Effective Date with respect to Fallback Rate (THBFIX) or the Fallback Index Cessation Effective Date with respect to the BOT Recommended Rate (as applicable) will be THOR, to which the Calculation Agent shall make such adjustments as are necessary to account for any difference in term structure or tenor of THOR by comparison to Fallback Rate (THBFIX) and by reference to the Bank of Thailand THBFIX Fallback Rate Adjustments Rule Book.
“Bank of Thailand THBFIX Fallback Rate Adjustments Rule Book” means the THBFIX Fallback Rate Adjustments Rule Book published by the Bank of Thailand as updated from time to time.
“Bloomberg IBOR Fallback Rate Adjustments Rule Book” means the IBOR Fallback Rate Adjustments Rule Book published by Bloomberg Index Services Limited (or a successor provider as approved and/or appointed by ISDA from time to time) as updated from time to time in accordance with its terms.
“BOC Target Rate” means the Bank of Canada’s Target for the Overnight Rate as set by the Bank of Canada and published on the Bank of Canada’s website (as defined in the 2006 ISDA Definitions).
“BOT Recommended Rate” means the rate (inclusive of any spreads or adjustments) recommended as the replacement for Fallback Rate (THBFIX) by the Bank of Thailand or by a committee officially endorsed or convened by the Bank of Thailand (which rate may be produced by the Bank of Thailand or another administrator) and as provided by the administrator of that rate in respect of the day for which that rate is required (which under the 2006 ISDA Definitions would be the “Reset Date”) or, if that rate is not provided by the administrator of that rate (or a successor administrator), published by an authorized distributor.
“CAD Recommended Rate” means the rate (inclusive of any spreads or adjustments) recommended as the replacement for CORRA by a committee officially endorsed or convened by the Bank of Canada for the purpose of recommending a replacement for CORRA (which rate may be produced by the Bank of Canada or another administrator) and as provided by the administrator of that rate or, if that rate is not provided by the administrator thereof (or a successor administrator), published by an authorized distributor. “Calculation Methodology for Fallback Rate (SOR)” means the Calculation Methodology for Fallback Rate (SOR) published by ABS Benchmarks Administration Co Pte. Ltd. as updated from time to time.
“ECB Recommended Rate” means the rate (inclusive of any spreads or adjustments) recommended as the replacement for EuroSTR by the European Central Bank (or any successor administrator of EuroSTR) and/or by a committee officially endorsed or convened by the European Central Bank (or any successor administrator of EuroSTR) for the purpose of recommending a replacement for EuroSTR (which rate may be produced by the European Central Bank or another administrator) and as provided by the administrator of that rate or, if that rate is not provided by the administrator thereof (or a successor administrator), published by an authorized distributor.
“EDFR Spread” means:
(a) If no ECB Recommended Rate is recommended before the end of the first TARGET Settlement Day (as defined in the 2006 ISDA Definitions) following the Fallback Index Cessation Effective Date with respect to Fallback Rate (EuroSTR) (or, if later, before the end of the first TARGET Settlement Day following the Fallback Index Cessation Effective Date with respect to EuroSTR), the arithmetic mean of the daily difference between EuroSTR and the Eurosystem Deposit Facility Rate over an observation period of 30 TARGET Settlement Days starting 30 TARGET Settlement Days prior to the day on which the Fallback Index Cessation Event with respect to Fallback Rate (EuroSTR) occurs (or, if later, 30 TARGET Settlement Days prior to the day on which the first Fallback Index Cessation Event with respect to EuroSTR occurs) and ending on the TARGET Settlement Day immediately preceding the day on which the Fallback Index Cessation Event with respect to Fallback Rate (EuroSTR) occurs (or, if later, the TARGET Settlement Day immediately preceding the day on which the first Fallback Index Cessation Event with respect to EuroSTR occurs); or
(b) If a Fallback Index Cessation Event with respect to the ECB Recommended Rate occurs, the arithmetic mean of the daily difference between the ECB Recommended Rate and the Eurosystem Deposit Facility Rate over an observation period of 30 TARGET Settlement Days starting 30 TARGET Settlement Days prior to the day on which the Fallback Index Cessation Event with respect to the ECB Recommended Rate occurs and ending on the TARGET Settlement Day immediately preceding the day on which that Fallback Index Cessation Event occurs.
“Eurosystem Deposit Facility Rate” means the rate on the deposit facility, which banks may use to make overnight deposits with the Eurosystem and which is published on the ECB’s website (as defined in the 2006 ISDA Definitions).
“Fallback Index Cessation Effective Date” means, in respect of a Fallback Index Cessation Event, the first date on which the Applicable Fallback Rate is no longer provided. If the Applicable Fallback Rate ceases to be provided on the same day that it would have been observed but it was provided at the time at which it is ordinarily observed (or, if no such time is specified, at the time at which it is ordinarily published), then the Fallback Index Cessation Effective Date will be the next day on which the rate would ordinarily have been published. If the Applicable Fallback Rate is the Modified SNB Policy Rate or Modified EDFR, references to the Applicable Fallback Rate in this definition of “Fallback Index Cessation Effective Date” shall be deemed to be references to the index, benchmark or other price source that is referred to in the definition of Modified SNB Policy Rate or Modified EDFR, as applicable.
“Fallback Index Cessation Event” means, in respect of an Applicable Fallback Rate:
(a) A public statement or publication of information by or on behalf of the administrator or provider of the Applicable Fallback Rate announcing that it has ceased or will cease to provide the Applicable FallbackRate permanently or indefinitely, provided that, at the time of the statement or publication, there is no successor administrator or provider that will continue to provide the Applicable Fallback Rate; or
(b) If the Applicable Fallback Rate is:
(i) Fallback Rate (SONIA), Fallback Rate (SARON), Fallback Rate (SOFR), Fallback Rate (EuroSTR), Fallback Rate (TONA), Fallback Rate (AONIA), Fallback Rate (CORRA) or Fallback Rate (HONIA), a public statement or publication of information by the regulatory supervisor for the administrator of the Underlying Rate, the central bank for the currency of the Underlying Rate, an insolvency official with jurisdiction over the administrator for the Underlying Rate, a resolution authority with jurisdiction over the administrator for the Underlying Rate or a court or an entity with similar insolvency or resolution authority over the administrator for the Underlying Rate, which states that the administrator of the Underlying Rate has ceased or will cease to provide the Underlying Rate permanently or indefinitely, provided that, at the time of the statement or publication, there is no successor administrator that will continue to provide the Underlying Rate; or
(ii) SONIA, the GBP Recommended Rate, SARON, the NWG Recommended Rate, the Modified SNB Policy Rate, SOFR, the Fed Recommended Rate, OBFR, the FOMC Target Rate, EuroSTR, the ECB Recommended Rate, Modified EDFR, TONA, the JPY Recommended Rate, AONIA, the RBA Recommended Rate, CORRA, the CAD Recommended Rate, the BOC Target Rate, HONIA, the HKD Recommended Rate, Fallback Rate (SOR), the MAS Recommended Rate, SORA, Fallback Rate (THBFIX), the BOT Recommended Rate or THOR, a public statement or publication of information by the regulatory supervisor for the administrator or provider of the Applicable Fallback Rate, the central bank for the currency of the Applicable Fallback Rate, an insolvency official with jurisdiction over the administrator or provider for the Applicable Fallback Rate, a resolution authority with jurisdiction over the administrator or provider for the Applicable Fallback Rate or a court or an entity with similar insolvency or resolution authority over the administrator or provider for the Applicable Fallback Rate, which states that the administrator or provider of the Applicable Fallback Rate has ceased or will cease to provide the Applicable Fallback Rate permanently or indefinitely, provided that, at the time of the statement or publication, there is no successor administrator or provider that will continue to provide the Applicable Fallback Rate.
If the Applicable Fallback Rate is the Modified SNB Policy Rate or Modified EDFR, references to the administrator or provider of such rate in this definition of “Fallback Index Cessation Event” shall be deemed to be references to the administrator or provider of the index, benchmark or other price source that is referred to in the definition of Modified SNB Policy Rate or Modified EDFR, as applicable.
“Fallback Observation Day” means, in respect of an Applicable Fallback Rate and unless otherwise agreed, the day that is two Business Days (as defined in the relevant Protocol Covered Document or, if that term is not defined therein, as defined in the 2006 ISDA Definitions and, in each case, for the purposes of the payment which is calculated by reference to that Applicable Fallback Rate) preceding the day on which payment by reference to that rate is due (which under the 2006 ISDA Definitions would be equivalent to the “Payment Date”).
“Fallback Rate (AONIA)” means the term adjusted AONIA plus the spread relating to the bank bill swap rate, in each case, for the period of time in respect of which the Relevant IBOR is to be determined provided by Bloomberg Index Services Limited (or a successor provider as approved and/or appointed by ISDA from time to time), as the provider of term adjusted AONIA and the spread, on the Fallback Rate (AONIA) Screen (or by other means) or provided to, and published by, authorized distributors at, or prior to, the Applicable Cut-off Time.
“Fallback Rate (AONIA) Screen” means the Bloomberg Screen (as defined in the 2006 ISDA Definitions) corresponding to the Bloomberg ticker for the fallback for the bank bill swap rate for the period of time in respect of which the Relevant IBOR is to be determined accessed via the Bloomberg Screen
“Fallback Rate (CORRA)” means the term adjusted CORRA plus the spread relating to the Canadian dollar offered rate, in each case, for the period of time in respect of which the Relevant IBOR is to be determined provided by Bloomberg Index Services Limited (or a successor provider as approved and/or appointed by ISDA from time to time), as the provider of term adjusted CORRA and the spread, on the Fallback Rate (CORRA) Screen (or by other means) or provided to, and published by, authorized distributors at, or prior to, the Applicable Cut-off Time.
“Fallback Rate (CORRA) Screen” means the Bloomberg Screen (as defined in the 2006 ISDA Definitions) corresponding to the Bloomberg ticker for the fallback for the Canadian dollar offered rate for the period of time in respect of which the Relevant IBOR is to be determined accessed via the Bloomberg Screen
“Fallback Rate (EuroSTR)” means:
(a) The term adjusted EuroSTR; plus
(b) If the Relevant IBOR is:
(i) Euro LIBOR, the spread relating to euro LIBOR; or
(ii) The euro interbank offered rate, the spread relating to the euro interbank offered rate, in each case, for the period of time in respect of which the Relevant IBOR is to be determined provided by Bloomberg Index Services Limited (or a successor provider as approved and/or appointed by ISDA from time to time), as the provider of term adjusted EuroSTR and the spread, on the Fallback Rate (EuroSTR) Screen (or by other means) or provided to, and published by, authorized distributors at, or prior to, the Applicable Cut-off Time.
“Fallback Rate (EuroSTR) Screen” means the Bloomberg Screen (as defined in the 2006 ISDA Definitions) corresponding to the Bloomberg ticker for the fallback for euro LIBOR or the euro interbank offered rate, as applicable, for the period of time in respect of which the Relevant IBOR is to be determined accessed via the Bloomberg Screen
“Fallback Rate (HONIA)” means the term adjusted HONIA rate plus the spread relating to the Hong Kong interbank offered rate, in each case, for the period of time in respect of which the Relevant IBOR is to be determined provided by Bloomberg Index Services Limited (or a successor provider as approved and/or appointed by ISDA from time to time), as the provider of term adjusted HONIA and the spread, on the Fallback Rate (HONIA) Screen (or by other means) or provided to, and published by, authorized distributors at, or prior to, the Applicable Cut-off Time.
“Fallback Rate (HONIA) Screen” means the Bloomberg Screen (as defined in the 2006 ISDA Definitions) corresponding to the Bloomberg ticker for the fallback for the Hong Kong interbank offered rate for the period of time in respect of which the Relevant IBOR is to be determined accessed via the Bloomberg Screen
“Fallback Rate (SARON)” means the term adjusted SARON plus the spread relating to Swiss franc LIBOR, in each case, for the period of time in respect of which the Relevant IBOR is to be determined provided by Bloomberg Index Services Limited (or a successor provider as approved and/or appointed by ISDA from time to time), as the provider of term adjusted SARON and the spread, on the Fallback Rate (SARON) Screen (or by other means) or provided to, and published by, authorized distributors at, or prior to, the Applicable Cut-off Time.
“Fallback Rate (SARON) Screen” means the Bloomberg Screen (as defined in the 2006 ISDA Definitions) corresponding to the Bloomberg ticker for the fallback for Swiss franc LIBOR for the period of time in respect of which the Relevant IBOR is to be determined accessed via the Bloomberg Screen
“Fallback Rate Screen” means, if the Applicable Fallback Rate is: (a) Fallback Rate (SONIA), the Fallback Rate (SONIA) Screen; (b) Fallback Rate (SARON), the Fallback Rate (SARON) Screen; (c) Fallback Rate (SOFR), the Fallback Rate (SOFR) Screen; (d) Fallback Rate (EuroSTR), the Fallback Rate (EuroSTR) Screen; (e) Fallback Rate (TONA), the Fallback Rate (TONA) Screen; (f) Fallback Rate (AONIA), the Fallback Rate (AONIA) Screen; (g) Fallback Rate (CORRA), the Fallback Rate (CORRA) Screen, (h) Fallback Rate (HONIA), the Fallback Rate (HONIA) Screen, (i) Fallback Rate (SOR), the Fallback Rate (SOR) Screen; and (j) Fallback Rate (THBFIX), the Fallback Rate (THBFIX) Screen.
“Fallback Rate (SOFR)” means the term adjusted SOFR plus the spread relating to U.S. dollar LIBOR, in each case, for the period of time in respect of which the Relevant IBOR is to be determined provided by Bloomberg Index Services Limited (or a successor provider as approved and/or appointed by ISDA from time to time), as the provider of term adjusted SOFR and the spread, on the Fallback Rate (SOFR) Screen (or by other means) or provided to, and published by, authorized distributors at, or prior to, the Applicable Cut-off Time.
“Fallback Rate (SOFR) Screen” means the Bloomberg Screen (as defined in the 2006 ISDA Definitions) corresponding to the Bloomberg ticker for the fallback for U.S. dollar LIBOR for the period of time in respect of which the Relevant IBOR is to be determined accessed via the Bloomberg Screen
“Fallback Rate (SONIA)” means the term adjusted SONIA rate plus the spread relating to sterling LIBOR, in each case, for the period of time in respect of which the Relevant IBOR is to be determined provided by Bloomberg Index Services Limited (or a successor provider as approved and/or appointed by ISDA from time to time), as the provider of term adjusted SONIA and the spread, on the Fallback Rate (SONIA) Screen (or by other means) or provided to, and published by, authorized distributors at, or prior to, the Applicable Cut-off Time.
“Fallback Rate (SONIA) Screen” means the Bloomberg Screen (as defined in the 2006 ISDA Definitions) corresponding to the Bloomberg ticker for the fallback for sterling LIBOR for the period of time in respect of which the Relevant IBOR is to be determined accessed via the Bloomberg Screen
“Fallback Rate (SOR)” means the rate based on actual transactions in the U.S. dollar/Singapore dollar foreign exchange swap market and a U.S. dollar interest rate calculated by reference to “Fallback Rate (SOFR)” as defined above and including any fallback rate that may apply pursuant to subparagraph (c) of the definition of “Applicable Fallback Rate” above for the period of time in respect of which the Relevant IBOR is to be determined provided by ABS Benchmarks Administration Co Pte. Ltd. (or a successor provider), as the provider of Fallback Rate (SOR), on the Fallback Rate (SOR) Screen (or by other means) or provided to, and published by, authorized distributors at, or prior to, the Applicable Cut-off Time.
“Fallback Rate (SOR) Screen” means the Refinitiv Screen (as defined in the 2006 ISDA Definitions) corresponding to the Refinitiv ticker for the fallback for the Singapore dollar swap offer rate for the period of time in respect of which the Relevant IBOR is to be determined accessed via the Refinitiv Screen
“Fallback Rate (THBFIX)” means the rate based on actual transactions in the U.S. dollar/Thai baht foreign exchange swap market and a U.S. dollar interest rate calculated by reference to “Fallback Rate (SOFR)” as defined above and including any fallback rate that may apply pursuant to subparagraph (c) of the definition of “Applicable Fallback Rate” above for the period of time in respect of which the Relevant IBOR is to be determined provided by the Bank of Thailand (or a successor provider), as the provider of Fallback Rate (THBFIX), on the Fallback Rate (THBFIX) Screen (or by other means) or provided to, and published by, authorized distributors at, or prior to, the Applicable Cut-off Time.
“Fallback Rate (THBFIX) Screen” means the Refinitiv Screen (as defined in the 2006 ISDA Definitions) corresponding to the Refinitiv ticker for the fallback for the Thai baht interest rate fixing for the period of time in respect of which the Relevant IBOR is to be determined accessed via the Refinitiv Screen
“Fallback Rate (TONA)” means:
(a) The term adjusted TONA; plus
(b) If the Relevant IBOR is:
(i) Japanese yen LIBOR, the spread relating to Japanese yen LIBOR;
(ii) The Japanese yen Tokyo interbank offered rate, the spread relating to the Japanese yen Tokyo interbank offered rate; or the euroyen Tokyo interbank offered rate, the spread relating to the euroyen Tokyo interbank offered rate, in each case, for the period of time in respect of which the Relevant IBOR is to be determined provided by Bloomberg Index Services Limited (or a successor provider as approved and/or appointed by ISDA from time to time), as the provider of term adjusted TONA and the spread, on the Fallback Rate (TONA) Screen (or by other means) or provided to, and published by, authorized distributors at, or prior to, the Applicable Cut-off Time.
“Fallback Rate (TONA) Screen” means the Bloomberg Screen (as defined in the 2006 ISDA Definitions) corresponding to the Bloomberg ticker for the fallback for Japanese yen LIBOR, the Japanese yen Tokyo interbank offered rate or the euroyen Tokyo interbank offered rate, as applicable, for the period of time in respect of which the Relevant IBOR is to be determined accessed via the Bloomberg Screen
“Fed Recommended Rate” means the rate (inclusive of any spreads or adjustments) recommended as the replacement for SOFR by the Federal Reserve Board or the Federal Reserve Bank of New York, or by a committee officially endorsed or convened by the Federal Reserve Board or the Federal Reserve Bank of New York for the purpose of recommending a replacement for SOFR (which rate may be produced by the Federal Reserve Bank of New York or another administrator) and as provided by the administrator of that rate or, if that rate is not provided by the administrator thereof (or a successor administrator), published by an authorized distributor.
“FOMC Target Rate” means the short-term interest rate target set by the Federal Open Market Committee and published on the Federal Reserve’s website (as defined in the 2006 ISDA Definitions) or, if the Federal Open Market Committee does not target a single rate, the mid-point of the short-term interest rate target range set by the Federal Open Market Committee and published on the Federal Reserve’s website (calculated as the arithmetic average of the upper bound of the target range and the lower bound of the target range, rounded, if necessary, in accordance with the method set forth in Section 8.1(c) of the 2006 ISDA Definitions).
“GBP Recommended Rate” means the rate (inclusive of any spreads or adjustments) recommended as the replacement for SONIA by (a) the administrator of SONIA if the administrator of SONIA is a national central bank, or (b) if the national central bank administrator of SONIA does not make a recommendation or the administrator of SONIA is not a national central bank, a committee designated for this purpose by one or both of the Financial Conduct Authority (or any successor thereto) and the Bank of England and as provided by the then administrator of that rate (or a successor administrator) or, if that rate is not provided by the administrator thereof (or a successor administrator), published by an authorized distributor.
“HKD Recommended Rate” means the rate (inclusive of any spreads or adjustments) recommended as the replacement for HONIA by the administrator of HONIA or by a committee officially endorsed or convened by the administrator of HONIA for the purpose of recommending a replacement for HONIA (which rate may be produced by the administrator of HONIA or another administrator) and as provided by the administrator of that rate or, if that rate is not provided by the administrator thereof (or a successor administrator), published by an authorized distributor.
“Index Cessation Effective Date” means, in respect of a Relevant IBOR (or, if either the Singapore dollar swap offer rate or the Thai baht interest rate fixing is the Relevant IBOR, U.S. dollar LIBOR) and one or more Index Cessation Events, the first date on which the Relevant IBOR (or, if either the Singapore dollar swap offer rate or the Thai baht interest rate fixing is the Relevant IBOR, U.S. dollar LIBOR) is either (a) in respect of a Relevant LIBOR (or, if the Relevant IBOR is the Singapore dollar swap offer rate or the Thai baht interest rate fixing, in respect of U.S. dollar LIBOR), Non-Representative by reference to the most recent statement or publication contemplated in subparagraph (c) of the definition of “Index Cessation Event” below and even if such rate continues to be provided on such date or (b) no longer provided. If the Relevant IBOR (or, if either the Singapore dollar swap offer rate or the Thai baht interest rate fixing is the Relevant IBOR, U.S. dollar LIBOR) ceases to be provided on the Relevant Original Fixing Date but it was provided (and, in respect of a Relevant LIBOR (or, if the Relevant IBOR is the Singapore dollar swap offer rate or the Thai baht interest rate fixing, in respect of U.S. dollar LIBOR), is not Non-Representative) at the time at which it is ordinarily observed, then the Index Cessation Effective Date will be the next day on which the rate would ordinarily have been published. An Index Cessation Effective Date may also occur in accordance with paragraph 6(d), subparagraph 6(e)(ii) or subparagraph 6(e)(iii) above.
“Index Cessation Event” means, in respect of a Relevant IBOR:
(a) A public statement or publication of information by or on behalf of the administrator of the Relevant IBOR announcing that it has ceased or will cease to provide the Relevant IBOR permanently or indefinitely, provided that, at the time of the statement or publication, there is no successor administrator that will continue to provide the Relevant IBOR;
(b) A public statement or publication of information by the regulatory supervisor for the administrator of the Relevant IBOR, the central bank for the currency of the Relevant IBOR, an insolvency official with jurisdiction over the administrator for the Relevant IBOR, a resolution authority with jurisdiction over the administrator for the Relevant IBOR or a court or an entity with similar insolvency or resolution authority over the administrator for the Relevant IBOR, which states that the administrator of the Relevant IBOR has ceased or will cease to provide the Relevant IBOR permanently or indefinitely, provided that, at the time of the statement or publication, there is no successor administrator that will continue to provide the Relevant IBOR; or
(c) If the Relevant IBOR is sterling LIBOR, Swiss franc LIBOR, U.S. dollar LIBOR, euro LIBOR, Japanese yen LIBOR, the Singapore dollar swap offer rate or the Thai baht interest rate fixing, a public statement or publication of information by the regulatory supervisor for the administrator of such Relevant IBOR (or, if the Relevant IBOR is the Singapore dollar swap offer rate or the Thai baht interest rate fixing, by the regulatory supervisor for the administrator of U.S. dollar LIBOR) announcing that (i) the regulatory supervisor has determined that such Relevant IBOR is no longer, or as of a specified future date will no longer be, representative of the underlying market and economic reality that such Relevant IBOR is intended to measure and that representativeness will not be restored and (ii) it is being made in the awareness that the statement or publication will engage certain contractual triggers for fallbacks activated by pre-cessation announcements by such supervisor (howsoever described) in contracts, provided that, if either the Singapore dollar swap offer rate or the Thai baht interest rate fixing is the Relevant IBOR, references to the “Relevant IBOR” in subparagraphs (a), (b) and (c)(i) above of this definition of “Index Cessation Event” will be deemed to be references to U.S. dollar LIBOR.
An Index Cessation Event may also occur in accordance with paragraph 6(d), subparagraph 6(e)(ii) or subparagraph 6(e)(iii) above.
“JPY Recommended Rate” means the rate (inclusive of any spreads or adjustments) recommended as the replacement for TONA by a committee officially endorsed or convened by the Bank of Japan for the purpose of recommending a replacement for TONA (which rate may be produced by the Bank of Japan or another administrator) and as provided by the administrator of that rate or, if that rate is not provided by the administrator thereof (or a successor administrator), published by an authorized distributor.
“MAS Recommended Rate” means the rate (inclusive of any spreads or adjustments) recommended as the replacement for Fallback Rate (SOR) by the Monetary Authority of Singapore or by a committee officially endorsed or convened by the Monetary Authority of Singapore (which rate may be produced by the Monetary Authority of Singapore or another administrator) and as provided by the administrator of that rate in respect of the day for which that rate is required (which under the 2006 ISDA Definitions would be the “Reset Date”) or, if that rate is not provided by the administrator of that rate (or a successor administrator), published by an authorized distributor.
“Modified EDFR” means a rate equal to the Eurosystem Deposit Facility Rate plus the EDFR Spread.
“Modified SNB Policy Rate” means a rate equal to the SNB Policy Rate plus the SNB Spread.
“Non-Representative” means, in respect of a Relevant LIBOR (or, if the Relevant IBOR is the Singapore dollar swap offer rate or the Thai baht interest rate fixing, in respect of U.S. dollar LIBOR), the regulatory supervisor for the administrator of the Relevant LIBOR (or, if the Relevant IBOR is the Singapore dollar swap offer rate or the Thai baht interest rate fixing, U.S. dollar LIBOR):
(a) Has determined and announced that the Relevant LIBOR (or, if the Relevant IBOR is the Singapore dollar swap offer rate or the Thai baht interest rate fixing, U.S. dollar LIBOR) is no longer representative of the underlying market and economic reality it is intended to measure and representativeness will not be restored; and
(b) Is aware that certain contractual triggers for fallbacks activated by pre-cessation announcements by such supervisor (howsoever described) in contracts have been or are engaged, provided that such Relevant LIBOR (or, if the Relevant IBOR is the Singapore dollar swap offer rate or the Thai baht interest rate fixing, U.S. dollar LIBOR) will be `Non-Representative’ by reference to the date indicated in the most recent statement or publication contemplated in subparagraph (c) of the definition of “Index Cessation Event” above.
“NWG Recommended Rate” means the rate (inclusive of any spreads or adjustments) recommended as the replacement for SARON by any working group or committee in Switzerland organized in the same or a similar manner as the National Working Group on Swiss Franc Reference Rates that was founded in 2013 for purposes of, among other things, considering proposals to reform reference interest rates in Switzerland, and as provided by the administrator of that rate or, if that rate is not provided by the administrator thereof (or a successor administrator), published by an authorized distributor.
“OBFR” means the Overnight Bank Funding Rate, as provided by the Federal Reserve Bank of New York (or a successor administrator) on the New York Fed’s website (as defined in the 2006 ISDA Definitions) or, if that rate is not provided by the Federal Reserve Bank of New York (or a successor administrator), published by an authorized distributor.
“RBA Recommended Rate” means the rate (inclusive of any spreads or adjustments) recommended as the replacement for AONIA by the Reserve Bank of Australia (which rate may be produced by the Reserve Bank of Australia or another administrator) and as provided by the administrator of that rate or, if that rate is not provided by the administrator thereof (or a successor administrator), published by an authorized distributor.
“Relevant LIBOR” means sterling LIBOR, Swiss franc LIBOR, U.S. dollar LIBOR, euro LIBOR and Japanese yen LIBOR.
“Relevant Original Fixing Date” means, in respect of a Relevant IBOR and unless otherwise agreed, the day on which that Relevant IBOR would have been observed (which under the 2006 ISDA Definitions would be the “Reset Date” or, if the Relevant IBOR is Swiss franc LIBOR, U.S. dollar LIBOR, euro LIBOR, the euro interbank offered rate, Japanese yen LIBOR, the Japanese yen Tokyo interbank offered rate, the euroyen Tokyo interbank offered rate, the Singapore dollar swap offer rate or the Thai baht interest rate fixing, the day that is two Applicable Banking Days preceding a relevant “Reset Date”, as applicable).
“SNB Policy Rate” means the policy rate of the Swiss National Bank.
“SNB Spread” means the historical median between SARON and the SNB Policy Rate over an observation period of two years starting two years prior to the day on which the Fallback Index Cessation Event with respect to Fallback Rate (SARON) occurs (or, if later, two years prior to the day on which the first Fallback Index Cessation Event with respect to SARON occurs) and ending on the Zurich Banking Day (as defined in the 2006 ISDA Definitions) immediately preceding the day on which the Fallback Index Cessation Event with respect to Fallback Rate (SARON) occurs (or, if later, the Zurich Banking Day immediately preceding the day on which the first Fallback Index Cessation Event with respect to SARON occurs), as determined by the Calculation Agent.
“SORA” means the Singapore Overnight Rate Average as provided by the Monetary Authority of Singapore (or a successor administrator) on the Monetary Authority of Singapore’s website (as defined in the 2006 ISDA Definitions) (or as published by its authorized distributors).
“THOR” means the Thai Overnight Repurchase Rate as provided by the Bank of Thailand as administrator of the benchmark (or a successor administrator) on the Bank of Thailand’s website (as defined in the 2006 ISDA Definitions) (or as published by its authorized distributors).
“UK Bank Rate” means the official bank rate as determined by the Monetary Policy Committee of the Bank of England and published by the Bank of England from time to time.
“Underlying Rate” means, if the Applicable Fallback Rate is: (a) Fallback Rate (SONIA), SONIA; (b) Fallback Rate (SARON), SARON; (c) Fallback Rate (SOFR), SOFR; (d) Fallback Rate (EuroSTR), EuroSTR; (e) Fallback Rate (TONA), TONA; (f) Fallback Rate (AONIA), AONIA; (g) Fallback Rate (CORRA), CORRA; and (h) Fallback Rate (HONIA), HONIA.
The parties agree that the amendments made by this Protocol do not constitute a “Spread Provision” (as defined in the ISDA 2014 Collateral Agreement Negative Interest Protocol published on May 12, 2014 by ISDA).
Published by permission of the International Swaps and Derivatives Association, Inc. (“ISDA”) ISDA® reserves all rights in the Protocol.
Source: ISDA 2020 IBOR Fallbacks Protocol, published on October 23, 2020, by the International Swaps and Derivatives Association, Inc., https://assets.isda.org/media/3062e7b4/08268161-pdf/.
PART 261 – RULES REGARDING AVAILABILITY OF INFORMATION
Subpart A – General
§ 261.1 Authority, purpose, and scope.
(a) Authority and purpose. This part establishes mechanisms for carrying out the Board’s statutory responsibilities relating to the disclosure, production, or withholding of information to facilitate the Board’s interaction with financial institutions and the public. In this regard, the Board has determined that the Board or its delegees may disclose nonpublic information of the Board, in accordance with the procedures set forth in this part, whenever it is necessary or appropriate to do so in the exercise of any of the Board’s authorities, including but not limited to authority granted to the Board in the Freedom of Information Act, 5 U.S.C. 552, Federal Reserve Act, 12 U.S.C. 221 et seq., the Bank Holding Company Act, 12 U.S.C. 1841 et seq., the Home Owners’ Loan Act, 12 U.S.C. 1461 et seq., and the International Banking Act, 12 U.S.C. 3101 et seq. The Board has determined that all such disclosures made in accordance with the rules and procedures specified in this part are authorized by law, and are, as applicable, disclosures to proper persons pursuant to 12 U.S.C. 326. This part also sets forth the categories of information made available to the public, the procedures for obtaining information and records, the procedures for limited release of nonpublic information, and the procedures for protecting confidential business information.
(b) Scope. (1) This subpart A contains general provisions and definitions of terms used in this part.
(2) Subpart B implements the Freedom of Information Act (FOIA) (5 U.S.C. 552).
(3) Subpart C sets forth:
(i) The kinds of nonpublic information made available to supervised financial institutions, governmental agencies, and others in certain circumstances;
(ii) The procedures for disclosure; and
(iii) The procedures with respect to subpoenas, orders compelling production, and other process.
§ 261.2 Definitions.
For purposes of this part:
(a) Affiliate has the meaning given it in 12 CFR 225.2(a).
(b)(1) Confidential supervisory information means nonpublic information that is exempt from disclosure pursuant to 5 U.S.C. 552(b)(8) and includes information that is or was created or obtained in furtherance of the Board’s supervisory, investigatory, or enforcement activities, including activities conducted by a Federal Reserve Bank (Reserve Bank) under delegated authority, relating to any supervised financial institution, and any information derived from or related to such information. Examples of confidential supervisory information include, without limitation, reports of examination, inspection, and visitation; confidential operating and condition reports; supervisory assessments; investigative requests for documents or other information; and supervisory correspondence or other supervisory communications. Additionally, any portion of a document in the possession of any person, entity, agency or authority, including a supervised financial institution, that contains or would reveal confidential supervisory information is confidential supervisory information.
(2) Confidential supervisory information does not include:
(i) Documents prepared by or for a supervised financial institution for its own business purposes that are in its own possession and that do not include confidential supervisory information as defined in paragraph (b)(1) of this section, even though copies of such documents in the Board’s or Reserve Bank’s possession constitute confidential supervisory information; or
(ii) Final orders, amendments, or modifications of final orders, or other actions or documents that are specifically required to be published or made available to the public pursuant to 12 U.S.C. 1818(u), the Community Reinvestment Act, or other applicable law.
(c) Nonpublic information means information that has not been publicly disclosed by the Board and that is:
(1) Confidential supervisory information, or
(2) Exempt from disclosure under § 261.15(a).
(d)(1) Records of the Board or Board records means all recorded information, regardless of form or characteristics, that is created or obtained by the Board and is under the Board’s control. A record is created or obtained by the Board if it is created or obtained by:
(i) Any Board member or any officer, employee, or contractor of the Board in the conduct of the Board’s official duties, or
(ii) Any officer, director, employee, or contractor of any Reserve Bank and either constitutes confidential supervisory information as defined in paragraph (b)(1) of this section or is created or obtained in the performance of Board functions delegated to the Reserve Bank pursuant to 12 U.S.C. 248(k).
(2) Records of the Board do not include:
(i) Personal files or notes of Board members, employees, or contractors; extra copies of documents and library and museum materials kept solely for reference or exhibition purposes; or unaltered publications otherwise available to the public in Board publications, libraries, or established distribution systems;
(ii) Records located at Reserve Banks other than those records identified in paragraph (d)(1) of this section; or
(iii) Records that belong to or are otherwise under the control of another entity or agency despite the Board’s possession.
(e)(1) Search means a reasonable search of such records of the Board as seem likely in the particular circumstances to contain information of the kind requested.
(2) As part of the Board’s search for responsive records, the Board is not obligated to conduct any research, create any document, or modify an electronic program or automated information system.
(f) Supervised financial institution includes any institution that is supervised by the Board, including a bank; a bank holding company, intermediate holding company, or savings and loan holding company (including their non-depository subsidiaries); an Edge Act or agreement corporation; a U.S. branch or agency of a foreign bank; any company designated for Board supervision by the Financial Stability Oversight Council; or any other entity or service subject to examination by the Board.
(g) Working day means any day except Saturday, Sunday, or a legal Federal holiday.
(a) Custodian of records. The Secretary of the Board (Secretary) is the official custodian of all records of the Board.
(b) Certification of record. The Secretary may certify the authenticity of any Board record, or any copy of such record, for any purpose, and for or before any duly constituted Federal or State court, tribunal, or agency.
(c) Service of subpoenas or other process. Subpoenas or other judicial or administrative process demanding access to any Board records or making any claim against the Board or against Board members or staff in their official capacity shall be addressed to and served upon the Secretary of the Board at the Board’s office at 20th Street and Constitution Avenue NW, Washington, DC 20551. The Board does not accept service of process on behalf of any employee in respect of purely private legal disputes.
(d) Alternative authority. Any action or determination required or permitted by this part to be done by the Board, the Secretary, the General Counsel, the Director of any Division, or any Reserve Bank, may be done by any employee who has been duly authorized or designated for this purpose by the Board, the Secretary, the General Counsel, the appropriate Director, or the appropriate Reserve Bank, respectively.
§ 261.4 Prohibition against disclosure.
Except as provided in this part or as otherwise authorized, no officer, employee, or agent of the Board or any Reserve Bank shall disclose or permit the disclosure of any nonpublic information of the Board to any person other than Board or Reserve Bank officers, employees, or agents properly entitled to such information for the performance of official duties.
Subpart B – Published Information and Records Available to Public; Procedures for Requests
§ 261.10 Published information.
(a)
(1) Descriptions of the Board’s central and field organization;
(2) Statements of the general course and method by which the Board’s functions are channeled and determined, including the nature and requirements of procedures;
(3) Rules of procedure, descriptions of forms available and the place where they may be obtained, and instructions on the scope and contents of all papers, reports, and examinations;
(4) Substantive rules, interpretations of general applicability, and statements of general policy;
(5) Every amendment, revision, or repeal of the foregoing in paragraphs (a)(1) through (4) of this section; and
(6) Other notices as required by law.
(b) Publications. The Board maintains a list of publications on its website (at www.federalreserve.gov/publications). Most publications issued by the Board, including available back issues, may be downloaded from the website; some may be obtained through an order form located on the website (at www.federalreserve.gov/files/orderform.pdf) or by contacting Board Printing & Fulfillment, Federal Reserve Board, Washington, DC 20551. Subscription or other charges may apply for some publications.
(c) Publicly available information – (1) Electronic reading room. The Board makes the following records available in its electronic reading room, http://www.federalreserve.gov/foia/readingrooms.htm#rr1.
(i) Final opinions, including concurring and dissenting opinions, as well as final orders and written agreements, made in the adjudication of cases;
(ii) Statements of policy and interpretations adopted by the Board that are not published in the
(iii) Administrative staff manuals and instructions to staff that affect the public;
(iv) Copies of all records, regardless of form or format –
(A) That have been released to any person under § 261.11; and
(B)(1) That because of the nature of their subject matter, the Board has determined have become or are likely to become the subject of subsequent requests for substantially the same records; or
(2) That have been requested three or more times;
(v) A general index of the records referred to in paragraph (c)(1)(iv) of this section; and
(vi) The public section of Community Reinvestment Act examination reports.
(2) Inspection in electronic format at Reserve Banks. The Board may determine that certain classes of publicly available filings shall be made available for inspection in electronic format only at the Reserve Bank where those records are filed.
(3) Privacy protection. The Board may delete identifying details from any public record to prevent a clearly unwarranted invasion of personal privacy.
§ 261.11 Records available to the public upon request.
(a) Procedures for requesting records. (1) Requesters are encouraged to submit requests electronically by filling out the required information at https://www.federalreserve.gov/secure/forms/efoiaform.aspx. Alternatively, requests may be submitted in writing to the Office of the Secretary, Board of Governors of the Federal Reserve System, Attn: FOIA Requests, 20th Street and Constitution Avenue NW, Washington, DC 20551; or sent by facsimile to the Office of the Secretary, (202) 872-7565. Clearly mark the request FREEDOM OF INFORMATION ACT REQUEST.
(2) A request may not be combined with any other request or with any matter presented to the Board such as a protest on a pending application or a comment on a public rulemaking. It may, however, be combined with a request for records under the Privacy Act pursuant to 12 CFR 261a.5(a) or a request for discretionary release of confidential supervisory information pursuant to § 261.23.
(b) Contents of request. A request must include:
(1) The requester’s name, address, daytime telephone number, and an email address if available.
(2) A description of the records that enables the Board’s staff to identify and produce the records with reasonable effort and without unduly burdening or significantly interfering with any of the Board’s operations. Whenever possible, the request should include specific information about each record sought, such as the date, title or name, author, recipient, and subject matter of the record.
(3) A statement agreeing to pay the applicable fees. If the information requested is not intended for a commercial use (as defined in § 261.16(d)(1)) and the requester seeks a reduction or waiver of fees because he or she is either a representative of the news media, an educational institution, or a noncommercial scientific institution, the requester should include the information called for in § 261.16(g)(2).
(c) Perfected and defective requests. (1) The Board will consider the request to be perfected on the date the Office of the Secretary receives a request that contains all of the information required by paragraphs (b)(1) through (3) of this section.
(2) The Board need not accept or process a request that does not reasonably describe the records requested or that does not otherwise comply with the requirements of this section.
(3) The Board may return a defective request, specifying the deficiency. The requester may submit a corrected request, which will be treated as a new request.
§ 261.12 Processing requests.
(a) Receipt of requests. Upon receipt of any request that satisfies the requirements set forth in § 261.11, the Office of the Secretary shall assign the request to the appropriate processing schedule, pursuant to paragraph (b) of this section. The date of receipt for any request, including one that is addressed incorrectly or that is referred to the Board by another agency or by a Reserve Bank, is the date the Office of the Secretary actually receives the request.
(b) Multitrack processing. (1) The Board provides different levels of processing for categories of requests under this section.
(i) Requests for records that are readily identifiable by the Office of the Secretary and that have already been cleared for public release or can easily be cleared for public release may qualify for simple processing.
(ii) All other requests shall be handled under normal processing procedures, unless expedited processing has been granted pursuant to paragraph (c) of this section.
(2) The Office of the Secretary will make the determination whether a request qualifies for simple processing. A requester may contact the Office of the Secretary to learn whether a particular request has been assigned to simple processing. If the request has not qualified for simple processing, the requester may limit the scope of the request in order to qualify for simple processing by contacting the Office of the Secretary in writing, by letter or email, or by telephone.
(c) Expedited processing. (1) A request for expedited processing may be made at any time. A request for expedited processing must be clearly labeled “Expedited Processing Requested.” The Board will process requests and appeals on an expedited basis whenever it is determined that they involve:
(i) Circumstances in which the lack of expedited processing could reasonably be expected to pose an imminent threat to the life or physical safety of an individual; or
(ii) An urgency to inform the public about an actual or alleged Federal Government activity, if made by a person who is primarily engaged in disseminating information.
(2) A requester who seeks expedited processing must submit a statement, certified to be true and correct, explaining in detail the basis for making the request for expedited processing. For example, under paragraph (c)(1)(ii) of this section, a requester who is not a full-time member of the news media must establish that the requester is a person whose primary professional activity or occupation is information dissemination, though it need not be the requester’s sole occupation. Such a requester also must establish a particular urgency to inform the public about the government activity involved in the request – one that extends beyond the public’s right to know about Federal Government activity generally. The existence of numerous articles published on a given subject can be helpful in establishing the requirement that there be an “urgency to inform” the public on the topic. As a matter of administrative discretion, the Board may waive the formal certification requirement.
(3) Within 10 calendar days of receipt of a request for expedited processing, the Board will notify the requester of its decision on the request. A denial of expedited processing may be appealed to the Board in accordance with § 261.14. The Board will respond to the appeal within 10 working days of receipt of the appeal.
(d) Priority of responses. The Office of the Secretary will normally process requests in the order they are received in the separate processing tracks, except when expedited processing is granted in which case the request will be processed as soon as practicable.
(e) Time limits. The time for response to requests shall be 20 working days from when a request is perfected. Exceptions to the 20-day time limit are only as follows:
(1) In the case of expedited treatment under paragraph (c) of this section, the Board shall give the expedited request priority over non-expedited requests and shall process the expedited request as soon as practicable.
(2) Where the running of such time is suspended for a requester to address fee requirements pursuant to § 261.16(c)(1) or (2).
(3) In unusual circumstances, as defined in 5 U.S.C. 552(a)(6)(B), the Board may –
(i) Extend the 20-day time limit for a period of time not to exceed 10 working days, where the Board has provided written notice to the requester setting forth the reasons for the extension and the date on which a determination is expected to be dispatched; and
(ii) Extend the 20-day time limit for a period of more than 10 working days where the Board has provided the requester with an opportunity to modify the scope of the FOIA request so that it can be processed within that time frame or with an opportunity to arrange an alternative time frame for processing the original request or a modified request, and has notified the requester that the Board’s FOIA Public Liaison is available to assist the requester for this purpose and in the resolution of any disputes between the requester and the Board and of the requester’s right to seek dispute resolution services from the Office of Government Information Services.
§ 261.13 Responses to requests.
(a) When the Board receives a perfected request, it will conduct a reasonable search of Board records in its possession on the date the Board’s search begins and will review any responsive information it locates.
(b) If a request covers documents that were created by, obtained from, or classified by another agency, the Board may refer the request for such documents to that agency for a response and inform the requester promptly of the referral.
(c) In responding to a request, the Board will withhold information under this section only if –
(1) The Board reasonably foresees that disclosure would harm an interest protected by an exemption described in § 261.15(a); or
(2) Disclosure is prohibited by law.
(d) The Board will take reasonable steps necessary to segregate and release nonexempt information.
(e) The Board will notify the requester of:
(1) The Board’s determination of the request;
(2) The reasons for the determination;
(3) An estimate of the amount of information withheld, if any. An estimate is not required if the amount of information is otherwise indicated by deletions marked on records that are disclosed in part or if providing an estimate would harm an interest protected by an applicable exemption;
(4) The right of the requester to seek assistance from the Board’s FOIA Public Liaison; and
(5) When an adverse determination is made, the Board will advise the requester in writing of that determination and will further advise the requester of:
(i) The right of the requester to appeal any adverse determination within 90 calendar days after the date of the determination as specified in § 261.14;
(ii) The right of the requester to seek dispute resolution services from the Board’s FOIA Public Liaison or the Office of Government Information Services; and
(iii) The name and title or position of the person responsible for the adverse determination.
(f) Adverse determinations, or denials of requests, include decisions that the requested record is exempt, in whole or in part; the request does not reasonably describe the records sought; the information requested is not a record subject to the FOIA; the requested record does not exist, cannot be located, or has been destroyed; or the requested record is not readily reproducible in the form or format sought by the requester. Adverse determinations also include denials involving fees or fee waiver matters or denials of requests for expedited treatment.
(g) The Board will normally send responsive, nonexempt documents to the requester by email but may use other means as arranged between the Board and the requester or as determined by the Board. The Board will attempt to provide records in the format requested by the requester.
§ 261.14 Appeals.
(a) Appeal of adverse determination. If the Board makes an adverse determination as defined in § 261.13(f), the requester may file a written appeal with the Board, as follows:
(1) The appeal should prominently display the phrase FREEDOM OF INFORMATION ACT APPEAL on the first page, and should be sent directly to [email protected] or, if sent by mail, addressed to the Office of the Secretary, Board of Governors of the Federal Reserve System, Attn: FOIA Appeals, 20th Street & Constitution Avenue NW, Washington, DC 20551; or sent by facsimile to the Office of the Secretary, (202) 872-7565. If the requester is appealing the denial of expedited treatment, the appeal should clearly be labeled “Appeal for Expedited Processing.”
(2) A request for records under § 261.11 may not be combined in the same letter with an appeal.
(3) To be considered timely, an appeal must be postmarked, or in the case of electronic submissions, transmitted, within 90 calendar days after the date of the adverse determination.
(b) Except as provided in § 261.12(c)(3), the Board shall make a determination regarding any appeal within 20 working days of actual receipt of the appeal by the Office of the Secretary. If an adverse determination is upheld on appeal, in whole or in part, the determination letter shall notify the appealing party of the right to seek judicial review and of the availability of dispute resolution services from the Office of Government Information Services as a nonexclusive alternative to litigation.
(c) The Board may reconsider an adverse determination, including one on appeal, if intervening circumstances or additional facts not known at the time of the adverse determination come to the attention of the Board.
§ 261.15 Exemptions from disclosure.
(a) Types of records exempt from disclosure. Pursuant to 5 U.S.C. 552(b), the following records of the Board are exempt from disclosure under this part:
(1) Any information that is specifically authorized under criteria established by an executive order to be kept secret in the interest of national defense or foreign policy and is in fact properly classified pursuant to the executive order.
(2) Any information related solely to the internal personnel rules and practices of the Board.
(3) Any information specifically exempted from disclosure by statute to the extent required by 5 U.S.C. 552(b)(3).
(4) Any matter that is a trade secret or that constitutes commercial or financial information obtained from a person and that is privileged or confidential.
(5) Inter- or intra-agency memorandums or letters that would not be available by law to a party other than an agency in litigation with the Board, provided that the deliberative process privilege shall not apply to records that were created 25 years or more before the date on which the records were requested.
(6) Any information contained in personnel and medical files and similar files the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
(7) Any records or information compiled for law enforcement purposes, to the extent permitted under 5 U.S.C. 552(b)(7).
(8) Any matter that is contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions, including a State financial institution supervisory agency.
(b) Release of nonpublic information. (1) The Board may make any nonpublic information furnished in connection with an application for Board approval of a transaction available to the public in response to a request in accordance with § 261.11, and may, without prior notice and to the extent it deems necessary, comment on such information in any opinion or statement issued to the public in connection with a Board action to which such information pertains.
(2) The fact that the Board has determined to release particular nonpublic information does not waive the Board’s ability to withhold similar nonpublic information in response to the same or a different request.
(3) Except where disclosure is expressly prohibited by statute, regulation, or order, the Board may release records that are exempt from mandatory disclosure whenever the Board or designated Board members, the Secretary, or the General Counsel determines that such disclosure would be in the public interest. The Board will provide predisclosure notice to submitters of confidential information in accordance with § 261.18(b)(1). Confidential supervisory information may only be released as set forth in subpart C.
(c) Delayed release. Except as required by law, publication in the
(1) Interfere with accomplishing the objectives of the Board in the discharge of its statutory functions;
(2) Interfere with the orderly conduct of the foreign affairs of the United States;
(3) Permit speculators or others to gain unfair profits or other unfair advantages by speculative trading in securities or otherwise;
(4) Result in unnecessary or unwarranted disturbances in the securities markets;
(5) Interfere with the orderly execution of the objectives or policies of other government agencies; or
(6) Impair the ability to negotiate any contract or otherwise harm the commercial or financial interest of the United States, the Board, any Reserve Bank, or any department or agency of the United States.
§ 261.16 Fee schedules; waiver of fees.
(a) Fee schedules. Consistent with the limitations set forth in 5 U.S.C. 552(a)(4)(A)(viii), the fees applicable to a request for records pursuant to § 261.11 are set forth in table 1 to this section. These fees cover only the full allowable direct costs of search, duplication, and review. No fees will be charged where the average cost of collecting the fee (calculated at $5.00) exceeds the amount of the fee.
(b) For purposes of computing fees. (1) Search time includes all time spent looking for material that is responsive to a request, including line-by-line identification of material within documents. Such activity is distinct from “review” of material to determine whether the material is exempt from disclosure.
(2) Direct costs mean those expenditures that the Board actually incurs in searching for, reviewing, and duplicating records in response to a request made under § 261.11, as shown in table 1 to this section.
(3) Duplication refers to the process of making a copy, in any format, of a document.
(4) Review refers to the process of examining documents that have been located as being potentially responsive to a request for records to determine whether any portion of a document is exempt from disclosure. It includes doing all that is necessary to prepare the documents for release, including the redaction of exempt information. It does not include time spent resolving general legal or policy issues regarding the application of exemptions.
(c) Payment procedures. The Board may assume that a person requesting records pursuant to § 261.11 will pay the applicable fees, unless the request includes a limitation on fees to be paid or seeks a waiver or reduction of fees pursuant to paragraph (g) of this section.
(1) Advance notification of fees. If the estimated charges are likely to exceed the amount authorized by the requester, the Office of the Secretary shall notify the requester of the estimated amount. Upon receipt of such notice, the requester may confer with the Office of the Secretary to reformulate the request to lower the costs or may authorize a higher amount. The time period for responding to requests under § 261.12(e) and the processing of the request will be suspended until the requester agrees in writing to pay the applicable fees.
(2) Advance payment. The Board may require advance payment of any fee estimated to exceed $250. The Board may also require full payment in advance where a requester has previously failed to pay a fee in a timely fashion. The time period for responding to a request under § 261.12(e) and the processing of the request will be suspended until the Office of the Secretary receives the required payment.
(3) Late charges. The Board may assess interest charges when fee payment is not made within 30 days of the date on which the billing was sent. Interest is at the rate prescribed in 31 U.S.C. 3717 and accrues from the date of the billing.
(d) Categories of uses. The fees assessed depend upon the intended use for the records requested. In determining which category is appropriate, the Board will look to the intended use set forth in the request for records. Where a requester’s description of the use is insufficient to make a determination, the Board may seek additional clarification before categorizing the request.
(1) A commercial use requester is one who requests records for a use or purpose that furthers the commercial, trade, or profit interests of the requester or the person on whose behalf the request is made, which can include furthering those interests through litigation.
(2) Representative of the news media is any person or entity that gathers information of potential interest to a segment of the public, uses its editorial skills to turn the raw materials into a distinct work, and distributes that work to an audience, including organizations that disseminate solely on the internet. The term “news” means information that is about current events or that would be of current interest to the public. A non-affiliated journalist who demonstrates a solid basis for expecting publication through a news media entity, such as a publishing contract or past publication record, will be considered as a representative of the news media.
(3) Educational institution is any school that operates a program of scholarly research. A requester in this fee category must show that the request is made in connection with his or her role at the educational institution. The Board may seek verification from the requester that the request is in furtherance of scholarly research.
(4) Noncommercial scientific institution is an institution that is not operated on a “commercial” basis, as defined in paragraph (d)(1) of this section, and that is operated solely for the purpose of conducting scientific research the results of which are not intended to promote any particular product or industry. A requester in this category must show that the request is authorized by and is made under the auspices of a qualifying institution and that the records are sought to further scientific research and are not for a commercial use.
(5) Fees table. Please refer to table 1 to this section to determine what fees apply for different categories of users.
(e) Nonproductive search. Fees for search and review may be charged even if no responsive documents are located or if the request is denied.
(f) Aggregated requests. A requester may not file multiple requests at the same time, solely in order to avoid payment of fees. If the Board reasonably believes that a requester is separating a single request into a series of requests for the purpose of evading the assessment of fees, the Board may aggregate any such requests and charge accordingly. It is considered reasonable for the Board to presume that multiple requests of this type made within a 30-day period have been made to avoid fees.
(g) Waiver or reduction of fees. A request for a waiver or reduction of the fees, and the justification for the waiver, shall be included with the request for records to which it pertains. If a waiver is requested and the requester has not indicated in writing an agreement to pay the applicable fees if the waiver request is denied, the time for response to the request for documents, as set forth in § 261.12(e), shall not begin until either a waiver has been granted or, if the waiver is denied, until the requester has agreed to pay the applicable fees.
(1) The Board will grant a waiver or reduction of fees where it is determined both that disclosure of the information is in the public interest because it is likely to contribute significantly to public understanding of the operations or activities of the government, and that the disclosure of information is not primarily in the commercial interest of the requester. In making this determination, the Board will consider the following factors:
(i) Whether the subject of the records would shed light on identifiable operations or activities of the government with a connection that is direct and clear, not remote or attenuated; and
(ii) Whether disclosure of the information is likely to contribute significantly to public understanding of those operations or activities. This factor is satisfied when the following criteria are met:
(A) Disclosure of the requested records must be meaningfully informative about government operations or activities. The disclosure of information that already is in the public domain, in either the same or a substantially identical form, would not be meaningfully informative if nothing new would be added to the public’s understanding.
(B) The disclosure must contribute to the understanding of a reasonably broad audience of persons interested in the subject, as opposed to the individual understanding of the requester. A requester’s expertise in the subject area as well as the requester’s ability and intention to effectively convey information to the public must be considered. The Board will presume that a representative of the news media will satisfy this consideration.
(iii) The disclosure must not be primarily in the commercial interest of the requester. A commercial interest includes any commercial, trade, profit, or litigation interest.
(2) A request for a waiver or reduction of fees must include:
(i) A clear statement of the requester’s interest in the documents;
(ii) The use proposed for the documents and whether the requester will derive income or other benefit for such use;
(iii) A statement of how the public will benefit from such use and from the Board’s release of the documents;
(iv) A description of the method by which the information will be disseminated to the public; and
(v) If specialized use of the information is contemplated, a statement of the requester’s qualifications that are relevant to that use.
(3) The requester has the burden to present evidence or information in support of a request for a waiver or reduction of fees.
(4) The Board will notify the requester of its determination on the request for a waiver or reduction of fees. The requester may appeal a denial in accordance with § 261.14(a).
(5) Where only some of the records to be released satisfy the requirements for a waiver of fees, a waiver must be granted for those records.
(6) A request for a waiver or reduction of fees should be made when the request for records is first submitted to the Board and should address the criteria referenced above. A requester may submit a fee waiver request at a later time so long as the underlying record request is pending or on administrative appeal. When a requester who has committed to pay fees subsequently asks for a waiver of those fees and that waiver is denied, the requester must pay any costs incurred up to the date the fee waiver request was received.
(h) Restrictions on charging fees. (1) If the Board fails to comply with the FOIA’s time limits in which to respond to a request, the Board may not charge search fees, or, in the instances of requests from requesters described in paragraphs (d)(2) through (4) of this section, may not charge duplication fees, except as permitted under paragraphs (h)(2) through (4) of this section.
(2) If the Board determines that unusual circumstances exist, as described in 5 U.S.C. 552(a)(6)(B), and has provided timely written notice to the requester and subsequently responds within the additional 10 working days as provided in § 261.12(e)(3), the Board may charge search fees, or, in the case of requesters described in paragraphs (d)(2) through (4) of this section, may charge duplication fees.
(3) If the Board determines that unusual circumstances exist, as described in 5 U.S.C. 552(a)(6)(B), and more than 5,000 pages are necessary to respond to the request, then the Board may charge search fees, or, in the case of requesters described in paragraphs (d)(2) through (4) of this section, may charge duplication fees, if the Board has:
(i) Provided timely written notice of unusual circumstances to the requester in accordance with the FOIA; and
(ii) Discussed with the requester via written mail, email, or telephone (or made not less than three good-faith attempts to do so) how the requester could effectively limit the scope of the request in accordance with 5 U.S.C. 552(a)(6)(B)(ii).
(4) If a court has determined that exceptional circumstances exist, as defined by the FOIA, a failure to comply with the time limits shall be excused for the length of time provided by the court order.
(i) Employee requests. In connection with any request by an employee, former employee, or applicant for employment, for records for use in prosecuting a grievance or complaint of discrimination against the Board, fees shall be waived where the total charges (including charges for information provided under the Privacy Act of 1974 (5 U.S.C. 552a)) are $50 or less; but the Board may waive fees in excess of that amount.
(j) Special services. The Board may agree to provide, and set fees to recover the costs of, special services not covered by the FOIA, such as certifying records or information and sending records by special methods such as express mail or overnight delivery.
Table 1 to § 261.16 – Fees
| Type of requester | Search costs per hour | Review costs per hour | Duplication costs |
|---|---|---|---|
| Commercial | Clerical/Technical staff – $20 | Clerical/Technical staff – $20 | Photocopy per standard page – .10. |
| Professional/Supervisory staff – $40 | Professional/Supervisory staff – $40 | Other types of duplication – Direct Costs. | |
| Manager/Senior professional staff – $65 | Manager/Senior professional staff – $65 | ||
| Computer search, including computer search time, output, operator’s salary – Direct Costs | |||
| Educational; or Non-commercial scientific; or News media | Costs waived | Costs waived | First 100 pages Other types of duplication – Direct Costs. |
| All other requesters | First 2 hours | Costs waived | First 100 pages |
| Professional/Supervisory staff – $40 | Other types of duplication – Direct Costs. | ||
| Manager/Senior professional staff – $65 | |||
| Computer search, including computer search time, output, operator’s salary – Direct Costs |
§ 261.17 Request for confidential treatment.
(a) Submission of request. Any submitter of information to the Board who desires that such information be withheld pursuant to § 261.15(a)(4) or (6) shall file a request for confidential treatment with the Board (or in the case of documents filed with a Reserve Bank, with that Reserve Bank) at the time the information is submitted or within 10 working days thereafter.
(b) Form of request. Each request for confidential treatment shall state in reasonable detail the facts supporting the request, provide the legal justification, use good faith efforts to designate by appropriate markings any portion of the submission for which confidential treatment is requested, and include an affirmative statement that such information is not available publicly. A submitter’s request for confidentiality in reliance upon § 261.15(a)(4) generally expires 10 years after the date of the submission unless the submitter requests and provides justification for a longer designation period.
(c) Designation and separation of confidential material. All information considered confidential by a submitter shall be clearly designated CONFIDENTIAL in the submission and separated from information for which confidential treatment is not requested. Failure to segregate confidential information from other material may result in release of the unsegregated material to the public without notice to the submitter.
(d) Exceptions. This section does not apply to:
(1) Data items collected on forms that are approved pursuant to the Paperwork Reduction Act (44 U.S.C. 3501 et seq.) and deemed confidential by the Board. Any such data items deemed confidential by the Board shall so indicate on the face of the form or in its instructions. The data may, however, be disclosed in aggregate form in such a manner that individual company data is not disclosed or derivable.
(2) Any comments submitted by a member of the public on applications and regulatory proposals being considered by the Board, unless the Board determines that confidential treatment is warranted.
(3) A determination by the Board to comment upon information submitted to the Board in any opinion or statement issued to the public as described in § 261.15(b)(1).
(e) Special procedures. The Board may establish special procedures for particular documents, filings, or types of information by express provisions in this part or by instructions on particular forms that are approved by the Board. These special procedures shall take precedence over this section.
§ 261.18 Process for addressing a submitter’s request for confidential treatment.
(a) Resolving requests for confidential treatment. In general, a request by a submitter for confidential treatment of any information shall be considered in connection with a request for access to that information. At its discretion, the Board may act on a request for confidentiality prior to any request for access to the documents.
(b) Notice to the submitter. (1) When the Board receives a FOIA request for information for which a submitter has requested confidential treatment, the Board shall promptly provide written notice of the request to the submitter if the Board determines that it may be required to disclose the records, provided:
(i) The requested information has been designated in good faith by the submitter as information considered protected from disclosure under 5 U.S.C. 552(b)(4) or (b)(6); and
(ii) The Board has reason to believe that the requested information may be protected from disclosure, but has not yet determined whether the information may be protected from disclosure.
(2) Where a submitter has not requested confidential treatment but the Board reasonably believes the requested information may be protected from disclosure under 5 U.S.C. 552(b)(4) or (b)(6), the Board may notify a submitter of the receipt of a request for access to that information and provide the submitter an opportunity to respond.
(3) The notice given to the submitter shall:
(i) Describe the information that has been requested or include a copy of the requested records or portions of records containing the information. In cases involving a voluminous number of submitters, the Board may post or publish a notice in a place or manner reasonably likely to inform the submitters of the proposed disclosure, instead of sending individual notifications; and
(ii) Give the submitter a reasonable opportunity, not to exceed 10 working days from the date of notice, to submit written objections to disclosure of the information.
(c) Exceptions to notice to submitter. Notice to the submitter need not be given if:
(1) The Board determines that the information is exempt under the FOIA and, therefore, will not be disclosed;
(2) The requested information has been lawfully published or has been officially made available to the public;
(3) Disclosure of the information is required by a statute (other than 5 U.S.C. 552) or by a regulation issued in accordance with the requirements of Executive Order 12600 of June 23, 1987; or
(4) The submitter’s claim of confidentiality appears obviously frivolous or has already been denied by the Board. In such case, the Board shall give the submitter written notice of the determination to disclose the information at least five working days prior to disclosure.
(d) Notice to requester. The requester shall be notified whenever:
(1) The submitter is provided with notice and an opportunity to object to disclosure under paragraph (b) of this section;
(2) The submitter is notified of the Board’s intention to disclose the requested information; or
(3) The submitter files a lawsuit to prevent the disclosure of information.
(e) Written objections by submitter. (1) Upon receipt of the notice referenced in paragraph (b) of this section, a submitter that has any objections to disclosure should provide a detailed written statement that specifies all grounds for withholding the particular information under any exemption identified in § 261.15(a). A submitter relying on § 261.15(a)(4) as the basis for nondisclosure must explain why the information constitutes a trade secret or commercial or financial information that is confidential and must explain the consequences of disclosure of the information.
(2) A submitter who fails to respond within the time period specified in the notice will be considered to have no objection to disclosure of the information. The Board is not required to consider any information received after the date of any disclosure decision. Any information provided by a submitter under this subpart, including a written request for confidential treatment, may itself be subject to disclosure under the FOIA.
(f) Analysis of objections. The Board’s determination to disclose any information for which confidential treatment has been requested shall be communicated to the submitter immediately. If the Board determines to disclose the information and the submitter has objected to such disclosure pursuant to paragraph (e) of this section, the Board shall provide the submitter with the reasons for disclosure and shall delay disclosure for 10 working days from the date of the determination.
(g) Notice of lawsuit. The Board shall promptly notify any submitter of information covered by this section of the filing of any legal action against the Board to compel disclosure of such information.
Subpart C – Nonpublic Information Made Available to Supervised Financial Institutions, Governmental Agencies, and Others in Certain Circumstances
§ 261.20 General.
(a) All confidential supervisory information and other nonpublic information, including but not limited to information made available under this subpart, remains the property of the Board, and except as otherwise provided in this regulation, no person, entity, agency, or authority to whom the information is made available or who otherwise possesses the information, including any officer, director, employee, or agent thereof, may use any such information for an unauthorized purpose or disclose any such information without the prior written permission of the General Counsel.
(b) The disclosure of confidential supervisory information or other nonpublic information in accordance with this subpart shall not constitute a waiver by the Board of any applicable privileges.
(c) Nothing in this subpart shall be construed to limit or restrict the authority of the Board to impose any additional conditions or limitations on the use and disclosure of confidential supervisory information or other nonpublic information. Further, nothing in this subpart shall be construed to limit or restrict the authority of the Board to make discretionary disclosures of confidential supervisory information or other nonpublic information in addition to the disclosures expressly provided for in this subpart.
§ 261.21 Confidential supervisory information made available to supervised financial institutions.
(a) Disclosure of confidential supervisory information to supervised financial institutions. The Board or the appropriate Reserve Bank may disclose confidential supervisory information concerning a supervised financial institution to that supervised financial institution.
(b) Disclosure of confidential supervisory information by supervised financial institutions – (1) General. Any supervised financial institution lawfully in possession of confidential supervisory information pursuant to this section may when necessary or appropriate for business purposes disclose such information to its directors, officers, or employees, and to the directors, officers, or employees of its affiliates.
(2) Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Bureau of Consumer Financial Protection, and State financial supervisory agencies. Any supervised financial institution may, with the concurrence of the institution’s central point of contact at the Reserve Bank, equivalent supervisory team leader, or other designated Reserve Bank employee (hereinafter, “Reserve Bank Point of Contact” or “Reserve Bank POC”), disclose confidential supervisory information about the institution that is contained in documents prepared by or for the institution for its own business purposes to the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Bureau of Consumer Financial Protection, and the State financial supervisory agency that supervises that institution when the Reserve Bank POC determines that the receiving agency has a legitimate supervisory or regulatory interest in the information. A Reserve Bank POC’s action under this paragraph may require concurrence of other Federal Reserve staff in accordance with internal supervisory procedures. Requests to disclose any other confidential supervisory information to these or other agencies should be directed to the General Counsel under § 261.22(c) or § 261.23(c).
(3) Legal counsel and auditors. When necessary or appropriate in connection with the provision of legal or auditing services to the supervised financial institution, the supervised financial institution may disclose confidential supervisory information to its legal counsel or auditors. The supervised financial institution may also disclose confidential supervisory information to service providers (such as consultants, contractors, contingent workers, and technology providers) of its legal counsel or auditors if the service provider is under a written agreement with the legal counsel or auditor in which the service provider agrees that:
(i) It will treat the confidential supervisory information in accordance with § 261.20(a); and
(ii) It will not use the confidential supervisory information for any purpose other than as necessary to provide the services to the supervised financial institution.
(4) Other service providers. (i) A supervised financial institution may disclose confidential supervisory information to other service providers engaged by the supervised financial institution if the service provider is under a written contract to provide services to the institution, the disclosure of the confidential supervisory information is deemed necessary to the service provider’s provision of services, and the service provider has a written agreement with the institution in which the service provider has agreed that:
(A) It will treat the confidential supervisory information in accordance with § 261.20(a); and
(B) It will not use the confidential supervisory information for any purpose other than as provided under its contract to provide services to the supervised financial institution.
(ii) A supervised financial institution shall maintain a written account of the disclosures of confidential supervisory information that the supervised financial institution makes to service providers under this section and provide the Board or Reserve Bank with a copy of such written account upon the Board’s or Reserve Bank’s request.
(a) Disclosure to Federal and State financial institution supervisory agencies. The Director of the Division of Supervision and Regulation, the Director of the Division of Consumer and Community Affairs, the General Counsel, or the appropriate Reserve Bank may, for legitimate supervisory or regulatory purposes and with or without a request, disclose confidential supervisory information and other nonpublic information to the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Bureau of Consumer Financial Protection, and a State financial institution supervisory agency.
(b) Disclosures pursuant to the Equal Credit Opportunity Act, the Fair Housing Act, and the Employee Retirement Income Security Act. The Director of the Division of Supervision and Regulation, the Director of the Division of Consumer and Community Affairs, or the General Counsel may disclose confidential supervisory information and other nonpublic information concerning a supervised financial institution to:
(1) The Attorney General or to the Secretary of the Department of Housing and Urban Development related to the enforcement of the Equal Credit Opportunity Act (15 U.S.C. 1691 et seq.) or the Fair Housing Act (42 U.S.C. 3601 et seq.); and
(2) The Secretary of the Department of Labor and the Secretary of the Department the Treasury in accordance with section 3004(b) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1204(b)).
(c) Disclosure to other governmental agencies and entities exercising governmental authority. Except as provided in paragraph (d) or (e) of this section, other Federal, State, and local agencies, including law enforcement agencies, and other entities exercising governmental authority, may file written requests with the Board for access to confidential supervisory information and other nonpublic information under this section, including information in the form of testimony and interviews from current or former Federal Reserve System staff. Properly accredited foreign law enforcement agencies and other foreign government agencies may also file written requests with the Board in accordance with this paragraph, except that provision of confidential supervisory information to foreign bank regulatory or supervisory authorities is governed by 12 CFR 211.27.
(1) Contents of request. To obtain access to confidential supervisory information or other nonpublic information under this section, including information in the possession of a person other than the Board, the requester shall address a letter request to the Board’s General Counsel, specifying:
(i) The particular information, kinds of information, and where possible, the particular documents to which access is sought;
(ii) The reasons why such information cannot be obtained from the supervised financial institution in question or another source rather than from the Board;
(iii) A statement of the law enforcement purpose or other statutory purpose for which the information shall be used;
(iv) A commitment that the information requested shall not be disclosed to any person outside the requesting agency or entity without the written permission of the General Counsel; and
(v) If the document or information requested includes customer account information subject to the Right to Financial Privacy Act, as amended (12 U.S.C. 3401 et seq.), any Federal agency request must include a statement that such customer account information need not be provided, or a statement as to why the Act does not apply to the request, or a certification that the requesting Federal agency has complied with the requirements of the Act.
(2) Action on request. The General Counsel may approve the request upon determining that:
(i) The request complies with this section;
(ii) The information is needed in connection with a formal investigation or other official duties of the requesting agency or entity;
(iii) Satisfactory assurances of confidentiality have been given; and
(iv) Disclosure is consistent with the supervisory and regulatory responsibilities and policies of the Board.
(d) Federal and State grand jury, criminal trial, and government administrative subpoenas. The General Counsel shall review and may approve the disclosure of nonpublic information pursuant to Federal and State grand jury, criminal trial, and government administrative subpoenas.
(e) Conditions or limitations; written agreements. The General Counsel may impose any conditions or limitations on disclosure that the General Counsel determines to be necessary to effect the purposes of this regulation, including the protection of the confidentiality of the Board’s information, or to ensure compliance with applicable laws or regulations. In addition, Board or Reserve Bank staff may make disclosures pursuant to any written agreement entered into by the Board when authorized by the express terms of such agreement or by the General Counsel.
§ 261.23 Other disclosure of confidential supervisory information.
(a) Board policy. (1) It is the Board’s policy regarding confidential supervisory information that such information is confidential and privileged. Accordingly, the Board does not normally disclose confidential supervisory information to the public or authorize third parties in possession of confidential supervisory information to further use or disclose the information. When considering a request to access, use, or to disclose confidential supervisory information under this section, the Board will not authorize access, use, or disclosure unless the requesting person is able to show a substantial need to access, use, or disclose such information that outweighs the need to maintain confidentiality.
(2) Notwithstanding any other provision of this part, the Board will not authorize access to or disclosure of any suspicious activity report (SAR), or any information that would reveal the existence of a SAR, except as necessary to fulfill official duties consistent with Title II of the Bank Secrecy Act. For purposes of this part, “official duties” shall not include the disclosure of a SAR, or any information that would reveal the existence of a SAR, in response to a request for disclosure of nonpublic information or a request for use in a private legal proceeding, including a request pursuant to this section.
(b) Requests in connection with litigation. Except as provided in §§ 261.21 and 261.22:
(1) In connection with any proposed use of confidential supervisory information in litigation before a court, board, commission, agency, or arbitration, any person who –
(i) Seeks access to confidential supervisory information from the Board or a Reserve Bank (including the testimony of present or former Board or Reserve Bank employees on matters involving confidential supervisory information, whether by deposition or otherwise),
(ii) Seeks to use confidential supervisory information in its possession or to disclose such information to another party, or
(iii) Seeks to require a person to disclose confidential supervisory information to a party, shall file a written request with the General Counsel.
(2) The request shall include:
(i) The judicial or administrative action, including the case number and court or adjudicative body and a copy of the complaint or other pleading setting forth the assertions in the case;
(ii) A description of any prior judicial or other decisions or pending motions in the case that may bear on the asserted relevance of the requested information;
(iii) A narrow and specific description of the confidential supervisory information the requester seeks to access or to disclose for use in the litigation including, whenever possible, the specific documents the requester seeks to access or disclose;
(iv) The relevance of the confidential supervisory information to the issues or matters raised by the litigation;
(v) The reason why the information sought, or equivalent information adequate to the needs of the case, cannot be obtained from any other source; and
(vi) A commitment to obtain a protective order acceptable to the Board from the judicial or administrative tribunal hearing the action preserving the confidentiality of any information that is provided.
(3) In the case of requests covered by paragraph (b)(1)(ii) of this section, the Board may require the party to whom disclosure would ultimately be made to substantiate its need for the information prior to acting on any request.
(c) All other requests. Any other person seeking to access, use, or disclose confidential supervisory information for any other purpose shall file a written request with the General Counsel. A request under this paragraph (c) shall describe the purpose for which access, use, or disclosure is sought and the requester shall provide other information as requested by the General Counsel.
(d) Action on request – (1) Determination of approval. The General Counsel may approve a request made under this section provided that he or she determines that:
(i) The person seeking access, or the person to whom access would be provided, has shown a substantial need to access confidential supervisory information that outweighs the need to maintain confidentiality; and
(ii) Approval is consistent with the supervisory and regulatory responsibilities and policies of the Board.
(2) Conditions or limitations. The General Counsel may, in approving a request, impose such conditions or limitations on use of any information disclosed as is deemed necessary to protect the confidentiality of the Board’s information.
(e) Exhaustion of administrative remedies for discovery purposes in civil, criminal, or administrative action. Action on a request under this section by the General Counsel is necessary in order to exhaust administrative remedies for discovery purposes in any civil, criminal, or administrative proceeding. A request made pursuant to § 261.11 of this regulation does not exhaust administrative remedies for discovery purposes. Therefore, it is not necessary to file a request pursuant to § 261.11 to exhaust administrative remedies under this section.
§ 261.24 Subpoenas, orders compelling production, and other process.
(a) Advice by person served. Any person (including any officer, employee, or agent of the Board or any Reserve Bank) who is served with a subpoena, order, or other judicial or administrative process requiring the production of confidential supervisory information or other nonpublic information of the Board or requiring the person’s testimony regarding such Board information in any proceeding, shall:
(1) Promptly inform the Board’s General Counsel of the service and all relevant facts, including the documents, information or testimony demanded, and any facts relevant to the Board in determining whether the material requested should be made available;
(2) Inform the entity issuing the process of the substance of these rules and, in particular, of the obligation to follow the request procedures in § 261.23(b); and
(3) At the appropriate time inform the court or tribunal that issued the process of the substance of these rules.
(b) Appearance by person served. Unless authorized by the Board or as ordered by a Federal court in a judicial proceeding in which the Board has had the opportunity to appear and oppose discovery, any person who is required to respond to a subpoena or other legal process concerning Board confidential supervisory information or other nonpublic Board information shall attend at the time and place required and respectfully decline to disclose or to give any testimony with respect to the information, basing such refusal upon the provisions of this regulation. If the court or other body orders the disclosure of the information or the giving of testimony, the person having the information shall continue to decline to disclose the information and shall promptly report the facts to the Board for such action as the Board may deem appropriate.
(c) Civil requests for production. A litigant or non-party who is served with a civil request for production of documents calling for production of confidential supervisory information should proceed under § 261.23 rather than this section.
PART 261a – RULES REGARDING ACCESS TO PERSONAL INFORMATION UNDER THE PRIVACY ACT 1974
Subpart A – General Provisions
§ 261a.1 Authority, purpose and scope.
(a) Authority. This part is issued by the Board of Governors of the Federal Reserve System (the Board) pursuant to the Privacy Act of 1974 (5 U.S.C. 552a).
(b) Purpose and scope. This part implements the provisions of the Privacy Act of 1974 with regard to the maintenance, protection, disclosure, and amendment of records contained within systems of records maintained by the Board. It sets forth the procedures for requests for access to, or amendment of, records concerning individuals that are contained in systems of records maintained by the Board.
§ 261a.2 Definitions.
For purposes of this part, the following definitions apply:
(a) Business day means any day except Saturday, Sunday or a legal Federal holiday.
(b) Guardian means the parent of a minor, or the legal guardian of any individual who has been declared to be incompetent due to physical or mental incapacity or age by a court of competent jurisdiction.
(c) Individual means a natural person who is either a citizen of the United States or an alien lawfully admitted for permanent residence.
(d) Maintain includes maintain, collect, use, or disseminate.
(e) Record means any item, collection, or grouping of information about an individual maintained by the Board that contains the individual’s name or the identifying number, symbol, or other identifying particular assigned to the individual, such as a fingerprint, voice print, or photograph.
(f) Routine use means, with respect to disclosure of a record, the use of such record for a purpose that is compatible with the purpose for which it was collected or created.
(g) System of records means a group of any records under the control of the Board from which information is retrieved by the name of the individual or by some identifying number, symbol, or other identifying particular assigned to the individual.
(h) You means an individual making a request under the Privacy Act.
(i) We means the Board.
(a) Custodian of records. The Secretary of the Board is the official custodian of all Board records.
(b) Delegated authority of the Secretary. The Secretary of the Board is authorized to –
(1) Respond to requests for access to, accounting of, or amendment of records contained in a system of records, except for requests regarding systems of records maintained by the Board’s Office of Inspector General (OIG);
(2) Approve the publication of new systems of records and amend existing systems of records, except those systems of records exempted pursuant to § 261a.12(b), (c) and (d); and
(3) File any necessary reports related to the Privacy Act.
(c) Delegated authority of designee. Any action or determination required or permitted by this part to be done by the Secretary of the Board may be done by a Deputy or Associate Secretary or other responsible employee of the Board who has been duly designated for this purpose by the Secretary.
(d) Delegated authority of Inspector General. The Inspector General is authorized to respond to requests for access to, accounting of, or amendment of records contained in a system of records maintained by the OIG.
§ 261a.4 Fees.
(a) Copies of records. We will provide you with copies of the records you request under § 261a.5 of this part at the same cost we charge for duplication of records and/or production of computer output under the Board’s Rules Regarding Availability of Information, 12 CFR Part 261.
(b) No fee. We will not charge you a fee if:
(1) Your total charges are less than $5, or
(2) You are a Board employee or former employee, or an applicant for employment with the Board, and you request records pertaining to you.
Subpart B – Procedures for Requests by Individuals to Whom Record Pertains
§ 261a.5 Request for access to records.
(a) Procedures for making request. (1) Except as provided in paragraph (a)(2) or (f) of this section, if you (or your guardian) want to learn of the existence of, or to gain access to, your record in a system of records, you may submit a request in writing to the Secretary of the Board, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551.
(2) If you request information contained in a system of records maintained by the Board’s OIG, you may submit the request in writing to the Inspector General, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551.
(b) Contents of request. Except for requests made under paragraph (f) of this section, your written request must include-
(1) A statement that the request is made pursuant to the Privacy Act of 1974;
(2) The name of the system of records you believe contains the record you request, or a concise description of that system of records;
(3) Information necessary to verify your identity pursuant to paragraph (c) of this section; and
(4) Any other information that might assist us in identifying the record you seek (e.g., maiden name, dates of employment, etc.).
(c) Verification of identity. We will require proof of your identity, and we reserve the right to determine whether the proof you submit is adequate. In general, we will consider the following to be adequate proof of identity:
(1) If you are a current or former Board employee, your Board identification card; or
(2) If you are not a current or former Board employee, either
(i) Two forms of identification, including one photo identification, or
(ii) A notarized statement attesting to your identity.
(d) Verification of identity not required. We will not require verification of identity when the records you seek are available to any person under the Freedom of Information Act (5 U.S.C. 552).
(e) Request for accounting of previous disclosures. You may request an accounting of previous disclosures of records pertaining to you in a system of records as provided in 5 U.S.C. 552a(c).
(f) Requests Made by Board Employees. Unless the Secretary provides and you are notified otherwise, if you are a current or former Board employee, you also may request access to your record in a system of records by appearing in person before or writing directly to the Board office that maintains the record.
§ 261a.6 Board procedures for responding to request for access.
(a) Compliance with Freedom of Information Act. We will handle every request made pursuant to § 261a.5 of this part (other than requests submitted under § 261a.5(f) that were granted) as a request for information pursuant to the Freedom of Information Act. The time limits set forth in paragraph (b) of this section and the fees specified in § 261a.4 of this part will apply to such requests.
(b) Time for response. We will acknowledge every request made pursuant to § 261a.5 of this part within 20 business days from receipt of the request and will, where practicable, respond to each request within that 20-day period. When a full response is not practicable within the 20-day period, we will respond as promptly as possible.
(c) Disclosure. (1) When we disclose information in response to your request, except for information maintained by the Board’s OIG, we will make the information available for inspection and copying during regular business hours at the Board’s Freedom of Information Office, or we will mail it to you on your request. For requests made under paragraph § 261a.5(f), you may request that the information be provided orally or in person.
(2) When the information to be disclosed is maintained by the Board’s OIG, the OIG will make the information available for inspection and copying or will mail it to you on request.
(3) You may bring with you anyone you choose to see the requested material. All visitors to the Board’s buildings must comply with the Board’s security procedures.
(d) Denial of request. If we deny a request made pursuant to § 261a.5 of this part, we will tell you the reason(s) for denial and the procedures for appealing the denial. If a request made under paragraph § 261a.5(f) is denied, in whole or in part, the Board office that denied your request will simultaneously notify the Secretary of the Board of its action.
§ 261a.7 Special procedures for medical records.
If you request medical or psychological records pursuant to § 261a.5, we will disclose them directly to you unless the Chief Privacy Officer, in consultation with the Board’s physician or Employee Assistance Program counselor, determines that such disclosure could have an adverse effect on you. If the Chief Privacy Officer makes that determination, we will provide the information to a licensed physician or other appropriate representative that you designate, who may disclose those records to you in a manner he or she deems appropriate.
§ 261a.8 Request for amendment of record.
(a) Procedures for making request. (1) If you wish to amend a record that pertains to you in a system of records, you may submit the request in writing to the Secretary of the Board (or to the Inspector General for records in a system of records maintained by the OIG) in an envelope clearly marked “Privacy Act Amendment Request.”
(2) Your request for amendment of a record must –
(i) Identify the system of records containing the record for which amendment is requested;
(ii) Specify the portion of that record requested to be amended; and
(iii) Describe the nature of and reasons for each requested amendment.
(3) We will require you to verify your identity under the procedures set forth in § 261a.5(c) of this part, unless you have already done so in a related request for access or amendment.
(b) Burden of proof. Your request for amendment of a record must tell us why you believe the record is not accurate, relevant, timely, or complete. You have the burden of proof for demonstrating the appropriateness of the requested amendment, and you must provide relevant and convincing evidence in support of your request.
§ 261a.9 Board review of request for amendment of record.
(a) Time limits. We will acknowledge your request for amendment of your record within 10 business days after we receive your request. In the acknowledgment, we may request additional information necessary for a determination on the request for amendment. We will make a determination on a request to amend a record promptly.
(b) Contents of response to request for amendment. When we respond to a request for amendment, we will tell you whether your request is granted or denied. If we grant your request, we will take the necessary steps to amend your record and, when appropriate and possible, notify prior recipients of the record of our action. If we deny the request, in whole or in part, we will tell you –
(1) Why we denied the request (or portion of the request);
(2) That you have a right to appeal; and
(3) How to file an appeal.
§ 261a.10 Appeal of adverse determination of request for access or amendment.
(a) Appeal. You may appeal a denial of a request made pursuant to § 261a.5 or § 261a.8 of this part within 10 business days after we notify you that we denied your request. Your appeal must –
(1) Be made in writing with the words “PRIVACY ACT APPEAL” written prominently on the first page and addressed to the Secretary of the Board, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551;
(2) Specify the background of the request; and
(3) Provide reasons why you believe the initial denial is in error.
(b) Determination. We will make a determination on your appeal within 30 business days from the date we receive it, unless we extend the time for good cause.
(1) If we grant your appeal regarding a request for amendment, we will take the necessary steps to amend your record and, when appropriate and possible, notify prior recipients of the record of our action.
(2) If we deny your appeal, we will inform you of such determination, tell you our reasons for the denial, and tell you about your rights to file a statement of disagreement and to have a court review our decision.
(c) Statement of disagreement. (1) If we deny your appeal regarding a request for amendment, you may file a concise statement of disagreement with the denial. We will maintain your statement with the record you sought to amend and any disclosure of the record will include a copy of your statement of disagreement.
(2) When practicable and appropriate, we will provide a copy of the statement of disagreement to any prior recipients of the record.
Subpart C – Disclosure of Records
§ 261a.11 Restrictions on disclosure.
We will not disclose any record about you contained in a system of records to any person or agency without your prior written consent unless the disclosure is authorized by 5 U.S.C. 552a(b).
§ 261a.12 Exempt records.
(a) Information compiled for civil action. This regulation does not permit you to have access to any information compiled in reasonable anticipation of a civil action or proceeding.
(b) Law enforcement information. Pursuant to 5 U.S.C. 552a(k)(2), we have determined that it is necessary to exempt the systems of records listed below from the requirements of the Privacy Act concerning access to records, accounting of disclosures of records, maintenance of only relevant and necessary information in files, and certain publication provisions, respectively, 5 U.S.C. 552a(c)(3), (d), (e)(1), (e)(4)(G), (H) and (I), and (f), and §§ 261a.5, 261a.7, and 261a.8 of this part. The exemption applies only to the extent that a system of records contains investigatory materials compiled for law enforcement purposes.
(1) BGFRS-1 Recruiting and Placement Records
(2) BGFRS-2 Personnel Security Systems
(3) BGFRS-4 General Personnel Records
(4) BGFRS-5 EEO Discrimination Complaint File
(5) BGFRS-18 Consumer Complaint Information
(6) BGFRS-21 Supervisory Enforcement Actions and Special Examinations Tracking System
(7) BGFRS-31 Protective Information System
(8) BGFRS-32 Visitor Registration System
(9) BGFRS-36 Federal Reserve Application Name Check System
(10) BGFRS-37 Electronic Applications
(11) BGFRS-43 Security Sharing Platform
(12) BGFRS/OIG-1 OIG Investigative Records
(c) Confidential references. Pursuant to 5 U.S.C. 552a(k)(5), we have determined that it is necessary to exempt the systems of records listed below from the requirements of the Privacy Act concerning access to records, accounting of disclosures of records, maintenance of only relevant and necessary information in files, and certain publication provisions, respectively, 5 U.S.C. 552a(c)(3), (d), (e)(1), (e)(4)(G), (H) and (I), and (f), and §§ 261a.5, 261a.7, and 261a.8 of this part. The exemption applies only to the extent that a system of records contains investigatory material compiled to determine an individual’s suitability, eligibility, and qualifications for Board employment or access to classified information, and the disclosure of such material would reveal the identity of a source who furnished information to the Board under a promise of confidentiality.
(1) BGFRS-1 Recruiting and Placement Records
(2) BGFRS-2 Personnel Security Systems
(3) BGFRS-4 General Personnel Records
(4) BGFRS-10 General Files on Board Members
(5) BGFRS-11 Official General Files
(6) BGFRS-13 Federal Reserve System Bank Supervision Staff Qualifications
(7) BGFRS-14 General File on Federal Reserve Bank and Branch Directors
(8) BGFRS-25 Multi-Rater Feedback Records
(9) BGFRS/OIG-1 OIG Investigative Records
(10) BGFRS/OIG-2 OIG Personnel Records
(d) Criminal law enforcement information. Pursuant to 5 U.S.C. 552a(j)(2), we have determined that the OIG Investigative Records (BGFRS/OIG-1) are exempt from the Privacy Act, except the provisions regarding disclosure, the requirement to keep an accounting, certain publication requirements, certain requirements regarding the proper maintenance of systems of records, and the criminal penalties for violation of the Privacy Act, respectively, 5 U.S.C. 552a(b), (c)(1), and (2), (e)(4)(A) through (F), (e)(6), (e)(7), (e)(9), (e)(10), (e)(11) and (i).
PART 261b – RULES REGARDING PUBLIC OBSERVATION OF MEETINGS
§ 261b.1 Basis and scope.
This part is issued by the Board of Governors of the Federal Reserve System (“the Board”) under section 552b of title 5 of the United States Code, the Government in the Sunshine Act (“the Act”), to carry out the policy of the Act that the public is entitled to the fullest practicable information regarding the decision making processes of the Board while at the same time preserving the rights of individuals and the ability of the Board to carry out its responsibilities. These regulations fulfill the requirement of subsection (g) of the Act that each agency subject to the provisions of the Act shall promulgate regulations to implement the open meeting requirements of subsections (b) through (f) of the Act.
§ 261b.2 Definitions.
For purposes of this part, the following definitions shall apply:
(a) The term agency means the Board and subdivisions thereof.
(b) The term subdivision means any group composed of two or more Board members that is authorized to act on behalf of the Board.
(c) The term meeting means the deliberations of at least the number of individual agency members required to take action on behalf of the agency where such deliberations determine or result in the joint conduct or disposition of official Board business, but does not include (1) deliberations required or permitted by subsections (d) or (e) of the Act, or (2) the conduct or disposition of official agency business by circulating written material to individual members.
(d) The term number of individual agency members required to take action on behalf of the agency means in the case of the Board, a majority of its members except that (1) Board determination of the ratio of reserves against deposits under section 19(b) of the Federal Reserve Act requires the vote of four members, (2) Board action with respect to advances, discounts and rediscounts under sections 10(a), 11(b), and 13(3) of the Federal Reserve Act requires the vote of five members and (3) Board action with respect to the percentage of individual member bank capital and surplus which may be represented by loans secured by stock and bond collateral under section 11(m) of the Federal Reserve Act requires the vote of six members. In the case of subdivisions of the Board, the term means the number of members constituting a quorum of the designated subdivision.
(e) The term member means a member of the Board appointed under section 10 of the Federal Reserve Act. In the case of certain Board proceedings pursuant to 12 U.S.C. 1818(e), the Comptroller of the Currency is entitled to sit as a member of the Board and for these proceedings he shall be deemed a member for the purposes of this part. In the case of any subdivision of the Board, the term member means a member of the Board designated to serve on that subdivision.
(f) The term public observation means that the public shall have the right to listen and observe but not to record any of the meetings by means of cameras or electronic or other recording devices unless approval in advance is obtained from the Public Affairs Office of the Board and shall not have the right to participate in the meeting, unless participation is provided for in the Board’s Rules of Procedure.
(g) The term Federal agency means an agency as defined in 5 U.S.C. 551(1).
(h) Committee means the Action Committee established pursuant to 12 CFR 265.1a(c).
§ 261b.3 Conduct of agency business.
Members shall not jointly conduct or dispose of official agency business other than in accordance with this part.
§ 261b.4 Meetings open to public observation.
(a) Except as provided in § 261b.5, every portion of every meeting of the agency shall be open to public observation.
(b) Copies of staff documents considered in connection with agency discussion of agenda items for a meeting that is open to public observation shall be made available for distribution to members of the public attending the meeting, in accordance with the provisions of 12 CFR part 261.
(c) The agency will maintain a complete electronic recording adequate to record fully the proceedings of each meeting or portion of a meeting open to public observation. Cassettes will be available for listening in the Freedom of Information Office, and copies may be ordered for $5 per cassette by telephoning or by writing Freedom of Information Office, Board of Governors of the Federal Reserve System, Washington, DC 20551.
(d) The agency will maintain mailing lists of names and addresses of all persons who wish to receive copies of agency announcements of meetings open to public observation. Requests for announcements may be made by telephoning or by writing Freedom of Information Office, Board of Governors of the Federal Reserve System, Washington, DC 20551.
§ 261b.5 Exemptions.
(a) Except in a case where the agency finds that the public interest requires otherwise, the agency may close a meeting or a portion or portions of a meeting under the procedures specified in § 261b.7 or § 261b.8 of this part, and withhold information under the provisions of §§ 261b.6, 261b.7, 261b.8, or 261b.11 of this part, where the agency properly determines that such meeting or portion or portions of its meeting or the disclosure of such information is likely to:
(1) Disclose matters that are (i) specifically authorized under criteria established by an Executive order to be kept secret in the interests of national defense or foreign policy, and (ii) in fact properly classified pursuant to such Executive order;
(2) Relate solely to internal personnel rules and practices;
(3) Disclose matters specifically exempted from disclosure by statute (other than section 552 of title 5 of the United States Code), provided that such statute (i) requires that the matters be withheld from the public in such a manner as to leave no discretion on the issue, or (ii) establishes particular criteria for withholding or refers to particular types of matters to be withheld;
(4) Disclose trade secrets and commercial or financial information obtained from a person and privileged or confidential;
(5) Involve accusing any person of a crime, or formally censuring any person;
(6) Disclose information of a personal nature where disclosure would constitute a clearly unwarranted invasion of personal privacy;
(7) Disclose investigatory records compiled for law enforcement purposes, or information which if written would be contained in such records, but only to the extent that the production of such records or information would –
(i) Interfere with enforcement proceedings,
(ii) Deprive a person of a right to a fair trial or an impartial adjudication,
(iii) Constitute an unwarranted invasion of personal privacy,
(iv) Disclose the identity of a confidential source and, in the case of a record compiled by a criminal law enforcement authority in the course of a criminal investigation, or by a Federal agency conducting a lawful national security intelligence investigation, confidential information furnished only by the confidential source,
(v) Disclose investigative techniques and procedures, or
(vi) Endanger the life or physical safety of law enforcement personnel;
(8) Disclose information contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of the Board or other Federal agency responsible for the regulation or supervision of financial institutions;
(9) Disclose information the premature disclosure of which would –
(i) Be likely to (A) lead to significant speculation in currencies, securities, or commodities, or (B) significantly endanger the stability of any financial institution; or
(ii) Be likely to significantly frustrate implementation of a proposed action, except that paragraph (a)(9)(ii) of this section shall not apply in any instance where the Board has already disclosed to the public the content or nature of its proposed action, or where the Board is required by law to make such disclosure on its own initiative prior to taking final action on such proposal; or
(10) Specifically concern the issuance of a subpoena, participation in a civil action or proceeding, an action in a foreign court or international tribunal, or an arbitration, or the initiation, conduct, or disposition of a particular case of formal agency adjudication pursuant to the procedures in section 554 of title 5 of the United States Code or otherwise involving a determination on the record after opportunity for a hearing.
§ 261b.6 Public announcement of meetings.
(a) Except as otherwise provided by the Act, public announcement of meetings open to public observation and meetings to be partially or completely closed to public observation pursuant to § 261b.8 of this part will be made at least one week in advance of the meeting. Except to the extent such information is determined to be exempt from disclosure under § 261b.5 of this part, each such public announcement will state the time, place and subject matter of the meeting, whether it is to be open or closed to the public, and the name and phone number of the official designated to respond to requests for information about the meeting.
(b) If a majority of the members of the agency determines by a recorded vote that agency business requires that a meeting covered by paragraph (a) of this section be called at a date earlier than that specified in paragraph (a) of this section, the agency will make a public announcement of the information specified in paragraph (a) of this section at the earliest practicable time.
(c) Changes in the subject matter of a publicly announced meeting, or in the determination to open or close a publicly announced meeting or any portion of a publicly announced meeting to public observation, or in the time or place of a publicly announced meeting made in accordance with the procedures specified in § 261b.9 of this part will be publicly announced at the earliest practicable time.
(d) Public announcements required by this section will be posted at the Board’s Public Affairs Office and Freedom of Information Office and may be made available by other means or at other locations as may be desirable.
(e) Immediately following each public announcement required by this section, notice of the time, place and subject matter of a meeting, whether the meeting is open or closed, any change in one of the preceding announcements and the name and telephone number of the official designated by the Board to respond to requests about the meeting, shall also be submitted for publication in the
§ 261b.7 Meetings closed to public observation under expedited procedures.
(a) Since the Board and the Committee qualifies for the use of expedited procedures under subsection (d)(4) of the Act, meetings or portions thereof exempt under paragraph (a)(4), (a)(8), (a)(9)(i) or (a)(10) of § 261b.5 of this part, will be closed to public observation under the expedited procedures of this section. Following are examples of types of items that, absent compelling contrary circumstances, will qualify for these exemptions: Matters relating to a specific bank or bank holding company, such as bank branches or mergers, bank holding company formations, or acquisition of an additional bank or acquisition or de novo undertaking of a permissible nonbanking activity; matters relating to a specific savings and loan holding company or its subsidiaries, such as acquisitions, reorganizations, savings and loan holding company formations, conversions, or acquisition or de novo undertaking of a permissible activity; bank regulatory matters, such as applications for membership, issuance of capital notes and investment in bank premises; foreign banking matters; bank supervisory and enforcement matters, such as cease-and-desist and officer removal proceedings; monetary policy matters, such as discount rates, use of the discount window, changes in the limitations on payment of interest on time and savings accounts, and changes in reserve requirements or margin regulations.
(b) At the beginning of each meeting, a portion or portions of which is closed to public observation under expedited procedures pursuant to this section, a recorded vote of the members present will be taken to determine whether a majority of the members of the agency votes to close such meeting of portions of such meeting to public observation.
(c) A copy of the vote, reflecting the vote of each member, and except to the extent such information is determined to be exempt from disclosure under § 261b.5, a public announcement of the time, place and subject matter of the meeting or each closed portion thereof, will be made available at the earliest practicable time at the Board’s Public Affairs Office and Freedom of Information Office.
§ 261b.8 Meetings closed to public observation under regular procedures.
(a) A meeting or a portion of a meeting will be closed to public observation under regular procedures, or information as to such meeting or portion of a meeting will be withheld only by recorded vote of a majority of the members of the agency when it is determined that the meeting or the portion of the meeting or the withholding of information qualifies for exemption under § 261b.5. Votes by proxy are not allowed.
(b) Except as provided in subsection (c) of this section, a separate vote of the members of the agency will be taken with respect to the closing or the withholding of information as to each meeting or portion thereof which is proposed to be closed to public observation or with respect to which information is proposed to be withheld pursuant to this section.
(c) A single vote may be taken with respect to a series of meetings, a portion or portions of which are proposed to be closed to public observation or with respect to any information concerning such series of meetings proposed to be withheld, so long as each meeting or portion thereof in such series involves the same particular matters and is scheduled to be held no more than thirty days after the initial meeting in such series.
(d) Whenever any person’s interests may be directly affected by a portion of a meeting for any of the reasons referred to in exemption (a)(5), (a)(6) or (a)(7) of § 261b.5 of this part, such person may request in writing to the Secretary of the Board that such portion of the meeting be closed to public observation. The Secretary, or in his or her absence, the Acting Secretary of the Board, will transmit the request to the members and upon the request of any one of them a recorded vote will be taken whether to close such meeting to public observation.
(e) Within one day of any vote taken pursuant to paragraphs (a) through (d) of this section, the agency will make publicly available at the Board’s Public Affairs Office and Freedom of Information Office a written copy of such vote reflecting the vote of each member on the question. If a meeting or a portion of a meeting is to be closed to public observation, the agency, within one day of the vote taken pursuant to paragraphs (a) through (d) of this section, will make publicly available at the Board’s Public Affairs Office and Freedom of Information Office a full, written explanation of its action closing the meeting or portion of the meeting together with a list of all persons expected to attend the meeting and their affiliation, except to the extent such information is determined by the agency to be exempt from disclosure under subsection (c) of the Act and § 261b.5 of this part.
(f) Any person may request in writing to the Secretary of the Board that an announced closed meeting, or portion of the meeting, be held open to public observation. The Secretary, or in his or her absence, the Acting Secretary of the Board, will transmit the request to the members of the Board and upon the request of any member a recorded vote will be taken whether to open such meeting to public observation.
§ 261b.9 Changes with respect to publicly announced meeting.
The subject matter of a meeting or the determination to open or close a meeting or a portion of a meeting to public observation may be changed following public announcement under § 261b.6 only if a majority of the members of the agency determines by a recorded vote that agency business so requires and that no earlier announcement of the change was possible. Public announcement of such change and the vote of each member upon such change will be made pursuant to § 261b.6(c). Changes in time, including postponements and cancellations of a publicly announced meeting or portion of a meeting or changes in the place of a publicly announced meeting will be publicly announced pursuant to § 261b.6(c) by the Secretary of the Board or, in the Secretary’s absence, the Acting Secretary of the Board.
§ 261b.10 Certification of General Counsel.
Before every meeting or portion of a meeting closed to public observation under § 261b.7 or 261b.8 of this part, the General Counsel, or in the General Counsel’s absence, the Acting General Counsel, shall publicly certify whether or not in his or her opinion the meeting may be closed to public observation and shall state each relevant exemptive provision. A copy of such certification, together with a statement from the presiding officer of the meeting setting forth the time and place of the meeting and the persons present, will be retained for the time prescribed in § 261b.11(d).
§ 261b.11 Transcripts, recordings, and minutes.
(a) The agency will maintain a complete transcript or electronic recording or transcription thereof adequate to record fully the proceedings of each meeting or portion of a meeting closed to public observation pursuant to exemption (a)(1), (a)(2), (a)(3), (a)(4), (a)(5), (a)(6), (a)(7) or (a)(9)(ii) of § 261b.5 of this part. Transcriptions of recordings will disclose the identity of each speaker.
(b) The agency will maintain either such a transcript, recording or transcription thereof, or a set of minutes that will fully and clearly describe all matters discussed and provide a full and accurate summary of any actions taken and the reasons therefor, including a description of each of the views expressed on any item and the record of any roll call vote (reflecting the vote of each member on the question), for meetings or portions of meetings closed to public observation pursuant to exemptions (a)(8), (a)(9)(A) or (a)(10) of § 261b.5 of this part. The minutes will identify all documents considered in connection with any action taken.
(c) Transcripts, recordings or transcriptions thereof, or minutes will promptly be made available to the public in the Freedom of Information Office except for such item or items of such discussion or testimony as may be determined to contain information that may be withheld under subsection (c) of the Act and § 261b.5 of this part.
(d) A complete verbatim copy of the transcript, a complete copy of the minutes, or a complete electronic recording or verbatim copy of a transcription thereof of each meeting or portion of a meeting closed to public observation will be maintained for a period of at least two years or one year after the conclusion of any agency proceeding with respect to which the meeting or portion thereof was held, whichever occurs later.
§ 261b.12 Procedures for inspection and obtaining copies of transcriptions and minutes.
(a) Any person may inspect or copy a transcript, a recording or transcription of a recording, or minutes described in § 261b.11(c) of this part.
(b) Requests for copies of transcripts, recordings or transcriptions of recordings, or minutes described in § 261b.11(c) of this part shall specify the meeting or the portion of meeting desired and shall be submitted in writing to the Secretary of the Board, Board of Governors of the Federal Reserve System, Washington, DC 20551. Copies of documents identified in minutes may be made available to the public upon request under the provisions of 12 CFR part 261 (Rules Regarding Availability of Information).
§ 261b.13 Fees.
(a) Copies of transcripts, recordings or transcriptions of recordings, or minutes requested pursuant to section § 261b.12(b) of this part will be provided at the cost of 10¢ per standard page for photocopying or at a cost not to exceed the actual cost of printing, typing, or otherwise preparing such copies.
(b) Documents may be furnished without charge where total charges are less than $2.
PART 262 – RULES OF PROCEDURE
§ 262.1 Basis and scope.
This part is issued pursuant to section 552 of title 5 of the United States Code, which requires that every agency shall publish in the
§ 262.2 Procedure for regulations.
(a) Notice. Notices of proposed regulations of the Board of Governors of the Federal Reserve System (the “Board”) or amendments thereto are published in the
(b) Public participation. The usual method of public submission of data, views, or arguments is in writing. It is ordinarily preferable that they be sent to the Secretary of the Board, Washington, DC 20551, with copies to the appropriate Federal Reserve Bank. The locations of the 12 Federal Reserve Banks and the boundaries of the Federal Reserve districts are shown in the appendix to the Board’s rules of organization. Such material will be made available for inspection and copying upon request, except as provided in § 261.6(b) of this chapter regarding availability of information.
(c) Preparation of draft and action by Board. In the light of consideration of all relevant matter presented or ascertained, the appropriate division of the Board’s staff, in collaboration with other divisions, prepares drafts of proposed regulations or amendments, and the staff submits them to the Board. The Board takes such action as it deems appropriate in the public interest. Any other documents that may be necessary to carry out any decision by the Board in the matter are usually prepared by the Legal Division, in collaboration with the other divisions of the staff.
(d) Effective dates. Any substantive regulation or amendment thereto issued by the Board is published not less than 30 days prior to the effective date thereof, except as specified in paragraph (e) of this section or as otherwise excepted by law.
(e) Exceptions as to notice or effective date. In certain situations, notice and public participation with respect to proposed regulations may be impracticable, unnecessary, contrary to the public interest, or otherwise not required in the public interest, or there may be reason and good cause in the public interest why the effective date should not be deferred for 30 days. The reason or reasons in such cases usually are that such notice, public participation, or deferment of effective date would prevent the action from becoming effective as promptly as necessary in the public interest, would permit speculators or others to reap unfair profits or to interfere with the Board’s actions taken with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the country, would provoke other consequences contrary to the public interest, would unreasonably interfere with the Board’s necessary functions with respect to management or personnel, would not aid the persons affected, or would otherwise serve no useful purpose. The following may be mentioned as some examples of situations in which advance notice or deferred effective date, or both, will ordinarily be omitted in the public interest: The review and determination of discount rates established by Federal Reserve Banks, and changes in general requirements regarding reserves of member banks, maximum interest rates on time and savings deposits, or credit for purchasing or carrying securities.
§ 262.3 Applications.
(a) Forms. Any application, request, or petition (hereafter referred to as “application”) for the approval, authority, determination, or permission of the Board with respect to any action for which such approval, authority, determination, or permission is required by law or regulation of the Board (including actions authorized to be taken by a Federal Reserve Bank or others on behalf of the Board pursuant to authority delegated under Part 265 of this chapter) shall be submitted in accordance with the pertinent form, if any, prescribed by the Board. Copies of any such form and details regarding information to be included therein may be obtained from any Federal Reserve Bank. Any application for which no form is prescribed should be signed by the person making the application or by his duly authorized agent, should state the facts involved, the action requested, and the applicant’s interest in the matter, and should indicate the reasons why the application should be granted. Applications for access to, or copying of, records of the Board should be submitted as provided in § 261.9(a) of this chapter.
(b) Notice of applications. (1)(i) In the case of applications,
(A) By a State member bank for the establishment of a domestic branch or other facility that would be authorized to receive deposits,
(B) To become a bank holding company (except as provided in § 225.15 of this chapter),
(C) By a bank holding company to acquire ownership or control of shares or assets of a bank, or to merge or consolidate with any other bank holding company,
(D) To become a savings and loan holding company (except as provided in § 238.14 of this chapter), and
(E) By a savings and loan holding company to acquire ownership or control of shares or assets of a savings association, or to merge or consolidate with any other savings and loan holding company, the applicant shall cause to be published a notice in the form prescribed by the Board.
(ii) The notice shall be placed in the classified advertising legal notices section of the newspaper, and must provide an opportunity for the public to give written comment on the application to the appropriate Federal Reserve Bank for the period specified in Regulation H (12 CFR part 208) in the case of applications specified in § 262.3(b)(1)(i)(A), and for at least thirty days after the date of publication in the case of applications specified in § 262.3(b)(1)(i)(B) and (C). Within 7 days of publication, the applicant shall submit its application to the appropriate Reserve Bank for acceptance along with a copy of the notice. If the Reserve Bank has not accepted the application as complete within ninety days of the date of publication of the notice, the applicant may be required to republish notice of the application. Such notice shall be published in a newspaper of general circulation in –
(A) [Reserved]
(B) The community or communities in which the head office of the bank and the proposed branch or other facility (other than an electronic funds transfer facility) are located in the case of an application for the establishment of a domestic branch or other facility that would be authorized to receive deposits, other than an application incidental to an application by a bank for merger, consolidation, or acquisition of assets or assumption of liabilities,
(C) The community or communities in which the head office of the bank, the office to be closed, and the office to be opened are located in the case of an application for the relocation of a domestic branch office,
(D) The community or communities in which the head office of each of the banks to be party to the merger, consolidation, or acquisition of assets or assumption of liabilities are located in the case of an application by a bank for merger, consolidation, or acquisition of assets or assumption of liabilities,
(E) The community or communities in which the head offices of the largest subsidiary bank, if any, or an applicant and of each bank, shares of which are to be directly or indirectly acquired, are located in the case of applications under section 3 of the Bank Holding Company Act, or
(F) The community or communities in which the head offices of the largest subsidiary savings association, if any, or an applicant and of each savings association, shares of which are to be directly or indirectly acquired, are located in the case of applications under section 10 of the Home Owners’ Loan Act.
(2) In addition to the foregoing notice, an applicant, in the case of an application to relocate a domestic branch office or other facility that would be authorized to receive deposits, shall post in a conspicuous public place in the lobby of the office to be closed a notice containing the information specified in § 262.3(b)(1). Such notice should be posted on the date of the notice required by § 262.3(b)(1).
(3) In the case of an application for a merger, consolidation, or acquisition of assets or assumption of liabilities, if the acquiring, assuming, or resulting bank is to be a State member bank, the applicant shall cause to be published notice in the form prescribed by the Board. The notice shall be published in a newspaper of general circulation in the community or communities in which the head office of each of the banks to be a party to the merger, consolidation, or acquisition of assets or assumption of liabilities is located. The notice shall be published on at least three occasions at appropriate intervals. The last publication of the notice shall appear at least thirty days after the first publication. The notice must provide an opportunity for the public to give written comment on the application to the appropriate Federal Reserve Bank for at least thirty days after the date of the first publication of the notice. Within seven days of publication of notice for the first time, the applicant shall submit its application to the appropriate Reserve Bank for acceptance, along with a copy of the notice. If the Reserve Bank has not accepted the application as complete within ninety days of the date of the first publication of the notice, the applicant may be required to republish notice of the application.
(c) Filing of applications. Any application should be sent to the Federal Reserve Bank of the district in which the head office of the parent banking organization is located, except as otherwise specified on application forms, and that Bank will forward it to the Board when appropriate; however, in the case of foreign banking organization, as defined in § 211.23(a)(2) of this chapter, applications shall be sent to the Federal Reserve Bank of the district in which the operations of the organization’s subsidiary banks are principally conducted. In the case of a foreign banking organization that is not a bank holding company but that has one or more branches, agencies, or commercial lending companies in any State of the United States or the District of Columbia, applications shall be sent to the Federal Reserve Bank of the district in which the organization’s banking assets are the largest. Applications of a member bank subsidiary, however, should be filed with the Reserve Bank of the district in which the member bank is located.
(d) Analysis by staff. In every case, the Reserve Bank makes such investigation as may be necessary, and, except when acting pursuant to delegated authority, reports the relevant facts, with its recommendation, to the Board. In the light of consideration of all relevant matter presented or ascertained, the Board’s staff prepares and submits to the Board comments on the subject.
(e) Submission of comments and requests for hearing. The Board is only required to consider a comment or a request for a hearing with respect to an application or notice if it is in writing and received by the Secretary of the Board or the appropriate Federal Reserve Bank on or before the latest date prescribed in any notice with respect to the application or notice, or where no such date is prescribed, on or before the 30th day after the date notice is first published. Similarly, the Board will consider comments on an application from the Attorney General or a banking supervisory authority to which notification of receipt of an application has been given, only if such comment is received by the Secretary of the Board within 30 days of the date of the letter giving such notification. Any comment on an application or notice that requests a hearing must include a statement of why a written presentation would not suffice in lieu of a hearing, identifying specifically any questions of fact that are in dispute and summarizing the evidence that would be presented at a hearing. In every case where a timely comment or request for hearing is received as provided herein, a copy of such comment or request shall be forwarded promptly to the applicant for its response. The Board will consider the applicant’s response only if it is in writing and sent to the Secretary of the Board on or before eight business days after the date of the letter by which it is forwarded to the applicant. At the same time it transmits its response to the Board, the applicant should transmit a copy of its response to the person or supervisory authority making such comment or requesting a hearing. Notwithstanding the foregoing, the Board may, in its sole discretion and without notifying the parties, take into consideration the substance of comments with respect to an application, (but not requests for hearing) that are not received within the time periods provided herein.
(f) Action on applications. The Board takes such action as it deems appropriate in the public interest. Such documents as may be necessary to carry out any decision by the Board are prepared by the Board’s staff. With respect to actions taken by a Federal Reserve Bank on behalf of the Board under delegated authority, statements and necessary documents are prepared by the staff of such Federal Reserve Bank.
(g) Notice of action. Prompt notice is given to the applicant of the granting or denial in whole or in part of any application. In the case of a denial, except in affirming a prior denial or where the denial is self-explanatory, such notice is accompanied by a simple statement of the grounds for such action.
(h) Action at Board’s initiative. When the Board, without receiving an application, takes action with respect to any matter as to which opportunity for hearing is not required by statute or Board regulation, similar procedure is followed, including investigations, reports, and recommendations by the Board’s staff and by the Reserve Banks, where appropriate.
(i) General procedures for bank holding company, savings and loan holding company, and merger applications. In addition to procedures applicable under other provisions of this part, the following procedures are applicable in connection with the Board’s consideration of applications under sections 3 and 4 of the Bank Holding Company Act of 1956 (12 U.S.C. 1842 and 1843), hereafter referred to as “section 3 applications” or “section 4 applications,” applications under section 10(c), (e), and (o) of the Home Owners’ Loan Act (12 U.S.C. 1467a), hereafter referred to as “section 10 applications,” and of applications under section 18(c) of the Federal Deposit Insurance Act (12 U.S.C. 1823), hereafter called “merger applications.” Except as otherwise indicated, the following procedures apply to all such applications.
(1) The Board issues each week a list that identifies section 3, section 4, section 10, and merger applications received and acted upon during the preceding week by the Board or the Reserve Banks pursuant to delegated authority. Notice of receipt of all section 3 section 4(c)(8), and section 10 applications acted on by the Board is published in the
(2) If a hearing is required by law or if the Board determines that a formal hearing for the purpose of taking evidence is desirable, the Board issues an order for such a hearing, and a notice thereof is published in the
(3) In any case in which a formal hearing is not ordered by the Board, the Board may afford the applicant and other properly interested persons (including Governmental agencies) an opportunity to present views orally before the Board or its designated representative. Unless otherwise ordered by the Board, any such oral presentation is public and notice of such public proceeding is published in the
(4) Each action taken by the Board on an application is embodied in an order that indicates the votes of members of the Board. The order either contains reasons for the Board’s action (i.e., an expanded order) or is accompanied by a statement of the reasons for the Board’s action. Both the order and any accompanying statement are released to the press. Each order accompanied by a statement and any order of general interest, together with a list of other orders, are published in the Federal Reserve Bulletin. Action by a Reserve Bank under delegated authority as provided for under part 265 of this chapter is reflected in a letter of notification to the applicant.
(5) Unless the Board shall otherwise direct, each section 3, section 4, section 10, and merger application is made available for inspection by the public except for portions thereof as to which the Board determines that nondisclosure is warranted under section 552(b) of title 5 of the United States Code.
(j) Special procedures for certain applications. The following types of applications require procedures exclusive of, or in addition to, those described in paragraphs (i)(1) through (5) of this section.
(1) Special rules pertaining to section 3 and merger applications follow:
(i) Each order of the Board and each letter of notification by a Reserve Bank acting pursuant to delegated authority approving a section 3 application includes, pursuant to the Act approved July 1, 1966 (12 U.S.C. 1849(b)), a requirement that the transaction approved shall not be consummated before the 30th calendar day following the date of such order.
(ii) Each order of the Board approving a merger application includes, pursuant to the Act approved February 21, 1966 (12 U.S.C. 1828(c)(6)), a requirement that the transaction approved shall not be consummated before the 30th calendar day following the date of such order, except as the Board may otherwise determine pursuant to emergency situations as to which the Act permits consummation at earlier dates.
(iii) Each order or each letter of notification approving an application also includes, as a condition of approval, a requirement that the transaction approved shall be consummated within 3 months and, in the case of acquisition by a holding company of stock of a newly organized bank, a requirement that such bank shall be opened for business within 6 months, but such periods may be extended for good cause by the Board (or by the appropriate Federal Reserve Bank where authority to grant such extensions is delegated to the Reserve Bank).
(2) For special rules governing procedures for section 4 applications, refer to § 225.23 of this chapter.
(3) Special rules pertaining to applications filed pursuant to section 10(e) and (o) of HOLA follow:
(i) Each order or each letter of notification approving an application also includes, as a condition of approval, a requirement that the transaction approved shall be consummated within 3 months and, in the case of acquisition by a holding company of stock of a newly organized savings association, a requirement that such savings association shall be opened for business within 6 months, but such periods may be extended for good cause by the Board (or by the appropriate Federal Reserve Bank where authority to grant such extensions is delegated to the Reserve Bank).
(ii) [Reserved]
(4) [Reserved]
(5) For special rules governing procedures for section 4(c)(13) applications, refer to § 225.4(f) of this chapter.
(k) Reconsideration of certain Board actions. The Board may reconsider any action taken by it on an application upon receipt by the Secretary of the Board of a written request for reconsideration from any party to such application, on or before the 15th day after the effective date of the Board’s action. Such request should specify the reasons why the Board should reconsider its action, and present relevant facts that for good cause shown, were not previously presented to the Board. Within 10 days of receipt of such a request, the General Counsel, acting pursuant to delegated authority (12 CFR 265.2(b)(7)), shall determine whether or not the request for reconsideration should be granted, and shall notify all parties to the application orally by telephone of this determination within 10 days. Such notification will be confirmed promptly in writing. In the exercise of this authority, the General Counsel shall confer with the Directors of other interested Divisions of the Board or their designees. Notwithstanding the foregoing, the Board may, on its own motion if it deems reconsideration appropriate, elect to reconsider its action with respect to any application, and the parties to such application shall be notified by the Secretary of the Board of its election as provided above. If it is determined that the Board should reconsider its action with respect to an application, such action will be stayed and will not be final until the Board has acted on the application upon reconsideration. If appropriate, notice of reconsideration of an application will be published promptly in the
(l) Waiver. The Board, or the officer or Reserve Bank authorized to approve an application, may waive or modify any procedural requirements for that application prescribed or cited in this section and may excuse any failure to comply with them upon a finding that immediate action on the application is necessary to prevent the probable failure of a bank or company or that an emergency exists requiring expeditious action.
§ 262.4 Adjudication with formal hearing.
In connection with adjudication with respect to which a formal hearing is required by law or is ordered by the Board, the procedure is set forth in part 263 of this chapter, entitled “Rules of Practice for Formal Hearings.”
§ 262.5 Appearance and practice.
Appearance and practice before the Board in all matters are governed by § 263.3 of this chapter.
§ 262.6 Forms.
Necessary forms to be used in connection with applications and other matters are available at the Federal Reserve Banks. A list of all such forms, which is reviewed and revised periodically, may be obtained from any Federal Reserve Bank.
(a) This action is taken pursuant to and in accordance with the provisions of section 552 of title 5 of the United States Code.
(b) The provisions of section 553 of title 5, United States Code, relating to notice and public participation and to deferred effective dates, are not followed in connection with the adoption of this action, because the rules involved are procedural in nature and accordingly do not constitute substantive rules subject to the requirements of such section.
§ 262.7 Use of supervisory guidance.
(a) Purpose. The Board issues regulations and guidance as part of its supervisory function. This section reiterates the distinctions between regulations and guidance, as stated in the Statement Clarifying the Role of Supervisory Guidance (appendix A to this part) (Statement).
(b) Implementation of the Statement Clarifying the Role of Supervisory Guidance. The Statement describes the official policy of the Board with respect to the use of supervisory guidance in the supervisory process. The Statement is binding on the Board.
(c) Rule of construction. This section does not alter the legal status of guidelines authorized by statute, including but not limited to, 12 U.S.C. 1831p-1, to create binding legal obligations.
§§ 262.8-262.24 [Reserved]
§ 262.25 Policy statement regarding notice of applications; timeliness of comments; informal meetings.
(a) Notice of applications. A bank or company applying to the Board for a deposit-taking facility must first publish notice of its application in local newspapers. This requirement, found in § 262.3(b)(1) of the Board’s Rules of Procedure covers applications under the Bank Holding Company Act, Bank Merger Act, and Home Owners’ Loan Act, as well as applications for membership in the Federal Reserve System and for new branches of State member banks. Notices of these applications are published in newspapers of general circulation in the communities where the applicant intends to do business as well as in the community where the applicant’s head office is located. These notices are important in calling the public’s attention to an applicant’s plans and giving the public a chance to comment on these plans. To improve the effectiveness of the notices, the Board has supplemented its notice procedures as follows.
(1) The Board has adopted standard forms of notice for use by applicants that will specify the exact date on which the comment period on the application ends, which may not be less than thirty calendar days from the date of publication of the notice. The newspaper forms also provide the name and telephone number of the Community Affairs Officer of the appropriate Reserve Bank as the person to call to obtain more information about submitting comments on an application. In general, the Community Affairs Officer will be available to answer questions of a general nature concerning the submission of comments and the processing of applications.
(2) The Board also publishes notice of bank holding company applications for bank acquisitions (but not for bank mergers or branches) and savings and loan holding company applications for savings association acquisitions (but not for savings association mergers or branches) in the
(3) In addition to the formal newspaper and
(4) With respect to applications by bank holding companies and savings and loan holding companies to engage de novo in nonbank activities or make acquisitions of nonbank firms, the Board publishes notice of most of these applications in the
(b) Timeliness of comments. (1) All comments must be actually received by the Board or the Reserve Bank on or before the last date of the comment period specified in the notice. Where more than one notice is published with respect to an application, comments must be received on or before the last date of the latest comment period. The Board’s Rules allow it to disregard comments received after the comment period expires. In particular, § 262.3(e) of the Board’s Rules of Procedure states that the Board will not consider comments on an application that are not received on or before the expiration of the comment period. Thus, a commenter who fails to comment on an application within the specified comment period (or any extension) may be precluded from participating in the consideration of the application.
(2) In cases where a commenter for good cause is unable to send its comment within the specified comment period, § 265.2(a)(10) of the Board’s Rules Regarding Delegation of Authority (12 CFR 265.2(a)(10)) allows the Secretary of the Board to grant requests for an extension of the period. Under this provision, upon receipt of a request received on or before the expiration of the comment period, the Secretary may grant a brief extension upon clear demonstration of hardship or other meritorious reason for seeking additional time.
(c) Private meetings. When a timely protest to approval of an application is received, the Reserve Bank may arrange a meeting between the applicant and the protestant to clarify and narrow the issues, and to provide a forum for the resolution of differences between the protestant and the applicant. If the Reserve Bank decides that a private meeting would be appropriate, the Reserve Bank will arrange a private meeting soon after the receipt of a protest and the applicant’s response, if any, to the protest. In scheduling the meeting, the Reserve Bank will consider convenience to the parties with respect to the time and place of the meeting. A decision to hold a private meeting will not preclude the Reserve Bank or the Board from holding a public meeting or other proceeding if it is deemed appropriate.
(d) Public meetings. The Board’s General Counsel (in consultation with the Reserve Bank and the directors of other interested divisions of the Board) may order that a public meeting or other proceeding be held if requested by the applicant or a protestant who files a timely protest, or if such a proceeding appears appropriate. In most instances, the determination to order a public meeting will be made after a private meeting has been held; however, where appropriate a public meeting may be convened immediately after receipt of the protest and the applicant’s response, if any. Additional information may be requested prior to making a determination to convene a public meeting. In these cases, a determination will be made within ten days from the date all relevant information is received. The public meeting will be scheduled as soon as possible, but in no event, later than 30 days after the decision to hold the proceeding is made. The purpose of the public meeting will be to elicit information, to clarify factual issues related to the application and to provide an opportunity for interested individuals to provide testimony. The Board has adopted the following guidelines to be used for convening public meetings, although specific provisions may be altered by the General Counsel if circumstances warrant.
(1) Requesting a public meeting. A meeting may be requested by a person or an organization objecting to the application during the comment period, and by the applicant during the period within which it must respond to comments. Such a request must be timely and in writing.
(i) A protest does not have to be filed in a legal brief or other format in order for a public meeting to be granted. The Community Affairs Officer at the Reserve Bank will be available to assist any member of the public regarding the types of information generally included in protests; the format generally used by protestants; and any other specific questions about the procedures of the Federal Reserve System regarding protested applications.
(ii) In general, a protest should identify the protestant, state the basis for objection to approval of the application, and provide available written evidence to support the objection. Objections to approval of an application must relate to the factors that the Board is authorized to consider in acting on an application. Generally, these factors relate to the financial and managerial resources of the companies and banks involved, the effects of the proposal on competition, and the convenience and needs of the communities to be served by the companies and banks involved. If a public meeting is requested, the protest should indicate that there are members of the public who wish to speak on the issues in a public forum.
(iii) The protest will be transmitted by the Reserve Bank to the applicant, and the applicant will generally be allowed eight business days to respond in writing to the protest.
(2) Arranging the public meeting. Public meetings will be arranged and presided over by a representative of the Federal Reserve System (“Presiding Officer”). In determining the time and place for the public meeting, such factors as convenience to the parties, the number of people expected to attend the meeting, access to public transportation and possible after-hour security problems will be taken into account.
(3) Conducting the public meeting. Prior to the meeting, all necessary steps will be taken to ensure that the meeting is conducted appropriately, including scheduling of witnesses, submission of written materials and other arrangements. In conducting the public meeting the Presiding Officer will have the authority and discretion to ensure that the meeting proceeds in a fair and orderly manner. Generally, the public meeting will consist of opening and closing remarks by the Presiding Officer, a presentation by the protestant and a presentation by the applicant. An official transcript will be made of the proceedings and entered into the record. The conclusion of the public meeting normally marks the close of the public portion of the record on the application.
(4) Notification of Board decision on the application. After a decision is made on the application, and the applicant is notified of the decision, staff will notify the protestant by telephone. This notification will be confirmed promptly in writing. As set forth in § 262.3(k) of the Board’s Rules of Procedure (12 CFR 262.3(k)) or § 265.3 of the Board’s Rules Regarding Delegation of Authority (12 CFR 265.3), a party to the application may request reconsideration of the Board’s order, or review of the Reserve Bank’s decision.
Appendix A to Part 262 – Statement Clarifying the Role of Supervisory Guidance Statement Clarifying the Role of Supervisory Guidance
The Board is issuing this statement to explain the role of supervisory guidance and to describe the Board’s approach to supervisory guidance.
The Board issues various types of supervisory guidance, including interagency statements, advisories, letters, policy statements, questions and answers, and frequently asked questions, to its supervised institutions. A law or regulation has the force and effect of law.
The Board is clarifying the following policies and practices related to supervisory guidance:
• The Board intends to limit the use of numerical thresholds or other “bright-lines” in describing expectations in supervisory guidance. Where numerical thresholds are used, the Board intends to clarify that the thresholds are exemplary only and not suggestive of requirements. The Board will continue to use numerical thresholds to tailor, and otherwise make clear, the applicability of supervisory guidance or programs to supervised institutions, and as required by statute.
• Examiners will not criticize (through the issuance of matters requiring attention), a supervised financial institution for, and the Board will not issue an enforcement action on the basis of, a “violation” of or “non-compliance” with supervisory guidance. In some situations, examiners may reference (including in writing) supervisory guidance to provide examples of safe and sound conduct, appropriate consumer protection and risk management practices, and other actions for addressing compliance with laws or regulations.
• Supervisory criticisms should continue to be specific as to practices, operations, financial conditions, or other matters that could have a negative effect on the safety and soundness of the financial institution, could cause consumer harm, or could cause violations of laws, regulations, final agency orders, or other legally enforceable conditions.
• The Board has at times sought, and may continue to seek, public comment on supervisory guidance. Seeking public comment on supervisory guidance does not mean that the guidance is intended to be a regulation or have the force and effect of law. The comment process helps the Board to improve its understanding of an issue, to gather information on institutions’ risk management practices, or to seek ways to achieve a supervisory objective most effectively and with the least burden on institutions.
• The Board will aim to reduce the issuance of multiple supervisory guidance documents on the same topic and will generally limit such multiple issuances going forward.
• The Board will continue efforts to make the role of supervisory guidance clear in communications to examiners and to supervised financial institutions and encourage supervised institutions with questions about this statement or any applicable supervisory guidance to discuss the questions with their appropriate agency contact.
PART 263 – RULES OF PRACTICE FOR HEARINGS
Subpart A – Uniform Rules of Practice and Procedure
§ 263.1 Scope.
This subpart prescribes Uniform Rules of practice and procedure applicable to adjudicatory proceedings required to be conducted on the record after opportunity for hearing under the following statutory provisions:
(a) Cease-and-desist proceedings under section 8(b) of the Federal Deposit Insurance Act (“FDIA”) (12 U.S.C. 1818(b));
(b) Removal and prohibition proceedings under section 8(e) of the FDIA (12 U.S.C. 1818(e));
(c) Change-in-control proceedings under section 7(j)(4) of the FDIA (12 U.S.C. 1817(j)(4)) to determine whether the Board of Governors of the Federal Reserve System (“Board”) should issue an order to approve or disapprove a person’s proposed acquisition of a state member bank, bank holding company, or savings and loan holding company;
(d) Proceedings under section 15C(c)(2) of the Securities Exchange Act of 1934 (“Exchange Act”) (15 U.S.C. 78o-5), to impose sanctions upon any government securities broker or dealer or upon any person associated or seeking to become associated with a government securities broker or dealer for which the Board is the appropriate agency;
(e) Assessment of civil money penalties by the Board against institutions, institution-affiliated parties, and certain other persons for which the Board is the appropriate agency for any violation of:
(1) Any provision of the Bank Holding Company Act of 1956, as amended (“BHC Act”), or any order or regulation issued thereunder, pursuant to 12 U.S.C. 1847(b) and (d);
(2) Sections 19, 22, 23, 23A and 23B of the Federal Reserve Act (“FRA”), or any regulation or order issued thereunder and certain unsafe or unsound practices or breaches of fiduciary duty, pursuant to 12 U.S.C. 504 and 505;
(3) Section 9 of the FRA pursuant to 12 U.S.C. 324;
(4) Section 106(b) of the Bank Holding Company Act Amendments of 1970 and certain unsafe or unsound practices or breaches of fiduciary duty, pursuant to 12 U.S.C. 1972(2)(F);
(5) Any provision of the Change in Bank Control Act of 1978, as amended, or any regulation or order issued thereunder and certain unsafe or unsound practices or breaches of fiduciary duty, pursuant to 12 U.S.C. 1817(j)(16);
(6) Any provision of the International Lending Supervision Act of 1983 (“ILSA”) or any rule, regulation or order issued thereunder, pursuant to 12 U.S.C. 3909;
(7) Any provision of the International Banking Act of 1978 (“IBA”) or any rule, regulation or order issued thereunder, pursuant to 12 U.S.C. 3108;
(8) Certain provisions of the Exchange Act, pursuant to section 21B of the Exchange Act (15 U.S.C. 78u-2);
(9) Section 1120 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 3349), or any order or regulation issued thereunder;
(10) The terms of any final or temporary order issued under section 8 of the FDIA or of any written agreement executed by the Board, the terms of any condition imposed in writing by the Board in connection with the grant of an application or request, and certain unsafe or unsound practices or breaches of fiduciary duty or law or regulation pursuant to 12 U.S.C. 1818(i)(2);
(11) Any provision of law referenced in section 102(f) of the Flood Disaster Protection Act of 1973 (42 U.S.C. 4012a(f)) or any order or regulation issued thereunder;
(12) Any provision of law referenced in 31 U.S.C. 5321 or any order or regulation issued thereunder;
(13) Section 5 of the Home Owners’ Loan Act (“HOLA”) or any regulation or order issued thereunder, pursuant to 12 U.S.C. 1464 (d), (s) and (v);
(14) Section 9 of the HOLA or any regulation or order issued thereunder, pursuant to 12 U.S.C. 1467(d); and
(15) Section 10 of the HOLA, pursuant to 12 U.S.C. 1467a (i) and (r);
(f) Remedial action under section 102(g) of the Flood Disaster Protection Act of 1973 (42 U.S.C. 4012a(g));
(g) Removal, prohibition, and civil monetary penalty proceedings under section 10(k) of the FDI Act (12 U.S.C. 1820(k)) for violations of the special post-employment restrictions imposed by that section; and
(h) This subpart also applies to all other adjudications required by statute to be determined on the record after opportunity for an agency hearing, unless otherwise specifically provided for in the Local Rules.
§ 263.2 Rules of construction.
For purposes of this subpart:
(a) Any term in the singular includes the plural, and the plural includes the singular, if such use would be appropriate;
(b) Any use of a masculine, feminine, or neuter gender encompasses all three, if such use would be appropriate;
(c) The term counsel includes a non-attorney representative; and
(d) Unless the context requires otherwise, a party’s counsel of record, if any, may, on behalf of that party, take any action required to be taken by the party.
§ 263.3 Definitions.
For purposes of this subpart, unless explicitly stated to the contrary:
(a) Administrative law judge means one who presides at an administrative hearing under authority set forth at 5 U.S.C. 556.
(b) Adjudicatory proceeding means a proceeding conducted pursuant to these rules and leading to the formulation of a final order other than a regulation.
(c) Decisional employee means any member of the Board’s or administrative law judge’s staff who has not engaged in an investigative or prosecutorial role in a proceeding and who may assist the Agency or the administrative law judge, respectively, in preparing orders, recommended decisions, decisions, and other documents under the Uniform Rules.
(d) Enforcement Counsel means any individual who files a notice of appearance as counsel on behalf of the Board in an adjudicatory proceeding.
(e) Final order means an order issued by the Board with or without the consent of the affected institution or the institution-affiliated party, that has become final, without regard to the pendency of any petition for reconsideration or review.
(f) Institution includes: (1) Any bank as that term is defined in section 3(a) of the FDIA (12 U.S.C. 1813(a));
(2) Any bank holding company or any subsidiary (other than a bank) of a bank holding company as those terms are defined in the BHC Act (12 U.S.C. 1841 et seq.);
(3) Any organization operating under section 25 of the FRA (12 U.S.C. 601 et seq.);
(4) Any foreign bank or company to which section 8 of the IBA (12 U.S.C. 3106), applies or any subsidiary (other than a bank) thereof;
(5) Any Federal agency as that term is defined in section 1(b) of the IBA (12 U.S.C. 3101(5)); and
(6) Any savings and loan holding company or any subsidiary (other than a savings association) of a savings and loan holding company as those terms are defined in the HOLA (12 U.S.C. 1461 et seq.).
(g) Institution-affiliated party means any institution-affiliated party as that term is defined in section 3(u) of the FDIA (12 U.S.C. 1813(u)).
(h) Local Rules means those rules promulgated by the Board in this part other than subpart A.
(i) OFIA means the Office of Financial Institution Adjudication, the executive body charged with overseeing the administration of administrative enforcement proceedings for the Board, the Office of Comptroller of the Currency (the OCC), the Federal Deposit Insurance Corporation (the FDIC), and the National Credit Union Administration (the NCUA).
(j) Party means the Board and any person named as a party in any notice.
(k) Person means an individual, sole proprietor, partnership, corporation, unincorporated association, trust, joint venture, pool, syndicate, agency or other entity or organization, including an institution as defined in paragraph (f) of this section.
(l) Respondent means any party other than the Board.
(m) Uniform Rules means those rules in subpart A of this part that are common to the Board, the OCC, the FDIC, and the NCUA.
(n) Violation includes any action (alone or with another or others) for or toward causing, bringing about, participating in, counseling, or aiding or abetting a violation.
§ 263.4 Authority of the Board.
The Board may, at any time during the pendency of a proceeding, perform, direct the performance of, or waive performance of, any act which could be done or ordered by the administrative law judge.
§ 263.5 Authority of the administrative law judge.
(a) General rule. All proceedings governed by this part shall be conducted in accordance with the provisions of chapter 5 of title 5 of the United States Code. The administrative law judge shall have all powers necessary to conduct a proceeding in a fair and impartial manner and to avoid unnecessary delay.
(b) Powers. The administrative law judge shall have all powers necessary to conduct the proceeding in accordance with paragraph (a) of this section, including the following powers:
(1) To administer oaths and affirmations;
(2) To issue subpoenas, subpoenas duces tecum, and protective orders, as authorized by this part, and to quash or modify any such subpoenas and orders;
(3) To receive relevant evidence and to rule upon the admission of evidence and offers of proof;
(4) To take or cause depositions to be taken as authorized by this subpart;
(5) To regulate the course of the hearing and the conduct of the parties and their counsel;
(6) To hold scheduling and/or pre-hearing conferences as set forth in § 263.31;
(7) To consider and rule upon all procedural and other motions appropriate in an adjudicatory proceeding, provided that only the Board shall have the power to grant any motion to dismiss the proceeding or to decide any other motion that results in a final determination of the merits of the proceeding;
(8) To prepare and present to the Board a recommended decision as provided herein;
(9) To recuse himself or herself by motion made by a party or on his or her own motion;
(10) To establish time, place and manner limitations on the attendance of the public and the media for any public hearing; and
(11) To do all other things necessary and appropriate to discharge the duties of a presiding officer.
§ 263.6 Appearance and practice in adjudicatory proceedings.
(a) Appearance before the Board or an administrative law judge – (1) By attorneys. Any member in good standing of the bar of the highest court of any state, commonwealth, possession, territory of the United States, or the District of Columbia may represent others before the Board if such attorney is not currently suspended or debarred from practice before the Board.
(2) By non-attorneys. An individual may appear on his or her own behalf; a member of a partnership may represent the partnership; a duly authorized officer, director, or employee of any government unit, agency, institution, corporation or authority may represent that unit, agency, institution, corporation or authority if such officer, director, or employee is not currently suspended or debarred from practice before the Board.
(3) Notice of appearance. Any individual acting as counsel on behalf of a party, including the Board, shall file a notice of appearance with OFIA at or before the time that individual submits papers or otherwise appears on behalf of a party in the adjudicatory proceeding. The notice of appearance must include a written declaration that the individual is currently qualified as provided in paragraph (a)(1) or (a)(2) of this section and is authorized to represent the particular party. By filing a notice of appearance on behalf of a party in an adjudicatory proceeding, the counsel agrees and represents that he or she is authorized to accept service on behalf of the represented party and that, in the event of withdrawal from representation, he or she will, if required by the administrative law judge, continue to accept service until new counsel has filed a notice of appearance or until the represented party indicates that he or she will proceed on a pro se basis.
(b) Sanctions. Dilatory, obstructionist, egregious, contemptuous or contumacious conduct at any phase of any adjudicatory proceeding may be grounds for exclusion or suspension of counsel from the proceeding.
§ 263.7 Good faith certification.
(a) General requirement. Every filing or submission of record following the issuance of a notice shall be signed by at least one counsel of record in his or her individual name and shall state that counsel’s address and telephone number. A party who acts as his or her own counsel shall sign his or her individual name and state his or her address and telephone number on every filing or submission of record.
(b) Effect of signature. (1) The signature of counsel or a party shall constitute a certification that: the counsel or party has read the filing or submission of record; to the best of his or her knowledge, information, and belief formed after reasonable inquiry, the filing or submission of record is well-grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law; and the filing or submission of record is not made for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.
(2) If a filing or submission of record is not signed, the administrative law judge shall strike the filing or submission of record, unless it is signed promptly after the omission is called to the attention of the pleader or movant.
(c) Effect of making oral motion or argument. The act of making any oral motion or oral argument by any counsel or party constitutes a certification that to the best of his or her knowledge, information, and belief formed after reasonable inquiry, his or her statement is well-grounded in fact and is warranted by existing law or a good faith argument for the extension, modification, or reversal of existing law, and is not made for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation.
§ 263.8 Conflicts of interest.
(a) Conflict of interest in representation. No person shall appear as counsel for another person in an adjudicatory proceeding if it reasonably appears that such representation may be materially limited by that counsel’s responsibilities to a third person or by the counsel’s own interests. The administrative law judge may take corrective measures at any stage of a proceeding to cure a conflict of interest in representation, including the issuance of an order limiting the scope of representation or disqualifying an individual from appearing in a representative capacity for the duration of the proceeding.
(b) Certification and waiver. If any person appearing as counsel represents two or more parties to an adjudicatory proceeding or also represents a non-party on a matter relevant to an issue in the proceeding, counsel must certify in writing at the time of filing the notice of appearance required by § 263.6(a):
(1) That the counsel has personally and fully discussed the possibility of conflicts of interest with each such party and non-party; and
(2) That each such party and non-party waives any right it might otherwise have had to assert any known conflicts of interest or to assert any non-material conflicts of interest during the course of the proceeding.
§ 263.9 Ex parte communications.
(a) Definition – (1) Ex parte communication means any material oral or written communication relevant to the merits of an adjudicatory proceeding that was neither on the record nor on reasonable prior notice to all parties that takes place between:
(i) An interested person outside the Board (including such person’s counsel); and
(ii) The administrative law judge handling that proceeding, a member of the Board, or a decisional employee.
(2) Exception. A request for status of the proceeding does not constitute an ex parte communication.
(b) Prohibition of ex parte communications. From the time the notice is issued by the Board until the date that the Board issues its final decision pursuant to § 263.40(c):
(1) No interested person outside the Federal Reserve System shall make or knowingly cause to be made an ex parte communication to a member of the Board, the administrative law judge, or a decisional employee; and
(2) A member of the Board, administrative law judge, or decisional employee shall not make or knowingly cause to be made to any interested person outside the Federal Reserve System any ex parte communication.
(c) Procedure upon occurrence of ex parte communication. If an ex parte communication is received by the administrative law judge, a member of the Board or any other person identified in paragraph (a) of this section, that person shall cause all such written communications (or, if the communication is oral, a memorandum stating the substance of the communication) to be placed on the record of the proceeding and served on all parties. All other parties to the proceeding shall have an opportunity, within ten days of receipt of service of the ex parte communication, to file responses thereto and to recommend any sanctions, in accordance with paragraph (d) of this section, that they believe to be appropriate under the circumstances.
(d) Sanctions. Any party or his or her counsel who makes a prohibited ex parte communication, or who encourages or solicits another to make any such communication, may be subject to any appropriate sanction or sanctions imposed by the Board or the administrative law judge including, but not limited to, exclusion from the proceedings and an adverse ruling on the issue which is the subject of the prohibited communication.
(e) Separation of functions. Except to the extent required for the disposition of ex parte matters as authorized by law, the administrative law judge may not consult a person or party on any matter relevant to the merits of the adjudication, unless on notice and opportunity for all parties to participate. An employee or agent engaged in the performance of investigative or prosecuting functions for the Board in a case may not, in that or a factually related case, participate or advise in the decision, recommended decision, or agency review of the recommended decision under § 263.40, except as witness or counsel in public proceedings.
§ 263.10 Filing of papers.
(a) Filing. Any papers required to be filed, excluding documents produced in response to a discovery request pursuant to §§ 263.25 and 263.26, shall be filed with OFIA, except as otherwise provided.
(b) Manner of filing. Unless otherwise specified by the Board or the administrative law judge, filing may be accomplished by:
(1) Personal service;
(2) Delivering the papers to a reliable commercial courier service, overnight delivery service, or to the U.S. Post Office for Express Mail delivery;
(3) Mailing the papers by first class, registered, or certified mail; or
(4) Transmission by electronic media, only if expressly authorized, and upon any conditions specified, by the Board or the administrative law judge. All papers filed by electronic media shall also concurrently be filed in accordance with paragraph (c) of this section.
(c) Formal requirements as to papers filed – (1) Form. All papers filed must set forth the name, address, and telephone number of the counsel or party making the filing and must be accompanied by a certification setting forth when and how service has been made on all other parties. All papers filed must be double-spaced and printed or typewritten on 8
(2) Signature. All papers must be dated and signed as provided in § 263.7.
(3) Caption. All papers filed must include at the head thereof, or on a title page, the name of the Board and of the filing party, the title and docket number of the proceeding, and the subject of the particular paper.
(4) Number of copies. Unless otherwise specified by the Board, or the administrative law judge, an original and one copy of all documents and papers shall be filed, except that only one copy of transcripts of testimony and exhibits shall be filed.
§ 263.11 Service of papers.
(a) By the parties. Except as otherwise provided, a party filing papers shall serve a copy upon the counsel of record for all other parties to the proceeding so represented, and upon any party not so represented.
(b) Method of service. Except as provided in paragraphs (c)(2) and (d) of this section, a serving party shall use one or more of the following methods of service:
(1) Personal service;
(2) Delivering the papers to a reliable commercial courier service, overnight delivery service, or to the U.S. Post Office for Express Mail delivery;
(3) Mailing the papers by first class, registered, or certified mail; or
(4) Transmission by electronic media, only if the parties mutually agree. Any papers served by electronic media shall also concurrently be served in accordance with the requirements of § 263.10(c).
(c) By the Board or the administrative law judge. (1) All papers required to be served by the Board or the administrative law judge upon a party who has appeared in the proceeding in accordance with § 263.6, shall be served by any means specified in paragraph (b) of this section.
(2) If a party has not appeared in the proceeding in accordance with § 263.6, the Board or the administrative law judge shall make service by any of the following methods:
(i) By personal service;
(ii) If the person to be served is an individual, by delivery to a person of suitable age and discretion at the physical location where the individual resides or works;
(iii) If the person to be served is a corporation or other association, by delivery to an officer, managing or general agent, or to any other agent authorized by appointment or by law to receive service and, if the agent is one authorized by statute to receive service and the statute so requires, by also mailing a copy to the party;
(iv) By registered or certified mail addressed to the person’s last known address; or
(v) By any other method reasonably calculated to give actual notice.
(d) Subpoenas. Service of a subpoena may be made:
(1) By personal service;
(2) If the person to be served is an individual, by delivery to a person of suitable age and discretion at the physical location where the individual resides or works;
(3) By delivery to an agent, which, in the case of a corporation or other association, is delivery to an officer, managing or general agent, or to any other agent authorized by appointment or by law to receive service and, if the agent is one authorized by statute to receive service and the statute so requires, by also mailing a copy to the party;
(4) By registered or certified mail addressed to the person’s last known address; or
(5) By any other method as is reasonably calculated to give actual notice.
(e) Area of service. Service in any state, territory, possession of the United States, or the District of Columbia, on any person or company doing business in any state, territory, possession of the United States, or the District of Columbia, or on any person as otherwise provided by law, is effective without regard to the place where the hearing is held, provided that if service is made on a foreign bank in connection with an action or proceeding involving one or more of its branches or agencies located in any state, territory, possession of the United States, or the District of Columbia, service shall be made on at least one branch or agency so involved.
§ 263.12 Construction of time limits.
(a) General rule. In computing any period of time prescribed by this subpart, the date of the act or event that commences the designated period of time is not included. The last day so computed is included unless it is a Saturday, Sunday, or Federal holiday. When the last day is a Saturday, Sunday, or Federal holiday, the period runs until the end of the next day that is not a Saturday, Sunday, or Federal holiday. Intermediate Saturdays, Sundays, and Federal holidays are included in the computation of time. However, when the time period within which an act is to be performed is ten days or less, not including any additional time allowed for in paragraph (c) of this section, intermediate Saturdays, Sundays, and Federal holidays are not included.
(b) When papers are deemed to be filed or served. (1) Filing and service are deemed to be effective:
(i) In the case of personal service or same-day commercial courier delivery, upon actual service;
(ii) In the case of overnight commercial delivery service, U.S. Express Mail delivery, or first class, registered, or certified mail, upon deposit in or delivery to an appropriate point of collection;
(iii) In the case of transmission by electronic media, as specified by the authority receiving the filing, in the case of filing, and as agreed among the parties, in the case of service.
(2) The effective filing and service dates specified in paragraph (b)(1) of this section may be modified by the Board or administrative law judge in the case of filing or by agreement of the parties in the case of service.
(c) Calculation of time for service and filing of responsive papers. Whenever a time limit is measured by a prescribed period from the service of any notice or paper, the applicable time limits are calculated as follows:
(1) If service is made by first class, registered, or certified mail, add three calendar days to the prescribed period;
(2) If service is made by express mail or overnight delivery service, add one calendar day to the prescribed period; or
(3) If service is made by electronic media transmission, add one calendar day to the prescribed period, unless otherwise determined by the Board or the administrative law judge in the case of filing, or by agreement among the parties in the case of service.
§ 263.13 Change of time limits.
Except as otherwise provided by law, the administrative law judge may, for good cause shown, extend the time limits prescribed by the Uniform Rules or by any notice or order issued in the proceedings. After the referral of the case to the Board pursuant to § 263.38, the Board may grant extensions of the time limits for good cause shown. Extensions may be granted at the motion of a party after notice and opportunity to respond is afforded all non-moving parties or sua sponte by the Board or the administrative law judge.
§ 263.14 Witness fees and expenses.
Witnesses subpoenaed for testimony or depositions shall be paid the same fees for attendance and mileage as are paid in the United States district courts in proceedings in which the United States is a party, provided that, in the case of a discovery subpoena addressed to a party, no witness fees or mileage need be paid. Fees for witnesses shall be tendered in advance by the party requesting the subpoena, except that fees and mileage need not be tendered in advance where the Board is the party requesting the subpoena. The Board shall not be required to pay any fees to, or expenses of, any witness not subpoenaed by the Board.
§ 263.15 Opportunity for informal settlement.
Any respondent may, at any time in the proceeding, unilaterally submit to Enforcement Counsel written offers or proposals for settlement of a proceeding, without prejudice to the rights of any of the parties. No such offer or proposal shall be made to any Board representative other than Enforcement Counsel. Submission of a written settlement offer does not provide a basis for adjourning or otherwise delaying all or any portion of a proceeding under this part. No settlement offer or proposal, or any subsequent negotiation or resolution, is admissible as evidence in any proceeding.
§ 263.16 The Board’s right to conduct examination.
Nothing contained in this subpart limits in any manner the right of the Board or any Federal Reserve Bank to conduct any examination, inspection, or visitation of any institution or institution-affiliated party, or the right of the Board or any Federal Reserve Bank to conduct or continue any form of investigation authorized by law.
§ 263.17 Collateral attacks on adjudicatory proceeding.
If an interlocutory appeal or collateral attack is brought in any court concerning all or any part of an adjudicatory proceeding, the challenged adjudicatory proceeding shall continue without regard to the pendency of that court proceeding. No default or other failure to act as directed in the adjudicatory proceeding within the times prescribed in this subpart shall be excused based on the pendency before any court of any interlocutory appeal or collateral attack.
§ 263.18 Commencement of proceeding and contents of notice.
(a) Commencement of proceeding. (1)(i) Except for change-in-control proceedings under section 7(j)(4) of the FDIA (12 U.S.C. 1817(j)(4)), a proceeding governed by this subpart is commenced by issuance of a notice by the Board.
(ii) The notice must be served by the Board upon the respondent and given to any other appropriate financial institution supervisory authority where required by law.
(iii) The notice must be filed with OFIA.
(2) Change-in-control proceedings under section 7(j)(4) of the FDIA (12 U.S.C. 1817(j)(4)) commence with the issuance of an order by the Board.
(b) Contents of notice. The notice must set forth:
(1) The legal authority for the proceeding and for the Board’s jurisdiction over the proceeding;
(2) A statement of the matters of fact or law showing that the Board is entitled to relief;
(3) A proposed order or prayer for an order granting the requested relief;
(4) The time, place, and nature of the hearing as required by law or regulation;
(5) The time within which to file an answer as required by law or regulation;
(6) The time within which to request a hearing as required by law or regulation; and
(7) That the answer and/or request for a hearing shall be filed with OFIA.
§ 263.19 Answer.
(a) When. Within 20 days of service of the notice, respondent shall file an answer as designated in the notice. In a civil money penalty proceeding, respondent shall also file a request for a hearing within 20 days of service of the notice.
(b) Content of answer. An answer must specifically respond to each paragraph or allegation of fact contained in the notice and must admit, deny, or state that the party lacks sufficient information to admit or deny each allegation of fact. A statement of lack of information has the effect of a denial. Denials must fairly meet the substance of each allegation of fact denied; general denials are not permitted. When a respondent denies part of an allegation, that part must be denied and the remainder specifically admitted. Any allegation of fact in the notice which is not denied in the answer must be deemed admitted for purposes of the proceeding. A respondent is not required to respond to the portion of a notice that constitutes the prayer for relief or proposed order. The answer must set forth affirmative defenses, if any, asserted by the respondent.
(c) Default – (1) Effect of failure to answer. Failure of a respondent to file an answer required by this section within the time provided constitutes a waiver of his or her right to appear and contest the allegations in the notice. If no timely answer is filed, Enforcement Counsel may file a motion for entry of an order of default. Upon a finding that no good cause has been shown for the failure to file a timely answer, the administrative law judge shall file with the Board a recommended decision containing the findings and the relief sought in the notice. Any final order issued by the Board based upon a respondent’s failure to answer is deemed to be an order issued upon consent.
(2) Effect of failure to request a hearing in civil money penalty proceedings. If respondent fails to request a hearing as required by law within the time provided, the notice of assessment constitutes a final and unappealable order.
§ 263.20 Amended pleadings.
(a) Amendments. The notice or answer may be amended or supplemented at any stage of the proceeding. The respondent must answer an amended notice within the time remaining for the respondent’s answer to the original notice, or within ten days after service of the amended notice, whichever period is longer, unless the Board or administrative law judge orders otherwise for good cause.
(b) Amendments to conform to the evidence. When issues not raised in the notice or answer are tried at the hearing by express or implied consent of the parties, they will be treated in all respects as if they had been raised in the notice or answer, and no formal amendments are required. If evidence is objected to at the hearing on the ground that it is not within the issues raised by the notice or answer, the administrative law judge may admit the evidence when admission is likely to assist in adjudicating the merits of the action and the objecting party fails to satisfy the administrative law judge that the admission of such evidence would unfairly prejudice that party’s action or defense upon the merits. The administrative law judge may grant a continuance to enable the objecting party to meet such evidence.
§ 263.21 Failure to appear.
Failure of a respondent to appear in person at the hearing or by a duly authorized counsel constitutes a waiver of respondent’s right to a hearing and is deemed an admission of the facts as alleged and consent to the relief sought in the notice. Without further proceedings or notice to the respondent, the administrative law judge shall file with the Board a recommended decision containing the findings and the relief sought in the notice.
§ 263.22 Consolidation and severance of actions.
(a) Consolidation. (1) On the motion of any party, or on the administrative law judge’s own motion, the administrative law judge may consolidate, for some or all purposes, any two or more proceedings, if each such proceeding involves or arises out of the same transaction, occurrence or series of transactions or occurrences, or involves at least one common respondent or a material common question of law or fact, unless such consolidation would cause unreasonable delay or injustice.
(2) In the event of consolidation under paragraph (a)(1) of this section, appropriate adjustment to the prehearing schedule shall be made to avoid unnecessary expense, inconvenience, or delay.
(b) Severance. The administrative law judge may, upon the motion of any party, sever the proceeding for separate resolution of the matter as to any respondent only if the administrative law judge finds that:
(1) Undue prejudice or injustice to the moving party would result from not severing the proceeding; and
(2) Such undue prejudice or injustice would outweigh the interests of judicial economy and expedition in the complete and final resolution of the proceeding.
§ 263.23 Motions.
(a) In writing. (1) Except as otherwise provided herein, an application or request for an order or ruling must be made by written motion.
(2) All written motions must state with particularity the relief sought and must be accompanied by a proposed order.
(3) No oral argument may be held on written motions except as otherwise directed by the administrative law judge. Written memoranda, briefs, affidavits or other relevant material or documents may be filed in support of or in opposition to a motion.
(b) Oral motions. A motion may be made orally on the record unless the administrative law judge directs that such motion be reduced to writing.
(c) Filing of motions. Motions must be filed with the administrative law judge, except that following the filing of the recommended decision, motions must be filed with the Board.
(d) Responses. (1) Except as otherwise provided herein, within ten days after service of any written motion, or within such other period of time as may be established by the administrative law judge or the Board, any party may file a written response to a motion. The administrative law judge shall not rule on any oral or written motion before each party has had an opportunity to file a response.
(2) The failure of a party to oppose a written motion or an oral motion made on the record is deemed a consent by that party to the entry of an order substantially in the form of the order accompanying the motion.
(e) Dilatory motions. Frivolous, dilatory or repetitive motions are prohibited. The filing of such motions may form the basis for sanctions.
(f) Dispositive motions. Dispositive motions are governed by §§ 263.29 and 263.30.
§ 263.24 Scope of document discovery.
(a) Limits on discovery. (1) Subject to the limitations set out in paragraphs (b), (c), and (d) of this section, a party to a proceeding under this subpart may obtain document discovery by serving a written request to produce documents. For purposes of a request to produce documents, the term “documents” may be defined to include drawings, graphs, charts, photographs, recordings, data stored in electronic form, and other data compilations from which information can be obtained, or translated, if necessary, by the parties through detection devices into reasonably usable form, as well as written material of all kinds.
(2) Discovery by use of deposition is governed by § 263.53 of subpart B of this part.
(3) Discovery by use of interrogatories is not permitted.
(b) Relevance. A party may obtain document discovery regarding any matter, not privileged, that has material relevance to the merits of the pending action. Any request to produce documents that calls for irrelevant material, that is unreasonable, oppressive, excessive in scope, unduly burdensome, or repetitive of previous requests, or that seeks to obtain privileged documents will be denied or modified. A request is unreasonable, oppressive, excessive in scope or unduly burdensome if, among other things, it fails to include justifiable limitations on the time period covered and the geographic locations to be searched, the time provided to respond in the request is inadequate, or the request calls for copies of documents to be delivered to the requesting party and fails to include the requestor’s written agreement to pay in advance for the copying, in accordance with § 263.25.
(c) Privileged matter. Privileged documents are not discoverable. Privileges include the attorney-client privilege, work-product privilege, any government’s or government agency’s deliberative-process privilege, and any other privileges the Constitution, any applicable act of Congress, or the principles of common law provide.
(d) Time limits. All discovery, including all responses to discovery requests, shall be completed at least 20 days prior to the date scheduled for the commencement of the hearing. No exceptions to this time limit shall be permitted, unless the administrative law judge finds on the record that good cause exists for waiving the requirements of this paragraph.
§ 263.25 Request for document discovery from parties.
(a) General rule. Any party may serve on any other party a request to produce for inspection any discoverable documents that are in the possession, custody, or control of the party upon whom the request is served. The request must identify the documents to be produced either by individual item or by category, and must describe each item and category with reasonable particularity. Documents must be produced as they are kept in the usual course of business or must be organized to correspond with the categories in the request.
(b) Production or copying. The request must specify a reasonable time, place, and manner for production and performing any related acts. In lieu of inspecting the documents, the requesting party may specify that all or some of the responsive documents be copied and the copies delivered to the requesting party. If copying of fewer than 250 pages is requested, the party to whom the request is addressed shall bear the cost of copying and shipping charges. If a party requests 250 pages or more of copying, the requesting party shall pay for the copying and shipping charges. Copying charges are the current per-page copying rate imposed by 12 CFR Part 261 implementing the Freedom of Information Act (5 U.S.C. 552). The party to whom the request is addressed may require payment in advance before producing the documents.
(c) Obligation to update responses. A party who has responded to a discovery request with a response that was complete when made is not required to supplement the response to include documents thereafter acquired, unless the responding party learns that:
(1) The response was materially incorrect when made; or
(2) The response, though correct when made, is no longer true and a failure to amend the response is, in substance, a knowing concealment.
(d) Motions to limit discovery. (1) Any party that objects to a discovery request may, within ten days of being served with such request, file a motion in accordance with the provisions of § 263.23 to strike or otherwise limit the request. If an objection is made to only a portion of an item or category in a request, the portion objected to shall be specified. Any objections not made in accordance with this paragraph and § 263.23 are waived.
(2) The party who served the request that is the subject of a motion to strike or limit may file a written response within five days of service of the motion. No other party may file a response.
(e) Privilege. At the time other documents are produced, the producing party must reasonably identify all documents withheld on the grounds of privilege and must produce a statement of the basis for the assertion of privilege. When similar documents that are protected by deliberative process, attorney-work-product, or attorney-client privilege are voluminous, these documents may be identified by category instead of by individual document. The administrative law judge retains discretion to determine when the identification by category is insufficient.
(f) Motions to compel production. (1) If a party withholds any documents as privileged or fails to comply fully with a discovery request, the requesting party may, within ten days of the assertion of privilege or of the time the failure to comply becomes known to the requesting party, file a motion in accordance with the provisions of § 263.23 for the issuance of a subpoena compelling production.
(2) The party who asserted the privilege or failed to comply with the request may file a written response to a motion to compel within five days of service of the motion. No other party may file a response.
(g) Ruling on motions. After the time for filing responses pursuant to this section has expired, the administrative law judge shall rule promptly on all motions filed pursuant to this section. If the administrative law judge determines that a discovery request, or any of its terms, calls for irrelevant material, is unreasonable, oppressive, excessive in scope, unduly burdensome, or repetitive of previous requests, or seeks to obtain privileged documents, he or she may deny or modify the request, and may issue appropriate protective orders, upon such conditions as justice may require. The pendency of a motion to strike or limit discovery or to compel production is not a basis for staying or continuing the proceeding, unless otherwise ordered by the administrative law judge. Notwithstanding any other provision in this part, the administrative law judge may not release, or order a party to produce, documents withheld on grounds of privilege if the party has stated to the administrative law judge its intention to file a timely motion for interlocutory review of the administrative law judge’s order to produce the documents, and until the motion for interlocutory review has been decided.
(h) Enforcing discovery subpoenas. If the administrative law judge issues a subpoena compelling production of documents by a party, the subpoenaing party may, in the event of noncompliance and to the extent authorized by applicable law, apply to any appropriate United States district court for an order requiring compliance with the subpoena. A party’s right to seek court enforcement of a subpoena shall not in any manner limit the sanctions that may be imposed by the administrative law judge against a party who fails to produce subpoenaed documents.
§ 263.26 Document subpoenas to nonparties.
(a) General rules. (1) Any party may apply to the administrative law judge for the issuance of a document discovery subpoena addressed to any person who is not a party to the proceeding. The application must contain a proposed document subpoena and a brief statement showing the general relevance and reasonableness of the scope of documents sought. The subpoenaing party shall specify a reasonable time, place, and manner for making production in response to the document subpoena.
(2) A party shall only apply for a document subpoena under this section within the time period during which such party could serve a discovery request under § 263.24(d). The party obtaining the document subpoena is responsible for serving it on the subpoenaed person and for serving copies on all parties. Document subpoenas may be served in any state, territory, or possession of the United States, the District of Columbia, or as otherwise provided by law.
(3) The administrative law judge shall promptly issue any document subpoena requested pursuant to this section. If the administrative law judge determines that the application does not set forth a valid basis for the issuance of the subpoena, or that any of its terms are unreasonable, oppressive, excessive in scope, or unduly burdensome, he or she may refuse to issue the subpoena or may issue it in a modified form upon such conditions as may be consistent with the Uniform Rules.
(b) Motion to quash or modify. (1) Any person to whom a document subpoena is directed may file a motion to quash or modify such subpoena, accompanied by a statement of the basis for quashing or modifying the subpoena. The movant shall serve the motion on all parties, and any party may respond to such motion within ten days of service of the motion.
(2) Any motion to quash or modify a document subpoena must be filed on the same basis, including the assertion of privilege, upon which a party could object to a discovery request under § 263.25(d), and during the same time limits during which such an objection could be filed.
(c) Enforcing document subpoenas. If a subpoenaed person fails to comply with any subpoena issued pursuant to this section or any order of the administrative law judge which directs compliance with all or any portion of a document subpoena, the subpoenaing party or any other aggrieved party may, to the extent authorized by applicable law, apply to an appropriate United States district court for an order requiring compliance with so much of the document subpoena as the administrative law judge has not quashed or modified. A party’s right to seek court enforcement of a document subpoena shall in no way limit the sanctions that may be imposed by the administrative law judge on a party who induces a failure to comply with subpoenas issued under this section.
(a) General rules. (1) If a witness will not be available for the hearing, a party desiring to preserve that witness’s testimony for the record may apply in accordance with the procedures set forth in paragraph (a)(2) of this section, to the administrative law judge for the issuance of a subpoena, including a subpoena duces tecum, requiring the attendance of the witness at a deposition. The administrative law judge may issue a deposition subpoena under this section upon a showing that:
(i) The witness will be unable to attend or may be prevented from attending the hearing because of age, sickness or infirmity, or will otherwise be unavailable;
(ii) The witness’s unavailability was not procured or caused by the subpoenaing party;
(iii) The testimony is reasonably expected to be material; and
(iv) Taking the deposition will not result in any undue burden to any other party and will not cause undue delay of the proceeding.
(2) The application must contain a proposed deposition subpoena and a brief statement of the reasons for the issuance of the subpoena. The subpoena must name the witness whose deposition is to be taken and specify the time and place for taking the deposition. A deposition subpoena may require the witness to be deposed at any place within the country in which that witness resides or has a regular place of employment or such other convenient place as the administrative law judge shall fix.
(3) Any requested subpoena that sets forth a valid basis for its issuance must be promptly issued, unless the administrative law judge on his or her own motion, requires a written response or requires attendance at a conference concerning whether the requested subpoena should be issued.
(4) The party obtaining a deposition subpoena is responsible for serving it on the witness and for serving copies on all parties. Unless the administrative law judge orders otherwise, no deposition under this section shall be taken on fewer than ten days’ notice to the witness and all parties. Deposition subpoenas may be served in any state, territory, possession of the United States, or the District of Columbia, on any person or company doing business in any state, territory, possession of the United States, or the District of Columbia, or as otherwise permitted by law.
(b) Objections to deposition subpoenas. (1) The witness and any party who has not had an opportunity to oppose a deposition subpoena issued under this section may file a motion with the administrative law judge to quash or modify the subpoena prior to the time for compliance specified in the subpoena, but not more than ten days after service of the subpoena.
(2) A statement of the basis for the motion to quash or modify a subpoena issued under this section must accompany the motion. The motion must be served on all parties.
(c) Procedure upon deposition. (1) Each witness testifying pursuant to a deposition subpoena must be duly sworn, and each party shall have the right to examine the witness. Objections to questions or documents must be in short form, stating the grounds for the objection. Failure to object to questions or documents is not deemed a waiver except where the ground for the objection might have been avoided if the objection had been timely presented. All questions, answers, and objections must be recorded.
(2) Any party may move before the administrative law judge for an order compelling the witness to answer any questions the witness has refused to answer or submit any evidence the witness has refused to submit during the deposition.
(3) The deposition must be subscribed by the witness, unless the parties and the witness, by stipulation, have waived the signing, or the witness is ill, cannot be found, or has refused to sign. If the deposition is not subscribed by the witness, the court reporter taking the deposition shall certify that the transcript is a true and complete transcript of the deposition.
(d) Enforcing subpoenas. If a subpoenaed person fails to comply with any order of the administrative law judge which directs compliance with all or any portion of a deposition subpoena under paragraph (b) or (c)(3) of this section, the subpoenaing party or other aggrieved party may, to the extent authorized by applicable law, apply to an appropriate United States district court for an order requiring compliance with the portions of the subpoena that the administrative law judge has ordered enforced. A party’s right to seek court enforcement of a deposition subpoena in no way limits the sanctions that may be imposed by the administrative law judge on a party who fails to comply with, or procures a failure to comply with, a subpoena issued under this section.
§ 263.28 Interlocutory review.
(a) General rule. The Board may review a ruling of the administrative law judge prior to the certification of the record to the Board only in accordance with the procedures set forth in this section and § 263.23.
(b) Scope of review. The Board may exercise interlocutory review of a ruling of the administrative law judge if the Board finds that:
(1) The ruling involves a controlling question of law or policy as to which substantial grounds exist for a difference of opinion;
(2) Immediate review of the ruling may materially advance the ultimate termination of the proceeding;
(3) Subsequent modification of the ruling at the conclusion of the proceeding would be an inadequate remedy; or
(4) Subsequent modification of the ruling would cause unusual delay or expense.
(c) Procedure. Any request for interlocutory review shall be filed by a party with the administrative law judge within ten days of his or her ruling and shall otherwise comply with § 263.23. Any party may file a response to a request for interlocutory review in accordance with § 263.23(d). Upon the expiration of the time for filing all responses, the administrative law judge shall refer the matter to the Board for final disposition.
(d) Suspension of proceeding. Neither a request for interlocutory review nor any disposition of such a request by the Board under this section suspends or stays the proceeding unless otherwise ordered by the administrative law judge or the Board.
§ 263.29 Summary disposition.
(a) In general. The administrative law judge shall recommend that the Board issue a final order granting a motion for summary disposition if the undisputed pleaded facts, admissions, affidavits, stipulations, documentary evidence, matters as to which official notice may be taken, and any other evidentiary materials properly submitted in connection with a motion for summary disposition show that:
(1) There is no genuine issue as to any material fact; and
(2) The moving party is entitled to a decision in its favor as a matter of law.
(b) Filing of motions and responses. (1) Any party who believes that there is no genuine issue of material fact to be determined and that he or she is entitled to a decision as a matter of law may move at any time for summary disposition in its favor of all or any part of the proceeding. Any party, within 20 days after service of such a motion, or within such time period as allowed by the administrative law judge, may file a response to such motion.
(2) A motion for summary disposition must be accompanied by a statement of the material facts as to which the moving party contends there is no genuine issue. Such motion must be supported by documentary evidence, which may take the form of admissions in pleadings, stipulations, depositions, investigatory depositions, transcripts, affidavits and any other evidentiary materials that the moving party contends support his or her position. The motion must also be accompanied by a brief containing the points and authorities in support of the contention of the moving party. Any party opposing a motion for summary disposition must file a statement setting forth those material facts as to which he or she contends a genuine dispute exists. Such opposition must be supported by evidence of the same type as that submitted with the motion for summary disposition and a brief containing the points and authorities in support of the contention that summary disposition would be inappropriate.
(c) Hearing on motion. At the request of any party or on his or her own motion, the administrative law judge may hear oral argument on the motion for summary disposition.
(d) Decision on motion. Following receipt of a motion for summary disposition and all responses thereto, the administrative law judge shall determine whether the moving party is entitled to summary disposition. If the administrative law judge determines that summary disposition is warranted, the administrative law judge shall submit a recommended decision to that effect to the Board. If the administrative law judge finds that no party is entitled to summary disposition, he or she shall make a ruling denying the motion.
§ 263.30 Partial summary disposition.
If the administrative law judge determines that a party is entitled to summary disposition as to certain claims only, he or she shall defer submitting a recommended decision as to those claims. A hearing on the remaining issues must be ordered. Those claims for which the administrative law judge has determined that summary disposition is warranted will be addressed in the recommended decision filed at the conclusion of the hearing.
§ 263.31 Scheduling and prehearing conferences.
(a) Scheduling conference. Within 30 days of service of the notice or order commencing a proceeding or such other time as parties may agree, the administrative law judge shall direct counsel for all parties to meet with him or her in person at a specified time and place prior to the hearing or to confer by telephone for the purpose of scheduling the course and conduct of the proceeding. This meeting or telephone conference is called a “scheduling conference.” The identification of potential witnesses, the time for and manner of discovery, and the exchange of any prehearing materials including witness lists, statements of issues, stipulations, exhibits and any other materials may also be determined at the scheduling conference.
(b) Prehearing conferences. The administrative law judge may, in addition to the scheduling conference, on his or her own motion or at the request of any party, direct counsel for the parties to meet with him or her (in person or by telephone) at a prehearing conference to address any or all of the following:
(1) Simplification and clarification of the issues;
(2) Stipulations, admissions of fact, and the contents, authenticity and admissibility into evidence of documents;
(3) Matters of which official notice may be taken;
(4) Limitation of the number of witnesses;
(5) Summary disposition of any or all issues;
(6) Resolution of discovery issues or disputes;
(7) Amendments to pleadings; and
(8) Such other matters as may aid in the orderly disposition of the proceeding.
(c) Transcript. The administrative law judge, in his or her discretion, may require that a scheduling or prehearing conference be recorded by a court reporter. A transcript of the conference and any materials filed, including orders, becomes part of the record of the proceeding. A party may obtain a copy of the transcript at his or her expense.
(d) Scheduling or prehearing orders. At or within a reasonable time following the conclusion of the scheduling conference or any prehearing conference, the administrative law judge shall serve on each party an order setting forth any agreements reached and any procedural determinations made.
§ 263.32 Prehearing submissions.
(a) Within the time set by the administrative law judge, but in no case later than 14 days before the start of the hearing, each party shall serve on every other party, his or her:
(1) Prehearing statement;
(2) Final list of witnesses to be called to testify at the hearing, including name and address of each witness and a short summary of the expected testimony of each witness;
(3) List of the exhibits to be introduced at the hearing along with a copy of each exhibit; and
(4) Stipulations of fact, if any.
(b) Effect of failure to comply. No witness may testify and no exhibits may be introduced at the hearing if such witness or exhibit is not listed in the prehearing submissions pursuant to paragraph (a) of this section, except for good cause shown.
§ 263.33 Public hearings.
(a) General rule. All hearings shall be open to the public, unless the Board, in the Board’s discretion, determines that holding an open hearing would be contrary to the public interest. Within 20 days of service of the notice or, in the case of change-in-control proceedings under section 7(j)(4) of the FDIA (12 U.S.C. 1817(j)(4)), within 20 days from service of the hearing order, any respondent may file with the Board a request for a private hearing, and any party may file a reply to such a request. A party must serve on the administrative law judge a copy of any request or reply the party files with the Board. The form of, and procedure for, these requests and replies are governed by § 263.23. A party’s failure to file a request or a reply constitutes a waiver of any objections regarding whether the hearing will be public or private.
(b) Filing document under seal. Enforcement Counsel, in his or her discretion, may file any document or part of a document under seal if disclosure of the document would be contrary to the public interest. The administrative law judge shall take all appropriate steps to preserve the confidentiality of such documents or parts thereof, including closing portions of the hearing to the public.
§ 263.34 Hearing subpoenas.
(a) Issuance. (1) Upon application of a party showing general relevance and reasonableness of scope of the testimony or other evidence sought, the administrative law judge may issue a subpoena or a subpoena duces tecum requiring the attendance of a witness at the hearing or the production of documentary or physical evidence at the hearing. The application for a hearing subpoena must also contain a proposed subpoena specifying the attendance of a witness or the production of evidence from any state, territory, or possession of the United States, the District of Columbia, or as otherwise provided by law at any designated place where the hearing is being conducted. The party making the application shall serve a copy of the application and the proposed subpoena on every other party.
(2) A party may apply for a hearing subpoena at any time before the commencement of a hearing. During a hearing, a party may make an application for a subpoena orally on the record before the administrative law judge.
(3) The administrative law judge shall promptly issue any hearing subpoena requested pursuant to this section. If the administrative law judge determines that the application does not set forth a valid basis for the issuance of the subpoena, or that any of its terms are unreasonable, oppressive, excessive in scope, or unduly burdensome, he or she may refuse to issue the subpoena or may issue it in a modified form upon any conditions consistent with this subpart. Upon issuance by the administrative law judge, the party making the application shall serve the subpoena on the person named in the subpoena and on each party.
(b) Motion to quash or modify. (1) Any person to whom a hearing subpoena is directed or any party may file a motion to quash or modify the subpoena, accompanied by a statement of the basis for quashing or modifying the subpoena. The movant must serve the motion on each party and on the person named in the subpoena. Any party may respond to the motion within ten days of service of the motion.
(2) Any motion to quash or modify a hearing subpoena must be filed prior to the time specified in the subpoena for compliance, but not more than ten days after the date of service of the subpoena upon the movant.
(c) Enforcing subpoenas. If a subpoenaed person fails to comply with any subpoena issued pursuant to this section or any order of the administrative law judge which directs compliance with all or any portion of a document subpoena, the subpoenaing party or any other aggrieved party may seek enforcement of the subpoena pursuant to § 263.26(c).
§ 263.35 Conduct of hearings.
(a) General rules. (1) Hearings shall be conducted so as to provide a fair and expeditious presentation of the relevant disputed issues. Each party has the right to present its case or defense by oral and documentary evidence and to conduct such cross examination as may be required for full disclosure of the facts.
(2) Order of hearing. Enforcement Counsel shall present its case-in-chief first, unless otherwise ordered by the administrative law judge, or unless otherwise expressly specified by law or regulation. Enforcement Counsel shall be the first party to present an opening statement and a closing statement, and may make a rebuttal statement after the respondent’s closing statement. If there are multiple respondents, respondents may agree among themselves as to their order of presentation of their cases, but if they do not agree the administrative law judge shall fix the order.
(3) Examination of witnesses. Only one counsel for each party may conduct an examination of a witness, except that in the case of extensive direct examination, the administrative law judge may permit more than one counsel for the party presenting the witness to conduct the examination. A party may have one counsel conduct the direct examination and another counsel conduct re-direct examination of a witness, or may have one counsel conduct the cross examination of a witness and another counsel conduct the re-cross examination of a witness.
(4) Stipulations. Unless the administrative law judge directs otherwise, all stipulations of fact and law previously agreed upon by the parties, and all documents, the admissibility of which have been previously stipulated, will be admitted into evidence upon commencement of the hearing.
(b) Transcript. The hearing must be recorded and transcribed. The reporter will make the transcript available to any party upon payment by that party to the reporter of the cost of the transcript. The administrative law judge may order the record corrected, either upon motion to correct, upon stipulation of the parties, or following notice to the parties upon the administrative law judge’s own motion.
§ 263.36 Evidence.
(a) Admissibility. (1) Except as is otherwise set forth in this section, relevant, material, and reliable evidence that is not unduly repetitive is admissible to the fullest extent authorized by the Administrative Procedure Act and other applicable law.
(2) Evidence that would be admissible under the Federal Rules of Evidence is admissible in a proceeding conducted pursuant to this subpart.
(3) Evidence that would be inadmissible under the Federal Rules of Evidence may not be deemed or ruled to be inadmissible in a proceeding conducted pursuant to this subpart if such evidence is relevant, material, reliable and not unduly repetitive.
(b) Official notice. (1) Official notice may be taken of any material fact which may be judicially noticed by a United States district court and any material information in the official public records of any Federal or state government agency.
(2) All matters officially noticed by the administrative law judge or Board shall appear on the record.
(3) If official notice is requested or taken of any material fact, the parties, upon timely request, shall be afforded an opportunity to object.
(c) Documents. (1) A duplicate copy of a document is admissible to the same extent as the original, unless a genuine issue is raised as to whether the copy is in some material respect not a true and legible copy of the original.
(2) Subject to the requirements of paragraph (a) of this section, any document, including a report of examination, supervisory activity, inspection or visitation, prepared by an appropriate Federal financial institution regulatory agency or state regulatory agency, is admissible either with or without a sponsoring witness.
(3) Witnesses may use existing or newly created charts, exhibits, calendars, calculations, outlines or other graphic material to summarize, illustrate, or simplify the presentation of testimony. Such materials may, subject to the administrative law judge’s discretion, be used with or without being admitted into evidence.
(d) Objections. (1) Objections to the admissibility of evidence must be timely made and rulings on all objections must appear on the record.
(2) When an objection to a question or line of questioning propounded to a witness is sustained, the examining counsel may make a specific proffer on the record of what he or she expected to prove by the expected testimony of the witness, either by representation of counsel or by direct interrogation of the witness.
(3) The administrative law judge shall retain rejected exhibits, adequately marked for identification, for the record, and transmit such exhibits to the Board.
(4) Failure to object to admission of evidence or to any ruling constitutes a waiver of the objection.
(e) Stipulations. The parties may stipulate as to any relevant matters of fact or the authentication of any relevant documents. Such stipulations must be received in evidence at a hearing, and are binding on the parties with respect to the matters therein stipulated.
(f) Depositions of unavailable witnesses. (1) If a witness is unavailable to testify at a hearing, and that witness has testified in a deposition to which all parties in a proceeding had notice and an opportunity to participate, a party may offer as evidence all or any part of the transcript of the deposition, including deposition exhibits, if any.
(2) Such deposition transcript is admissible to the same extent that testimony would have been admissible had that person testified at the hearing, provided that if a witness refused to answer proper questions during the depositions, the administrative law judge may, on that basis, limit the admissibility of the deposition in any manner that justice requires.
(3) Only those portions of a deposition received in evidence at the hearing constitute a part of the record.
§ 263.37 Post-hearing filings.
(a) Proposed findings and conclusions and supporting briefs. (1) Using the same method of service for each party, the administrative law judge shall serve notice upon each party, that the certified transcript, together with all hearing exhibits and exhibits introduced but not admitted into evidence at the hearing, has been filed. Any party may file with the administrative law judge proposed findings of fact, proposed conclusions of law, and a proposed order within 30 days following service of this notice by the administrative law judge or within such longer period as may be ordered by the administrative law judge.
(2) Proposed findings and conclusions must be supported by citation to any relevant authorities and by page references to any relevant portions of the record. A post-hearing brief may be filed in support of proposed findings and conclusions, either as part of the same document or in a separate document. Any party who fails to file timely with the administrative law judge any proposed finding or conclusion is deemed to have waived the right to raise in any subsequent filing or submission any issue not addressed in such party’s proposed finding or conclusion.
(b) Reply briefs. Reply briefs may be filed within 15 days after the date on which the parties’ proposed findings, conclusions, and order are due. Reply briefs must be strictly limited to responding to new matters, issues, or arguments raised in another party’s papers. A party who has not filed proposed findings of fact and conclusions of law or a post-hearing brief may not file a reply brief.
(c) Simultaneous filing required. The administrative law judge shall not order the filing by any party of any brief or reply brief in advance of the other party’s filing of its brief.
§ 263.38 Recommended decision and filing of record.
(a) Filing of recommended decision and record. Within 45 days after expiration of the time allowed for filing reply briefs under § 263.37(b), the administrative law judge shall file with and certify to the Board, for decision, the record of the proceeding. The record must include the administrative law judge’s recommended decision, recommended findings of fact, recommended conclusions of law, and proposed order; all prehearing and hearing transcripts, exhibits, and rulings; and the motions, briefs, memoranda, and other supporting papers filed in connection with the hearing. The administrative law judge shall serve upon each party the recommended decision, findings, conclusions, and proposed order.
(b) Filing of index. At the same time the administrative law judge files with and certifies to the Board for final determination the record of the proceeding, the administrative law judge shall furnish to the Board a certified index of the entire record of the proceeding. The certified index shall include, at a minimum, an entry for each paper, document or motion filed with the administrative law judge in the proceeding, the date of the filing, and the identity of the filer. The certified index shall also include an exhibit index containing, at a minimum, an entry consisting of exhibit number and title or description for: Each exhibit introduced and admitted into evidence at the hearing; each exhibit introduced but not admitted into evidence at the hearing; each exhibit introduced and admitted into evidence after the completion of the hearing; and each exhibit introduced but not admitted into evidence after the completion of the hearing.
§ 263.39 Exceptions to recommended decision.
(a) Filing exceptions. Within 30 days after service of the recommended decision, findings, conclusions, and proposed order under § 263.38, a party may file with the Board written exceptions to the administrative law judge’s recommended decision, findings, conclusions or proposed order, to the admission or exclusion of evidence, or to the failure of the administrative law judge to make a ruling proposed by a party. A supporting brief may be filed at the time the exceptions are filed, either as part of the same document or in a separate document.
(b) Effect of failure to file or raise exceptions. (1) Failure of a party to file exceptions to those matters specified in paragraph (a) of this section within the time prescribed is deemed a waiver of objection thereto.
(2) No exception need be considered by the Board if the party taking exception had an opportunity to raise the same objection, issue, or argument before the administrative law judge and failed to do so.
(c) Contents. (1) All exceptions and briefs in support of such exceptions must be confined to the particular matters in, or omissions from, the administrative law judge’s recommendations to which that party takes exception.
(2) All exceptions and briefs in support of exceptions must set forth page or paragraph references to the specific parts of the administrative law judge’s recommendations to which exception is taken, the page or paragraph references to those portions of the record relied upon to support each exception, and the legal authority relied upon to support each exception.
§ 263.40 Review by the Board.
(a) Notice of submission to the Board. When the Board determines that the record in the proceeding is complete, the Board shall serve notice upon the parties that the proceeding has been submitted to the Board for final decision.
(b) Oral argument before the Board. Upon the initiative of the Board or on the written request of any party filed with the Board within the time for filing exceptions, the Board may order and hear oral argument on the recommended findings, conclusions, decision, and order of the administrative law judge. A written request by a party must show good cause for oral argument and state reasons why arguments cannot be presented adequately in writing. A denial of a request for oral argument may be set forth in the Board’s final decision. Oral argument before the Board must be on the record.
(c) Agency final decision. (1) Decisional employees may advise and assist the Board in the consideration and disposition of the case. The final decision of the Board will be based upon review of the entire record of the proceeding, except that the Board may limit the issues to be reviewed to those findings and conclusions to which opposing arguments or exceptions have been filed by the parties.
(2) The Board shall render a final decision within 90 days after notification of the parties that the case has been submitted for final decision, or 90 days after oral argument, whichever is later, unless the Board orders that the action or any aspect thereof be remanded to the administrative law judge for further proceedings. Copies of the final decision and order of the Board shall be served upon each party to the proceeding, upon other persons required by statute, and, if directed by the Board or required by statute, upon any appropriate state or Federal supervisory authority.
§ 263.41 Stays pending judicial review.
The commencement of proceedings for judicial review of a final decision and order of the Board may not, unless specifically ordered by the Board or a reviewing court, operate as a stay of any order issued by the Board. The Board may, in its discretion, and on such terms as it finds just, stay the effectiveness of all or any part of its order pending a final decision on a petition for review of that order.
Subpart B – Board Local Rules Supplementing the Uniform Rules
§ 263.50 Purpose and scope.
(a) This subpart prescribes the rules of practice and procedure governing formal adjudications set forth in § 263.50(b) of this subpart, and supplements the rules of practice and procedure contained in subpart A of this part.
(b) The rules and procedures of this subpart and subpart A of this part shall apply to the formal adjudications set forth in § 263.1 of subpart A and to the following adjudications:
(1) Suspension of a member bank from use of credit facilities of the Federal Reserve System under section 4 of the FRA (12 U.S.C. 301);
(2) Termination of a bank’s membership in the Federal Reserve System under section 9 of the FRA (12 U.S.C. 327);
(3) Issuance of a cease-and-desist order under section 11 of the Clayton Act (15 U.S.C. 21);
(4) Adjudications under sections 2, 3, or 4 of the BHC Act (12 U.S.C. 1841, 1842, or 1843);
(5) Formal adjudications on bank merger applications under section 18(c) of the FDIA (12 U.S.C. 1828(c));
(6) Issuance of a divestiture order under section 5(e) of the BHC Act (12 U.S.C. 1844(e));
(7) Imposition of sanctions upon any municipal securities dealer for which the Board is the appropriate regulatory agency, or upon any person associated or seeking to become associated with such a municipal securities dealer, under section 15B(c)(5) of the Exchange Act (15 U.S.C. 78o-4);
(8) Proceedings where the Board otherwise orders that a formal hearing be held;
(9) Termination of the activities of a state branch, state agency, or commercial lending company subsidiary of a foreign bank in the United States, pursuant to section 7(e) of the IBA (12 U.S.C. 3105(d));
(10) Termination of the activities of a representative office of a foreign bank in the United States, pursuant to section 10(b) of the IBA (12 U.S.C. 3107(b));
(11) Issuance of a prompt corrective action directive to a member bank under section 38 of the FDI Act (12 U.S.C. 1831o);
(12) Reclassification of a member bank on grounds of unsafe or unsound condition under section 38(g)(1) of the FDI Act (12 U.S.C. 1831o(g)(1));
(13) Reclassification of a member bank on grounds of unsafe and unsound practice under section 38(g)(1) of the FDI Act (12 U.S.C. 1831o(g)(1));
(14) Issuance of an order requiring a member bank to dismiss a director or senior executive officer under section 38 (e)(5) and 38(f)(2) (F)(ii) of the FDI Act (12 U.S.C. 1831o(e)(5) and 1831o(f)(2) (F)(ii));
(15) Adjudications under section 10 of the HOLA (12 U.S.C. 1467a).
§ 263.51 Definitions.
As used in subparts B through G of this part:
(a) Secretary means the Secretary of the Board of Governors of the Federal Reserve System;
(b) Member bank means any bank that is a member of the Federal Reserve System.
(c) Institution has the same meaning as that assigned to it in § 263.3(f) of subpart A, and includes any foreign bank with a representative office in the United States.
§ 263.52 Address for filing.
All papers to be filed with the Board shall be filed with the Secretary of the Board of Governors of the Federal Reserve System, Washington, DC 20551.
§ 263.53 Discovery depositions.
(a) In general. In addition to the discovery permitted in subpart A of this part, limited discovery by means of depositions shall be allowed for individuals with knowledge of facts material to the proceeding that are not protected from discovery by any applicable privilege, and of identified expert witnesses. Except in unusual cases, accordingly, depositions will be permitted only of individuals identified as hearing witnesses, including experts. All discovery depositions must be completed within the time set forth in § 263.24(d).
(b) Application. A party who desires to take a deposition of any other party’s proposed witnesses, shall apply to the administrative law judge for the issuance of a deposition subpoena or subpoena duces tecum. The application shall state the name and address of the proposed deponent, the subject matter of the testimony expected from the deponent and its relevancy to the proceeding, and the address of the place and the time, no sooner than ten days after the service of the subpoena, for the taking of the deposition. Any such application shall be treated as a motion subject to the rules governing motions practice set forth in § 263.23.
(c) Issuance of subpoena. The administrative law judge shall issue the requested deposition subpoena or subpoena duces tecum upon a finding that the application satisfies the requirements of this section and of § 263.24. If the administrative law judge determines that the taking of the deposition or its proposed location is, in whole or in part, unnecessary, unreasonable, oppressive, excessive in scope or unduly burdensome, he or she may deny the application or may grant it upon such conditions as justice may require. The party obtaining the deposition subpoena or subpoena duces tecum shall be responsible for serving it on the deponent and all parties to the proceeding in accordance with § 263.11.
(d) Motion to quash or modify. A person named in a deposition subpoena or subpoena duces tecum may file a motion to quash or modify the subpoena or for the issuance of a protective order. Such motions must be filed within ten days following service of the subpoena, but in all cases at least five days prior to the commencement of the scheduled deposition. The motion must be accompanied by a statement of the reasons for granting the motion and a copy of the motion and the statement must be served on the party which requested the subpoena. Only the party requesting the subpoena may file a response to a motion to quash or modify, and any such response shall be filed within five days following service of the motion.
(e) Enforcement of a deposition subpoena. Enforcement of a deposition subpoena shall be in accordance with the procedures set forth in § 263.27(d).
(f) Conduct of the deposition. The deponent shall be duly sworn, and each party shall have the right to examine the deponent with respect to all non-privileged, relevant and material matters. Objections to questions or evidence shall be in the short form, stating the ground for the objection. Failure to object to questions or evidence shall not be deemed a waiver except where the grounds for the objection might have been avoided if the objection had been timely presented. The discovery deposition shall be transcribed or otherwise recorded as agreed among the parties.
(g) Protective orders. At any time during the taking of a discovery deposition, on the motion of any party or of the deponent, the administrative law judge may terminate or limit the scope and manner of the deposition upon a finding that grounds exist for such relief. Grounds for terminating or limiting the taking of a discovery deposition include a finding that the discovery deposition is being conducted in bad faith or in such a manner as to:
(1) Unreasonably annoy, embarrass, or oppress the deponent;
(2) Unreasonably probe into privilege, irrelevant or immaterial matters; or
(3) Unreasonably attempt to pry into a party’s preparation for trial.
§ 263.54 Delegation to the Office of Financial Institution Adjudication.
Unless otherwise ordered by the Board, administrative adjudications subject to subpart A of this part shall be conducted by an administrative law judge of OFIA.
§ 263.55 Board as Presiding Officer.
The Board may, in its discretion, designate itself, one or more of its members, or an authorized officer, to act as presiding officer in a formal hearing. In such a proceeding, proposed findings and conclusions, briefs, and other submissions by the parties permitted in subpart A shall be filed with the Secretary for consideration by the Board. Sections 263.38 and 263.39 of subpart A will not apply to proceedings conducted under this section.
§ 263.56 Initial licensing proceedings.
Proceedings with respect to applications for initial licenses shall include, but not be limited to, applications for Board approval under section 3 of the BHC Act and section 10 of HOLA and such proceedings as may be ordered by the Board with respect to applications under section 18(c) of the FDIA. In such initial licensing proceedings, the procedures set forth in subpart A of this part shall apply, except that the Board may designate a Board Counsel to represent the Board in a nonadversary capacity for the purpose of developing for the record information relevant to the issues to be determined by the Presiding Officer and the Board. In such proceedings, Board Counsel shall be considered to be a decisional employee for purposes of §§ 263.9 and 263.40 of subpart A.
Subpart C – Rules and Procedures for Assessment and Collection of Civil Money Penalties
§ 263.60 Scope.
The Uniform Rules set forth in subpart A of this part shall govern the procedures for assessment of civil money penalties, except as otherwise provided in this subpart.
§ 263.61 Opportunity for informal proceeding.
In the sole discretion of the Board’s General Counsel, the General Counsel may, prior to the issuance by the Board of a notice of assessment of civil penalty, advise the affected person that the issuance of a notice of assessment of civil penalty is being considered and the reasons and authority for the proposed assessment. The General Counsel may provide the person an opportunity to present written materials or request a conference with members of the Board’s staff to show that the penalty should not be assessed or, if assessed, should be reduced in amount.
§ 263.62 Relevant considerations for assessment of civil penalty.
In determining the amount of the penalty to be assessed, the Board shall take into account the appropriateness of the penalty with respect to the financial resources and good faith of the person charged, the gravity of the misconduct, the history of previous misconduct, the economic benefit derived by the person from the misconduct, and such other matters as justice may require.
§ 263.63 Assessment order.
(a) In the event of consent to an assessment by the person concerned, or if, upon the record made at an administrative hearing, the Board finds that the grounds for having assessed the penalty have been established, the Board may issue a final order of assessment of civil penalty. In its final order, the Board may modify the amount of the penalty specified in the notice of assessment.
(b) An assessment order is effective immediately upon issuance, or upon such other date as may be specified therein, and shall remain effective and enforceable until it is stayed, modified, terminated, or set aside by action of the Board or a reviewing court.
§ 263.64 Payment of civil penalty.
(a) The date designated in the notice of assessment for payment of the civil penalty will normally be 60 days from the issuance of the notice. If, however, the Board finds in a specific case that the purposes of the authorizing statute would be better served if the 60-day period is changed, the Board may shorten or lengthen the period or make the civil penalty payable immediately upon receipt of the notice of assessment. If a timely request for a formal hearing to challenge an assessment of civil penalty is filed, payment of the penalty shall not be required unless and until the Board issues a final order of assessment following the hearing. If an assessment order is issued, it will specify the date by which the civil penalty should be paid or collected.
(b) Checks in payment of civil penalties should be made payable to the “Board of Governors of the Federal Reserve System.” Upon collection, the Board shall forward the amount of the penalty to the Treasury of the United States.
§ 263.65 Civil money penalty inflation adjustments.
(a) Inflation adjustments. In accordance with the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, which further amended the Federal Civil Penalties Inflation Adjustment Act of 1990, the Board has set forth in paragraph (b) of this section the adjusted maximum amounts for each civil money penalty provided by law within the Board’s jurisdiction. The authorizing statutes contain the complete provisions under which the Board may seek a civil money penalty. The adjusted civil money penalties apply only to penalties assessed on or after January 11, 2023, whose associated violations occurred on or after November 2, 2015.
(b) Maximum civil money penalties. The maximum (or, in the cases of 12 U.S.C. 334 and 1832(c), fixed) civil money penalties as set forth in the referenced statutory sections are set forth in the table in this paragraph (b).
Table 1 to Paragraph (
| Statute | Adjusted civil
money penalty | |
|---|---|---|
| 12 U.S.C. 324 | ||
| $4,745 | ||
| 47,454 | ||
| 2,372,677 | ||
| 12 U.S.C. 334 | 345 | |
| 12 U.S.C. 374a | 345 | |
| 12 U.S.C. 504 | ||
| 11,864 | ||
| 59,316 | ||
| 2,372,677 | ||
| 12 U.S.C. 505 | ||
| 11,864 | ||
| 59,316 | ||
| 2,372,677 | ||
| 12 U.S.C. 1464(v)(4) | 4,745 | |
| 12 U.S.C. 1464(v)(5) | 47,454 | |
| 12 U.S.C. 1464(v)(6) | 2,372,677 | |
| 12 U.S.C. 1467a(i)(2) | 59,316 | |
| 12 U.S.C. 1467a(i)(3) | 59,316 | |
| 12 U.S.C. 1467a(r) | ||
| 4,745 | ||
| 47,454 | ||
| 2,372,677 | ||
| 12 U.S.C. 1817(j)(16) | ||
| 11,864 | ||
| 59,316 | ||
| 2,372,677 | ||
| 12 U.S.C. 1818(i)(2) | ||
| 11,864 | ||
| 59,316 | ||
| 2,372,677 | ||
| 12 U.S.C. 1820(k)(6)(A)(ii) | 390,271 | |
| 12 U.S.C. 1832(c) | 3,446 | |
| 12 U.S.C. 1847(b) | 59,316 | |
| 12 U.S.C. 1847(d) | ||
| 4,745 | ||
| 47,454 | ||
| 2,372,677 | ||
| 12 U.S.C. 1884 | 345 | |
| 12 U.S.C. 1972(2)(F) | ||
| 11,864 | ||
| 59,316 | ||
| 2,372,677 | ||
| 12 U.S.C. 3110(a) | 54,224 | |
| 12 U.S.C. 3110(c) | ||
| 4,339 | ||
| 43,377 | ||
| 2,168,915 | ||
| 12 U.S.C. 3909(d) | 2,951 | |
| 15 U.S.C. 78u-2(b)(1) | ||
| 11,162 | ||
| 111,614 | ||
| 15 U.S.C. 78u-2(b)(2) | ||
| 111,614 | ||
| 558,071 | ||
| 15 U.S.C. 78u-2(b)(3) | ||
| 223,229 | ||
| 1,116,140 | ||
| 15 U.S.C. 1639e(k)(1) | 13,627 | |
| 15 U.S.C. 1639e(k)(2) | 27,252 | |
| 42 U.S.C. 4012a(f)(5) | 2,577 |
Subpart D – Rules and Procedures Applicable to Suspension or Removal of an Institution-Affiliated Party Where a Felony is Charged or Proven
§ 263.70 Purpose and scope.
The rules and procedures set forth in this subpart apply to informal hearings afforded to any institution-affiliated party for whom the Board is the appropriate regulatory agency, who has been suspended or removed from office or prohibited from further participation in any manner in the conduct of the institution’s affairs by a notice or order issued by the Board upon the grounds set forth in section 8(g) of the FDIA (12 U.S.C. 1818(g)).
§ 263.71 Notice or order of suspension, removal, or prohibition.
(a) Grounds. The Board may suspend an institution-affiliated party from office or prohibit an institution-affiliated party from further participation in any manner in the conduct of an institution’s affairs when the person is charged in any information, indictment, or complaint authorized by a United States attorney with the commission of, or participation in, a crime involving dishonesty or breach of trust that is punishable by imprisonment for a term exceeding one year under State or Federal law. The Board may remove an institution-affiliated party from office or prohibit an institution-affiliated party from further participation in any manner in the conduct of an institution’s affairs when the person is convicted of such an offense and the conviction is not subject to further direct appellate review. The Board may suspend or remove an institution-affiliated party or prohibit an institution-affiliated party from participation in an institution’s affairs in these circumstances if the Board finds that continued service to the financial institution or participation in its affairs by the institution-affiliated party may pose a threat to the interests of the institution’s depositors or may threaten to impair public confidence in the financial institution.
(b) Contents. The Board commences a suspension, removal, or prohibition action under this subpart with the issuance, and service upon an institution-affiliated party, of a notice of suspension from office, or order of removal from office, or notice or order of prohibition from participation in the financial institution’s affairs. Such a notice or order shall indicate the basis for the suspension, removal, or prohibition and shall inform the institution-affiliated party of the right to request in writing, within 30 days of service of the notice or order, an opportunity to show at an informal hearing that continued service to, or participation in the conduct of the affairs of, the financial institution does not and is not likely to pose a threat to the interests of the financial institution’s depositors or threaten to impair public confidence in the financial institution. Failure to file a timely request for an informal hearing shall be deemed to be a waiver of the right to request such a hearing. A notice of suspension or prohibition shall remain in effect until the criminal charge upon which the notice is based is finally disposed of or until the notice is terminated by the Board.
(c) Service. The notice or order shall be served upon the affiliated financial institution concerned, whereupon the institution-affiliated party shall immediately cease service to the financial institution or further participation in any manner in the conduct of the affairs of the financial institution. A notice or order of suspension, removal, or prohibition may be served by any of the means authorized for service under § 263.11(c)(2) of subpart A.
§ 263.72 Request for informal hearing.
An institution-affiliated party who is suspended or removed from office or prohibited from participation in the institution’s affairs may request an informal hearing within 30 days of service of the notice or order. The request shall be filed in writing with the Secretary, Board of Governors of the Federal Reserve System, Washington, DC 20551. The request shall state with particularity the relief desired and the grounds therefor and shall include, when available, supporting evidence in the form of affidavits. If the institution-affiliated party desires to present oral testimony or witnesses at the hearing, the institution-affiliated party must include a request to do so with the request for informal hearing. The request to present oral testimony or witnesses shall specify the names of the witnesses and the general nature of their expected testimony.
§ 263.73 Order for informal hearing.
(a) Issuance of hearing order. Upon receipt of a timely request for an informal hearing, the Secretary shall promptly issue an order directing an informal hearing to commence within 30 days of the receipt of the request. At the request of the institution-affiliated party, the Secretary may order the hearing to commence at a time more than 30 days after the receipt of the request for hearing. The hearing shall be held in Washington, DC, or at such other place as may be designated by the Secretary, before presiding officers designated by the Secretary to conduct the hearing. The presiding officers normally will include representatives from the Board’s Legal Division and the Division of Banking Supervision and Regulation and from the appropriate Federal Reserve Bank.
(b) Waiver of oral hearing. A institution-affiliated party may waive in writing his or her right to an oral hearing and instead elect to have the matter determined by the Board solely on the basis of written submissions.
(c) Hearing procedures. (1) The institution-affiliated party may appear at the hearing personally, through counsel, or personally with counsel. The institution-affiliated party shall have the right to introduce relevant written materials and to present an oral argument. The institution-affiliated party may introduce oral testimony and present witnesses only if expressly authorized by the Board or the Secretary. Except as provided in § 263.11, the adjudicative procedures of the Administrative Procedure Act (5 U.S.C. 554-557) and of subpart A of this part shall not apply to the informal hearing ordered under this subpart unless the Board orders that subpart A of this part applies.
(2) The informal hearing shall be recorded and a transcript shall be furnished to the institution-affiliated party upon request and after the payment of the cost thereof. Witnesses need not be sworn, unless specifically requested by a party or the presiding officers. The presiding officers may ask questions of any witness.
(3) The presiding officers may order the record to be kept open for a reasonable period following the hearing (normally five business days), during which time additional submissions to the record may be made. Thereafter, the record shall be closed.
(d) Authority of presiding officers. In the course of or in connection with any proceeding under this subpart, the Board or the presiding officers are authorized to administer oaths and affirmations, to take or cause to be taken depositions, to issue, quash or modify subpoenas and subpoenas duces tecum, and, for the enforcement thereof, to apply to an appropriate United States district court. All action relating to depositions and subpoenas shall be in accordance with the rules provided in §§ 263.34 and 263.53.
(e) Recommendation of presiding officers. The presiding officers shall make a recommendation to the Board concerning the notice or order of suspension, removal, or prohibition within 20 calendar days following the close of the record on the hearing.
§ 263.74 Decision of the Board.
(a) Within 60 days following the close of the record on the hearing, or receipt of written submissions where a hearing has been waived, the Board shall notify the institution-affiliated party whether the notice of suspension or prohibition will be continued, terminated, or otherwise modified, or whether the order of removal or prohibition will be rescinded or otherwise modified. The notification shall contain a statement of the basis for any adverse decision by the Board. In the case of a decision favorable to the institution-affiliated party, the Board shall take prompt action to rescind or otherwise modify the order of suspension, removal or prohibition.
(b) In deciding the question of suspension, removal, or prohibition under this subpart, the Board shall not rule on the question of the guilt or innocence of the individual with respect to the crime with which the individual has been charged.
Subpart E – Procedures for Issuance and Enforcement of Directives To Maintain Adequate Capital
§ 263.80 Purpose and scope.
This subpart establishes procedures under which the Board may issue a directive or take other action to require a state member bank, bank holding company, or a savings and loan holding company to achieve and maintain adequate capital.
§ 263.81 Definitions.
(a) Bank holding company means any company that controls a bank as defined in section 2 of the BHC Act, 12 U.S.C. 1841, and in the Board’s Regulation Y (12 CFR 225.2(b)) or any direct or indirect subsidiary thereof other than a bank subsidiary as defined in section 2(c) of the BHC Act, 12 U.S.C. 1841(c), and in the Board’s Regulation Y (12 CFR 225.2(a)).
(b) Capital Adequacy Guidelines means those guidelines for bank holding companies and state member banks contained in appendices A and D to the Board’s Regulation Y (12 CFR part 225), and in appendix A to the Board’s Regulation H (12 CFR part 208), or any succeeding capital guidelines promulgated by the Board.
(c) Directive means a final order issued by the Board:
(1) Pursuant to ILSA (12 U.S.C. 3907(b)(2)) requiring a state member bank or bank holding company to increase capital to or maintain capital at the minimum level set forth in the Board’s Capital Adequacy Guidelines or as otherwise established under procedures described in § 263.85; or
(2) Pursuant to HOLA (12 U.S.C. 1467a(g)(1)) requiring a savings and loan holding company to increase capital to or maintain capital at a certain level.
(d) State member bank means any state-chartered bank that is a member of the Federal Reserve System.
(e) Savings and loan holding company means any company that controls a savings association as defined in section 10 of the HOLA, 12 U.S.C. 1467a, and in the Board’s Regulation LL (12 CFR 238.2) or any direct or indirect subsidiary thereof other than a savings association subsidiary as defined in section 10 of the HOLA, 12 U.S.C. 1467a, and in the Board’s Regulation LL (12 CFR 238.2).
§ 263.82 Establishment of minimum capital levels.
The Board has established minimum capital levels for state member banks and bank holding companies in its Capital Adequacy Guidelines. The Board may set higher capital levels as necessary and appropriate for a particular state member bank or bank holding company based upon its financial condition, managerial resources, prospects, or similar factors, pursuant to the procedures set forth in § 263.85 of this subpart.
§ 263.83 Issuance of capital directives.
(a) Notice of intent to issue directive. If a state member bank or bank holding company is operating with less than the minimum level of capital established in the Board’s Capital Adequacy Guidelines, or as otherwise established under the procedures described in § 263.85, or if the Board has determined that the current capital level of a savings and loan holding company is not adequate, the Board may issue and serve upon such state member bank, bank holding company, or savings and loan holding company written notice of the Board’s intent to issue a directive to require the bank, bank holding company, or savings and loan holding company to achieve and maintain adequate capital within a specified time period.
(b) Contents of notice. The notice of intent to issue a directive shall include:
(1) The required minimum level of capital to be achieved or maintained by the institution;
(2) Its current level of capital;
(3) The proposed increase in capital needed to meet the minimum requirements;
(4) The proposed date or schedule for meeting these minimum requirements;
(5) When deemed appropriate, specific details of a proposed plan for meeting the minimum capital requirements; and
(6) The date for a written response by the bank or bank holding company to the proposed directive, which shall be at least 14 days from the date of issuance of the notice unless the Board determines a shorter period is necessary because of the financial condition of the bank or bank holding company.
(c) Response to notice. The bank or bank holding company may file a written response to the notice within the time period set by the Board. The response may include:
(1) An explanation why a directive should not be issued;
(2) Any proposed modification of the terms of the directive;
(3) Any relevant information, mitigating circumstances, documentation or other evidence in support of the institution’s position regarding the proposed directive; and
(4) The institution’s plan for attaining the required level of capital.
(d) Failure to file response. Failure by the bank or bank holding company to file a written response to the notice of intent to issue a directive within the specified time period shall constitute a waiver of the opportunity to respond and shall constitute consent to the issuance of such directive.
(e) Board consideration of response. After considering the response of the bank or bank holding company, the Board may:
(1) Issue the directive as originally proposed or in modified form;
(2) Determine not to issue a directive and so notify the bank or bank holding company; or
(3) Seek additional information or clarification of the response by the bank or bank holding company.
(f) Contents of directive. Any directive issued by the Board may order the bank or bank holding company to:
(1) Achieve or maintain the minimum capital requirement established pursuant to the Board’s Capital Adequacy Guidelines or the procedures in § 263.85 of this subpart by a certain date;
(2) Adhere to a previously submitted plan or submit for approval and adhere to a plan for achieving the minimum capital requirement by a certain date;
(3) Take other specific action as the Board directs to achieve the minimum capital levels, including requiring a reduction of assets or asset growth or restriction on the payment of dividends; or
(4) Take any combination of the above actions.
(g) Request for reconsideration of directive. Any state member bank or bank holding company, upon a change in circumstances, may request the Board to reconsider the terms of a directive and may propose changes in the plan under which it is operating to meet the required minimum capital level. The directive and plan continue in effect while such request is pending before the Board.
§ 263.84 Enforcement of directive.
(a) Judicial and administrative remedies. (1) Whenever a bank or bank holding company fails to follow a directive issued under this subpart, or to submit or adhere to a capital adequacy plan as required by such directive, the Board may seek enforcement of the directive, including the capital adequacy plan, in the appropriate United States district court, pursuant to section 908 (b)(2)(B)(ii) of ILSA (12 U.S.C. 3907(b)(2)(B)(ii)) and to section 8(i) of the FDIA (12 U.S.C. 1818(i)), in the same manner and to the same extent as if the directive were a final cease-and-desist order. Whenever a savings and loan holding company fails to follow a directive issued under this subpart, or to submit or adhere to a capital adequacy plan as required by such directive, the Board may seek enforcement of the directive, including the capital adequacy plan, in the proper United States district court, or the United States court of any territory or other place subject to the jurisdiction of the United States, pursuant to section 10(g)(4) of HOLA (12 U.S.C. 1567a(g)(4)).
(2) The Board, pursuant to section 910(d) of ILSA (12 U.S.C. 3909(d)), may also assess civil money penalties for violation of the directive against any bank or bank holding company and any institution-affiliated party of the bank or bank holding company, in the same manner and to the same extent as if the directive were a final cease-and-desist order. The Board, pursuant to section 10(i) (12 U.S.C. 1467a(i)), may also assess civil money penalties for violation of the directive against any savings and loan holding company and any institution-affiliated party of the savings and loan holding company, in the same manner and to the same extent as if the directive were a final cease-and-desist order.
(b) Other enforcement actions. A directive may be issued separately, in conjunction with, or in addition to any other enforcement actions available to the Board, including issuance of cease-and-desist orders, the approval or denial of applications or notices, or any other actions authorized by law.
(c) Consideration in application proceedings. In acting upon any application or notice submitted to the Board pursuant to any statute administered by the Board, the Board may consider the progress of a state member bank, bank holding company, or savings and loan holding company or any subsidiary thereof in adhering to any directive or capital adequacy plan required by the Board pursuant to this subpart, or by any other appropriate banking supervisory agency pursuant to ILSA. The Board shall consider whether approval or a notice of intent not to disapprove would divert earnings, diminish capital, or otherwise impede the bank, bank holding company, or savings and loan holding company in achieving its required minimum capital level or complying with its capital adequacy plan.
§ 263.85 Establishment of increased capital level for specific institutions.
(a) Establishment of capital levels for specific institutions. The Board may establish a capital level higher than the minimum specified in the Board’s Capital Adequacy Guidelines for a specific bank or bank holding company pursuant to:
(1) A written agreement or memorandum of understanding between the Board or the appropriate Federal Reserve Bank and the bank or bank holding company;
(2) A temporary or final cease-and-desist order issued pursuant to section 8(b) or (c) of the FDIA (12 U.S.C. 1818(b) or (c));
(3) A condition for approval of an application or issuance of a notice of intent not to disapprove a proposal;
(4) Or other similar means; or
(5) The procedures set forth in paragraph (b) of this section.
(b) Procedure to establish higher capital requirement – (1) Notice. When the Board determines that capital levels above those in the Board’s Capital Adequacy Guidelines may be necessary and appropriate for a particular bank or bank holding company under the circumstances, or when the Board determines that the current capital level of a savings and loan holding company is not adequate, the Board shall give the bank or bank holding company notice of the proposed higher capital requirement and shall permit the bank, bank holding company, or savings and loan holding company an opportunity to comment upon the proposed capital level, whether it should be required and, if so, under what time schedule. The notice shall contain the Board’s reasons for proposing a higher level of capital.
(2) Response. The bank, bank holding company, or savings and loan holding company shall be allowed at least 14 days to respond, unless the Board determines that a shorter period is necessary because of the financial condition of the bank, bank holding company, or savings and loan holding company. Failure by the bank, bank holding company, or savings and loan holding company to file a written response to the notice within the time set by the Board shall constitute a waiver of the opportunity to respond and shall constitute consent to issuance of a directive containing the required minimum capital level.
(3) Board decision. After considering the response of the institution, the Board may issue a written directive to the bank, bank holding company, or savings and loan holding company setting an appropriate capital level and the date on which this capital level will become effective. The Board may require the bank, bank holding company, or savings and loan holding company to submit and adhere to a plan for achieving such higher capital level as the Board may set.
(4) Enforcement of higher capital level. The Board may enforce the capital level established pursuant to the procedures described in this section and any plan submitted to achieve that capital level through the procedures set forth in § 263.84 of this subpart.
Subpart F – Practice Before the Board
§ 263.90 Scope.
This subpart prescribes rules relating to general practice before the Board on one’s own behalf or in a representational capacity, including the circumstances under which disciplinary sanctions – censure, suspension, or debarment – may be imposed upon persons appearing in a representational capacity, including attorneys and accountants, but not including employees of the Board. These disciplinary sanctions, which continue in effect beyond the duration of a specific proceeding, supplement the provisions of § 263.6(b) of subpart A, which address control of a specific proceeding.
§ 263.91 Censure, suspension or debarment.
The Board may censure an individual or suspend or debar such individual from practice before the Board if he or she engages, or has engaged, in conduct warranting sanctions as set forth in § 263.94; refuses to comply with the rules and regulations in this part; or with intent to defraud in any manner, willfully and knowingly deceives, misleads, or threatens any client or prospective client. The suspension or debarment of an individual shall be initiated only upon a finding by the Board that the conduct that forms the basis for the disciplinary action is egregious.
§ 263.92 Definitions.
(a) As used in this subpart, the following terms shall have the meaning given in this section unless the context otherwise requires.
(b)(1) Practice before the Board includes any matters connected with presentations to the Board or to any of its officers or employees relating to a client’s rights, privileges or liabilities under laws or regulations administered by the Board. Such matters include, but are not limited to, the preparation of any statement, opinion or other paper or document by an attorney, accountant, or other licensed professional which is filed with, or submitted to, the Board, on behalf of another person in, or in connection with, any application, notification, report or document; the representation of a person at conferences, hearings and meetings; and the transaction of other business before the Board on behalf of another person.
(2) Practice before the Board does not include work prepared for an institution solely at its request for use in the ordinary course of its business.
(c) Attorney means any individual who is a member in good standing of the bar of the highest court of any state, possession, territory, commonwealth, or the District of Columbia.
(d) Accountant means any individual who is duly qualified to practice as a certified public accountant or a public accountant in any state, possession, territory, commonwealth, or the District of Columbia.
§ 263.93 Eligibility to practice.
(a) Attorneys. Any attorney who is qualified to practice as an attorney and is not currently under suspension or debarment pursuant to this subpart may practice before the Board.
(b) Accountants. Any accountant who is qualified to practice as a certified public accountant or public accountant and is not currently under suspension or debarment by the Board may practice before the Board.
§ 263.94 Conduct warranting sanctions.
Conduct for which an individual may be censured, debarred or suspended from practice before the Board includes, but is not limited to:
(a) Willfully or recklessly violating or willfully or recklessly aiding and abetting the violation of any provision of the Federal banking or applicable securities laws or the rules and regulations thereunder or conviction of any offense involving dishonesty or breach of trust;
(b) Knowingly or recklessly giving false or misleading information, or participating in any way in the giving of false information to the Board or to any Board officer or employee, or to any tribunal authorized to pass upon matters administered by the Board in connection with any matter pending or likely to be pending before it. The term “information” includes facts or other statements contained in testimony, financial statements, applications, affidavits, declarations, or any other document or written or oral statement;
(c) Directly or indirectly attempting to influence, or offering or agreeing to attempt to influence, the official action of any officer or employee of the Board by the use of threats, false accusations, duress or coercion, by the offer of any special inducement or promise of advantage or by the bestowing of any gift, favor, or thing of value;
(d) Disbarment or suspension from practice as an attorney, or debarment or suspension from practice as a certified public accountant or public accountant, by any duly constituted authority of any state, possession, commonwealth, or the District of Columbia for the conviction of a felony or misdemeanor involving personal dishonesty or breach of trust in matters relating to the supervisory responsibilities of the Board, where the conviction has not been reversed on appeal;
(e) Knowingly aiding or abetting another individual to practice before the Board during that individual’s period of suspension, debarment, or ineligibility;
(f) Contemptuous conduct in connection with practice before the Board, and knowingly making false accusations and statements, or circulating or publishing malicious or libelous matter;
(g) Suspension or debarment from practice before the OCC, the FDIC, the Office of Thrift Supervision, the Securities and Exchange Commission, the NCUA, or any other Federal agency based on matters relating to the supervisory responsibilities of the Board;
(h) Willful or knowing violation of any of the regulations contained in this part.
§ 263.95 Initiation of disciplinary proceeding.
(a) Receipt of information. An individual, including any employee of the Board, who has reason to believe that an individual practicing before the Board in a representative capacity has engaged in any conduct that would serve as a basis for censure, suspension or debarment under § 263.94, may make a report thereof and forward it to the Board.
(b) Censure without formal proceeding. Upon receipt of information regarding an individual’s qualification to practice before the Board, the Board may, after giving the individual notice and opportunity to respond, censure such individual.
(c) Institution of formal disciplinary proceeding. When the Board has reason to believe that any individual who practices before the Board in a representative capacity has engaged in conduct that would serve as a basis for censure, suspension or debarment under § 263.94 the Board may, after giving the individual notice and opportunity to respond, institute a formal disciplinary proceeding against such individual. The proceeding shall be conducted pursuant to § 263.97 and shall be initiated by a complaint issued by the Board that names the individual as a respondent. Except in cases when time, the nature of the proceeding, or the public interest do not permit, a proceeding under this section shall not be instituted until the respondent has been informed, in writing, of the facts or conduct which warrant institution of a proceeding and the respondent has been accorded the opportunity to comply with all lawful requirements or take whatever action may be necessary to remedy the conduct that is the basis for the initiation of the proceeding.
§ 263.96 Conferences.
(a) General. The Board’s staff may confer with a proposed respondent concerning allegations of misconduct or other grounds for censure, debarment or suspension, regardless of whether a proceeding for debarment or suspension has been instituted. If a conference results in a stipulation in connection with a proceeding in which the individual is the respondent, the stipulation may be entered in the record at the request of either party to the proceeding.
(b) Resignation or voluntary suspension. In order to avoid the institution of, or a decision in, a debarment or suspension proceeding, a person who practices before the Board may consent to suspension from practice. At the discretion of the Board, the individual may be suspended or debarred in accordance with the consent offered.
§ 263.97 Proceedings under this subpart.
Except as otherwise provided in this subpart, any hearing held under this subpart shall be held before an administrative law judge of the OFIA pursuant to procedures set forth in subparts A and B of this part. The Board shall appoint a person to represent the Board in the hearing. Any person having prior involvement in the matter which is the basis for the suspension or debarment proceeding shall be disqualified from representing the Board in the hearing. The hearing shall be closed to the public unless the Board, sua sponte or on the request of a party, otherwise directs. The administrative law judge shall refer a recommended decision to the Board, which shall issue the final decision and order. In its final decision and order, the Board may censure, debar or suspend an individual, or take such other disciplinary action as the Board deems appropriate.
§ 263.98 Effect of suspension, debarment or censure.
(a) Debarment. If the final order against the respondent is for debarment, the individual will not thereafter be permitted to practice before the Board unless otherwise permitted to do so by the Board pursuant to § 263.99 of this subpart.
(b) Suspension. If the final order against the respondent is for suspension, the individual will not thereafter be permitted to practice before the Board during the period of suspension.
(c) Censure. If the final order against the respondent is for censure, the individual may be permitted to practice before the Board, but such individual’s future representations may be subject to conditions designed to promote high standards of conduct. If a written letter of censure is issued, a copy will be maintained in the Board’s files.
(d) Notice of debarment or suspension. Upon the issuance of a final order for suspension or debarment, the Board shall give notice of the order to appropriate officers and employees of the Board, to interested departments and agencies of the Federal Government, and to the appropriate authorities of the State in which any debarred or suspended individual is or was licensed to practice.
§ 263.99 Petition for reinstatement.
The Board may entertain a petition for reinstatement from any person debarred from practice before the Board. The Board shall grant reinstatement only if the Board finds that the petitioner is likely to act in accordance with the regulations in this part, and that granting reinstatement would not be contrary to the public interest. Any request for reinstatement shall be limited to written submissions unless the Board, in its discretion, affords the petitioner an informal hearing.
Subpart G – Rules Regarding Claims Under the Equal Access to Justice Act
§ 263.100 Authority and scope.
This subpart implements the provisions of the Equal Access to Justice Act (5 U.S.C. 504) as they apply to formal adversary adjudications before the Board. The types of proceedings covered by this subpart are listed in §§ 263.1 and 263.50.
§ 263.101 Standards for awards.
A respondent in a covered proceeding that prevails on the merits of that proceeding against the Board, and that is eligible under this subpart as defined in § 263.103, may receive an award for fees and expenses incurred in the proceeding unless the position of the Board during the proceeding was substantially justified or special circumstances make an award unjust. The position of the Board includes, in addition to the position taken by the Board in the adversary proceeding, the action or failure to act by the Board upon which the adversary proceeding was based. An award will be reduced or denied if the applicant has unduly or unreasonably protracted the proceedings.
§ 263.102 Prevailing party.
Only an eligible applicant that prevailed on the merits of an adversary proceeding may qualify for an award under this subpart.
§ 263.103 Eligibility of applicants.
(a) General rule. To be eligible for an award under this subpart, an applicant must have been named as a party to the adjudicatory proceeding and show that it meets all other conditions of eligibility set forth in paragraphs (b) and (c) of this section.
(b) Types of eligible applicant. An applicant is eligible for an award only if it meets at least one of the following descriptions:
(1) An individual with a net worth of not more than $2 million at the time the adversary adjudication was initiated;
(2) Any sole owner of an unincorporated business, or any partnership, corporation, associations, unit of local government or organization, the net worth of which did not exceed $7,000,000 and which did not have more than 500 employees at the time the adversary adjudication was initiated;
(3) A charitable or other tax-exempt organization described in section 501(c)(3) of the Internal Revenue Code (26 U.S.C. 501(c)(3)) with not more than 500 employees at the time the adversary proceeding was initiated; or
(4) A cooperative association as defined in section 15(a) of the Agricultural Marketing Act (12 U.S.C. 1141j(a)) with not more than 500 employees at the time the adversary proceeding was initiated.
(c) Factors to be considered. In determining the eligibility of an applicant:
(1) An applicant who owns an unincorporated business shall be considered as an individual rather than a sole owner of an unincorporated business if the issues on which he or she prevailed are related to personal interests rather than to business interests.
(2) An applicant’s net worth includes the value of any assets disposed of for the purpose of meeting an eligibility standard and excludes the value of any obligations incurred for this purpose. Transfers of assets or obligations incurred for less than reasonably equivalent value will be presumed to have been made for this purpose.
(3) The net worth of a financial institution shall be established by the net worth information reported in conformity with applicable instructions and guidelines on the financial institution’s financial report to its supervisory agency for the last reporting date before the initiation of the adversary proceeding. A bank holding company’s and a savings and loan holding company’s net worth will be considered on a consolidated basis even if the bank holding company or the savings and loan holding company is not required to file its regulatory reports to the Board on a consolidated basis.
(4) The employees of an applicant include all those persons who were regularly providing services for remuneration for the applicant, under its direction and control, on the date the adversary proceeding was initiated. Part-time employees are counted on a proportional basis.
(5) The net worth and number of employees of the applicant and all of its affiliates shall be aggregated to determine eligibility. As used in this subpart, affiliates are: Individuals, corporations, and entities that directly or indirectly or acting through one or more entities control at least 25% of the voting shares of the applicant, and corporations and entities of which the applicant directly or indirectly owns or controls at least 25% of the voting shares. The Board may determine, in light of the actual relationship among the affiliated entities, that aggregation with regard to one or more of the applicant’s affiliates would be unjust and contrary to the purposes of this subpart and decline to aggregate the net worth and employees of such affiliate; alternatively, the Board may determine that financial relationships of the applicant other than those described in this paragraph constitute special circumstances that would make an award unjust.
§ 263.104 Application for awards.
(a) Time to file. An application and any other pleading or document related to the application may be filed with the Board whenever the applicant has prevailed in the proceeding within 30 days after service of the final order of the Board disposing of the proceeding.
(b) Contents. An application for an award of fees and expenses under this subpart shall contain:
(1) The name of the applicant and an identification of the proceeding;
(2) A showing that the applicant has prevailed, and an identification of the way in which the applicant believes that the position of the Board in the proceeding was not substantially justified;
(3) If the applicant is not an individual, a statement of the number of its employees on the date the proceeding was initiated;
(4) A description of any affiliated individuals or entities, as defined in § 263.103(c)(5), or a statement that none exist;
(5) A declaration that the applicant, together with any affiliates, had a net worth not more than the maximum set forth in § 263.103(b) as of the date the proceeding was initiated, supported by a net worth statement conforming to the requirements of § 263.105;
(6) A statement of the amount of fees and expenses for which an award is sought conforming to § 263.107; and
(7) Any other matters that the applicant wishes the Board to consider in determining whether and in what amount an award should be made.
(c) Verification. The application shall be signed by the applicant or an authorized officer of or attorney for the applicant. It shall also contain or be accompanied by a written verification under oath or under penalty of perjury that the information provided in the application and supporting documents is true and correct.
(d) Service. The application and related documents shall be served on all parties to the adversary proceeding in accordance with § 263.11, except that statements of net worth shall be served only on counsel for the Board.
(e) Presiding officer. Upon receipt of an application, the Board shall, if feasible, refer the matter to the administrative law judge who heard the underlying adversary proceeding.
§ 263.105 Statement of net worth.
(a) General rule. A statement of net worth shall be filed with the application for an award of fees. The statement shall reflect the net worth of the applicant and all affiliates of the applicant, as specified in § 263.103(c)(5). In all cases, the administrative law judge or the Board may call for additional information needed to establish the applicant’s net worth as of the initiation of the proceeding.
(b) Contents. (1) Except as otherwise provided herein, the statement of net worth may be in any form convenient to the applicant which fully discloses all the assets and liabilities of the applicant and all the assets and liabilities of its affiliates, as of the time of the initiation of the adversary adjudication. Unaudited financial statements are acceptable for individual applicants as long as the statement provides a reliable basis for evaluation, unless the administrative law judge or the Board otherwise requires. Financial statements or reports filed with or reported to a Federal or State agency, prepared before the initiation of the adversary proceeding for other purposes, and accurate as of a date not more than three months prior to the initiation of the proceeding, shall be acceptable in establishing net worth as of the time of the initiation of the proceeding, unless the administrative law judge or the Board otherwise requires.
(2) In the case of applicants or affiliates that are not banks, net worth shall be considered for the purposes of this subpart to be the excess of total assets over total liabilities, as of the date the underlying proceeding was initiated, except as adjusted under § 263.103(c)(5). The net worth of a bank holding company or a savings and loan holding company shall be considered on a consolidated basis. Assets and liabilities of individuals shall include those beneficially owned.
(3) If the applicant or any of its affiliates is a bank or a savings association, the portion of the statement of net worth which relates to the bank or the savings association shall consist of a copy of the bank’s or a savings association’s last Consolidated Report of Condition and Income filed before the initiation of the adversary adjudication. Net worth shall be considered for the purposes of this subpart to be the total equity capital (or, in the case of mutual savings banks or mutual savings associations, the total surplus accounts) as reported, in conformity with applicable instructions and guidelines, on the bank’s or the savings association’s Consolidated Report of Condition and Income filed for the last reporting date before the initiation of the proceeding.
(c) Statement confidential. Unless otherwise ordered by the Board or required by law, the statement of net worth shall be for the confidential use of the Board, counsel for the Board, and the administrative law judge.
§ 263.106 Measure of awards.
(a) General rule. Awards shall be based on rates customarily charged by persons engaged in the business of acting as attorneys, agents, and expert witnesses, provided that no award under this subpart for the fee of an attorney or agent shall exceed $75 per hour. No award to compensate an expert witness shall exceed the highest rate at which the Board pays expert witnesses. An award may include the reasonable expenses of the attorney, agent, or expert witness as a separate item, if the attorney, agent, or expert witness ordinarily charges clients separately for such expenses.
(b) Determination of reasonableness of fees. In determining the reasonableness of the fee sought for an attorney, agent, or expert witness, subject to the limits set forth above, the administrative law judge shall consider the following:
(1) If the attorney, agent, or expert witness is in private practice, his or her customary fee for like services;
(2) The prevailing rate for similar services in the community in which the attorney, agent, or expert witness ordinarily performs services;
(3) The time actually spent in the representation of the applicant;
(4) The time reasonably spent in light of the difficulty or complexity of the issues in the proceeding; and
(5) Such other factors as may bear on the value of the services provided.
(c) Awards for studies. The reasonable cost of any study, analysis, test, project, or similar matter prepared on behalf of an applicant may be awarded to the extent that the charge for the service does not exceed the prevailing rate payable for similar services, and the study or other matter was necessary solely for preparation of the applicant’s case and not otherwise required by law or sound business or financial practice.
§ 263.107 Statement of fees and expenses.
The application shall be accompanied by a statement fully documenting the fees and expenses for which an award is sought. A separate itemized statement shall be submitted for each professional firm or individual whose services are covered by the application, showing the hours spent in work in connection with the proceeding by each individual, a description of the specific services performed, the rate at which each fee has been computed, any expenses for which reimbursement is sought, the total amount claimed, and the total amount paid or payable by the applicant or by any other person or entity for the services performed. The administrative law judge or the Board may require the applicant to provide vouchers, receipts, or other substantiation for any expenses claimed.
§ 263.108 Responses to application.
(a) By counsel for the Board. (1) Within 20 days after service of an application, counsel for the Board may file an answer to the application.
(2) The answer shall explain in detail any objections to the award requested and identify the facts relied on in support of the Board’s position. If the answer is based on any alleged facts not already in the record of the proceeding, the answer shall include either supporting affidavits or a request for further proceedings under § 263.109, or both.
(b) Reply to answer. The applicant may file a reply only if the Board has addressed in its answer any of the following issues: that the position of the agency was substantially justified, that the applicant unduly protracted the proceedings, or that special circumstances make an award unjust. Any reply authorized by this section shall be filed within 15 days of service of the answer. If the reply is based on any alleged facts not already in the record of the proceeding, the reply shall include either supporting affidavits or a request for further proceedings under § 263.109, or both.
(c) Additional response. Additional filings in the nature of pleadings may be submitted only by leave of the administrative law judge.
§ 263.109 Further proceedings.
(a) General rule. The determination of a recommended award shall be made by the administrative law judge on the basis of the written record of the adversary adjudication, including any supporting affidavits submitted in connection with the application, unless, on the motion of either the applicant or Board counsel, or sua sponte, the administrative law judge or the Board orders further proceedings to amplify the record such as an informal conference, oral argument, additional written submissions, or an evidentiary hearing. Such further proceedings shall be held only when necessary for full and fair resolution of the issues arising from the application and shall be conducted promptly and expeditiously.
(b) Request for further proceedings. A request for further proceedings under this section shall specifically identify the information sought or the issues in dispute and shall explain why additional proceedings are necessary.
(c) Hearing. The administrative law judge shall hold an oral evidentiary hearing only on disputed issues of material fact which cannot be adequately resolved through written submissions.
§ 263.110 Recommended decision.
The administrative law judge shall file with the Board a recommended decision on the fee application not later than 30 days after the submission of all pleadings and evidentiary material concerning the application. The recommended decision shall include written proposed findings and conclusions on the applicant’s eligibility and its status as a prevailing party and, if applicable, an explanation of the reasons for any difference between the amount requested and the amount of the recommended award. The recommended decision shall also include, if at issue, proposed findings as to whether the Board’s position was substantially justified, whether the applicant unduly protracted the proceedings, or whether special circumstances make an award unjust. The administrative law judge shall file the record of the proceeding on the fee application upon the filing of the recommended decision and, at the same time, serve upon each party a copy of the recommended decision, findings, conclusions, and proposed order.
§ 263.111 Action by the Board.
(a) Exceptions to recommended decision. Within 20 days after service of the recommended decision, findings, conclusions, and proposed order, the applicant or counsel for the Board may file written exceptions thereto. A supporting brief may also be filed.
(b) Decision by the Board. The Board shall render its decision within 90 days after it has notified the parties that the matter has been received for decision. The Board shall serve copies of the decision and order of the Board upon the parties. Judicial review of the decision and order may be obtained as provided in 5 U.S.C. 504(c)(2).
Subpart H – Issuance and Review of Orders Pursuant to Prompt Corrective Action Provisions of the Federal Deposit Insurance Act
§ 263.201 Scope.
(a) The rules and procedures set forth in this subpart apply to state member banks, companies that control state member banks or are affiliated with such banks, and senior executive officers and directors of state member banks that are subject to the provisions of section 38 of the Federal Deposit Insurance Act (section 38) and subpart D of part 208 of this chapter.
(b) [Reserved]
§ 263.202 Directives to take prompt regulatory action.
(a) Notice of intent to issue directive – (1) In general. The Board shall provide an undercapitalized, significantly undercapitalized, or critically undercapitalized state member bank or, where appropriate, any company that controls the bank, prior written notice of the Board’s intention to issue a directive requiring such bank or company to take actions or to follow proscriptions described in section 38 that are within the Board’s discretion to require or impose under section 38 of the FDI Act, including sections 38(e)(5), (f)(2), (f)(3), or (f)(5). The bank shall have such time to respond to a proposed directive as provided by the Board under paragraph (c) of this section.
(2) Immediate issuance of final directive. If the Board finds it necessary in order to carry out the purposes of section 38 of the FDI Act, the Board may, without providing the notice prescribed in paragraph (a)(1) of this section, issue a directive requiring a state member bank or any company that controls a state member bank immediately to take actions or to follow proscriptions described in section 38 that are within the Board’s discretion to require or impose under section 38 of the FDI Act, including section 38(e)(5), (f)(2), (f)(3), or (f)(5). A bank or company that is subject to such an immediately effective directive may submit a written appeal of the directive to the Board. Such an appeal must be received by the Board within 14 calendar days of the issuance of the directive, unless the Board permits a longer period. The Board shall consider any such appeal, if filed in a timely matter, within 60 days of receiving the appeal. During such period of review, the directive shall remain in effect unless the Board, in its sole discretion, stays the effectiveness of the directive.
(b) Contents of notice. A notice of intention to issue a directive shall include:
(1) A statement of the bank’s capital measures and capital levels;
(2) A description of the restrictions, prohibitions, or affirmative actions that the Board proposes to impose or require;
(3) The proposed date when such restrictions or prohibitions would be effective or the proposed date for completion of such affirmative actions; and
(4) The date by which the bank or company subject to the directive may file with the Board a written response to the notice.
(c) Response to notice – (1) Time for response. A bank or company may file a written response to a notice of intent to issue a directive within the time period set by the Board. The date shall be at least 14 calendar days from the date of the notice unless the Board determines that a shorter period is appropriate in light of the financial condition of the bank or other relevant circumstances.
(2) Content of response. The response should include:
(i) An explanation why the action proposed by the Board is not an appropriate exercise of discretion under section 38;
(ii) Any recommended modification of the proposed directive; and
(iii) Any other relevant information, mitigating circumstances, documentation, or other evidence in support of the position of the bank or company regarding the proposed directive.
(d) Board consideration of response. After considering the response, the Board may:
(1) Issue the directive as proposed or in modified form;
(2) Determine not to issue the directive and so notify the bank or company; or
(3) Seek additional information or clarification of the response from the bank or company, or any other relevant source.
(e) Failure to file response. Failure by a bank or company to file with the Board, within the specified time period, a written response to a proposed directive shall constitute a waiver of the opportunity to respond and shall constitute consent to the issuance of the directive.
(f) Request for modification or rescission of directive. Any bank or company that is subject to a directive under this subpart may, upon a change in circumstances, request in writing that the Board reconsider the terms of the directive, and may propose that the directive be rescinded or modified. Unless otherwise ordered by the Board, the directive shall continue in place while such request is pending before the Board.
§ 263.203 Procedures for reclassifying a state member bank based on criteria other than capital.
(a) Reclassification based on unsafe or unsound condition or practice – (1) Issuance of notice of proposed reclassification – (i) Grounds for reclassification. (A) Pursuant to § 208.43(c) of Regulation H (12 CFR 208.43(c)), the Board may reclassify a well capitalized bank as adequately capitalized or subject an adequately capitalized or undercapitalized institution to the supervisory actions applicable to the next lower capital category if:
(1) The Board determines that the bank is in unsafe or unsound condition; or
(2) The Board deems the bank to be engaged in an unsafe or unsound practice and not to have corrected the deficiency.
(B) Any action pursuant to this paragraph (a)(1)(i) shall hereinafter be referred to as “reclassification.”
(ii) Prior notice to institution. Prior to taking action pursuant to § 208.33(c) of this chapter, the Board shall issue and serve on the bank a written notice of the Board’s intention to reclassify the bank.
(2) Contents of notice. A notice of intention to reclassify a bank based on unsafe or unsound condition shall include:
(i) A statement of the bank’s capital measures and capital levels and the category to which the bank would be reclassified;
(ii) The reasons for reclassification of the bank;
(iii) The date by which the bank subject to the notice of reclassification may file with the Board a written appeal of the proposed reclassification and a request for a hearing, which shall be at least 14 calendar days from the date of service of the notice unless the Board determines that a shorter period is appropriate in light of the financial condition of the bank or other relevant circumstances.
(3) Response to notice of proposed reclassification. A bank may file a written response to a notice of proposed reclassification within the time period set by the Board. The response should include:
(i) An explanation of why the bank is not in unsafe or unsound condition or otherwise should not be reclassified;
(ii) Any other relevant information, mitigating circumstances, documentation, or other evidence in support of the position of the bank or company regarding the reclassification.
(4) Failure to file response. Failure by a bank to file, within the specified time period, a written response with the Board to a notice of proposed reclassification shall constitute a waiver of the opportunity to respond and shall constitute consent to the reclassification.
(5) Request for hearing and presentation of oral testimony or witnesses. The response may include a request for an informal hearing before the Board or its designee under this section. If the bank desires to present oral testimony or witnesses at the hearing, the bank shall include a request to do so with the request for an informal hearing. A request to present oral testimony or witnesses shall specify the names of the witnesses and the general nature of their expected testimony. Failure to request a hearing shall constitute a waiver of any right to a hearing, and failure to request the opportunity to present oral testimony or witnesses shall constitute a waiver of any right to present oral testimony or witnesses.
(6) Order for informal hearing. Upon receipt of a timely written request that includes a request for a hearing, the Board shall issue an order directing an informal hearing to commence no later than 30 days after receipt of the request, unless the bank requests a later date. The hearing shall be held in Washington, DC or at such other place as may be designated by the Board, before a presiding officer(s) designated by the Board to conduct the hearing.
(7) Hearing procedures. (i) The bank shall have the right to introduce relevant written materials and to present oral argument at the hearing. The bank may introduce oral testimony and present witnesses only if expressly authorized by the Board or the presiding officer(s). Neither the provisions of the Administrative Procedure Act (5 U.S.C. 554-557) governing adjudications required by statute to be determined on the record nor the Uniform Rules of Practice and Procedure in subpart A of this part apply to an informal hearing under this section unless the Board orders that such procedures shall apply.
(ii) The informal hearing shall be recorded, and a transcript shall be furnished to the bank upon request and payment of the cost thereof. Witnesses need not be sworn, unless specifically requested by a party or the presiding officer(s). The presiding officer(s) may ask questions of any witness.
(iii) The presiding officer(s) may order that the hearing be continued for a reasonable period (normally five business days) following completion of oral testimony or argument to allow additional written submissions to the hearing record.
(8) Recommendation of presiding officers. Within 20 calendar days following the date the hearing and the record on the proceeding are closed, the presiding officer(s) shall make a recommendation to the Board on the reclassification.
(9) Time for decision. Not later than 60 calendar days after the date the record is closed or the date of the response in a case where no hearing was requested, the Board will decide whether to reclassify the bank and notify the bank of the Board’s decision.
(b) Request for rescission of reclassification. Any bank that has been reclassified under this section, may, upon a change in circumstances, request in writing that the Board reconsider the reclassification, and may propose that the reclassification be rescinded and that any directives issued in connection with the reclassification be modified, rescinded, or removed. Unless otherwise ordered by the Board, the bank shall remain subject to the reclassification and to any directives issued in connection with that reclassification while such request is pending before the Board.
§ 263.204 Order to dismiss a director or senior executive officer.
(a) Service of notice. When the Board issues and serves a directive on a state member bank pursuant to § 263.202 requiring the bank to dismiss from office any director or senior executive officer under section 38(f) (2) (F) (ii) of the FDI Act, the Board shall also serve a copy of the directive, or the relevant portions of the directive where appropriate, upon the person to be dismissed.
(b) Response to directive – (1) Request for reinstatement. A director or senior executive officer who has been served with a directive under paragraph (a) of this section (Respondent) may file a written request for reinstatement. The request for reinstatement shall be filed within 10 calendar days of the receipt of the directive by the Respondent, unless further time is allowed by the Board at the request of the Respondent.
(2) Contents of request; informal hearing. The request for reinstatement shall include reasons why the Respondent should be reinstated, and may include a request for an informal hearing before the Board or its designee under this section. If the Respondent desires to present oral testimony or witnesses at the hearing, the Respondent shall include a request to do so with the request for an informal hearing. The request to present oral testimony or witnesses shall specify the names of the witnesses and the general nature of their expected testimony. Failure to request a hearing shall constitute a waiver of any right to a hearing and failure to request the opportunity to present oral testimony or witnesses shall constitute a waiver of any right or opportunity to present oral testimony or witnesses.
(3) Effective date. Unless otherwise ordered by the Board, the dismissal shall remain in effect while a request for reinstatement is pending.
(c) Order for informal hearing. Upon receipt of a timely written request from a Respondent for an informal hearing on the portion of a directive requiring a bank to dismiss from office any director or senior executive officer, the Board shall issue an order directing an informal hearing to commence no later than 30 days after receipt of the request, unless the Respondent requests a later date. The hearing shall be held in Washington, DC, or at such other place as may be designated by the Board, before a presiding officer(s) designated by the Board to conduct the hearing.
(d) Hearing procedures. (1) A Respondent may appear at the hearing personally or through counsel. A Respondent shall have the right to introduce relevant written materials and to present oral argument. A Respondent may introduce oral testimony and present witnesses only if expressly authorized by the Board or the presiding officer(s). Neither the provisions of the Administrative Procedure Act governing adjudications required by statute to be determined on the record nor the Uniform Rules of Practice and Procedure in subpart A of this part apply to an informal hearing under this section unless the Board orders that such procedures shall apply.
(2) The informal hearing shall be recorded, and a transcript shall be furnished to the Respondent upon request and payment of the cost thereof. Witnesses need not be sworn, unless specifically requested by a party or the presiding officer(s). The presiding officer(s) may ask questions of any witness.
(3) The presiding officer(s) may order that the hearing be continued for a reasonable period (normally five business days) following completion of oral testimony or argument to allow additional written submissions to the hearing record.
(e) Standard for review. A Respondent shall bear the burden of demonstrating that his or her continued employment by or service with the bank would materially strengthen the bank’s ability:
(1) To become adequately capitalized, to the extent that the directive was issued as a result of the bank’s capital level or failure to submit or implement a capital restoration plan; and
(2) To correct the unsafe or unsound condition or unsafe or unsound practice, to the extent that the directive was issued as a result of classification of the bank based on supervisory criteria other than capital, pursuant to section 38(g) of the FDI Act.
(f) Recommendation of presiding officers. Within 20 calendar days following the date the hearing and the record on the proceeding are closed, the presiding officer(s) shall make a recommendation to the Board concerning the Respondent’s request for reinstatement with the bank.
(g) Time for decision. Not later than 60 calendar days after the date the record is closed or the date of the response in a case where no hearing was requested, the Board shall grant or deny the request for reinstatement and notify the Respondent of the Board’s decision. If the Board denies the request for reinstatement, the Board shall set forth in the notification the reasons for the Board’s action.
§ 263.205 Enforcement of directives.
(a) Judicial remedies. Whenever a state member bank or company that controls a state member bank fails to comply with a directive issued under section 38, the Board may seek enforcement of the directive in the appropriate United States district court pursuant to section 8(i) (1) of the FDI Act.
(b) Administrative remedies – (1) Failure to comply with directive. Pursuant to section 8(i) (2) (A) of the FDI Act, the Board may assess a civil money penalty against any state member bank or company that controls a state member bank that violates or otherwise fails to comply with any final directive issued under section 38 and against any institution-affiliated party who participates in such violation or noncompliance.
(2) Failure to implement capital restoration plan. The failure of a bank to implement a capital restoration plan required under section 38, subpart D of Regulation H (12 CFR part 208, subpart D), or this subpart, or the failure of a company having control of a bank to fulfill a guarantee of a capital restoration plan made pursuant to section 38 (e) (2) of the FDI Act shall subject the bank or company to the assessment of civil money penalties pursuant to section 8(i) (2) (A) of the FDI Act.
(c) Other enforcement action. In addition to the actions described in paragraphs (a) and (b) of this section, the Board may seek enforcement of the provisions of section 38 or subpart B of Regulation H (12 CFR part 208, subpart B) through any other judicial or administrative proceeding authorized by law.
Subpart I – Submission and Review of Safety and Soundness Compliance Plans and Issuance of Orders To Correct Safety and Soundness Deficiencies
§ 263.300 Scope.
The rules and procedures set forth in this subpart apply to State member banks that are subject to the provisions of section 39 of the Federal Deposit Insurance Act (section 39) (12 U.S.C. 1831p-1).
§ 263.301 Purpose.
Section 39 of the FDI Act requires the Board to establish safety and soundness standards. Pursuant to section 39, a bank may be required to submit a compliance plan if it is not in compliance with a safety and soundness standard established by guideline under section 39(a) or (b). An enforceable order under section 8 may be issued if, after being notified that it is in violation of a safety and soundness standard established under section 39, the bank fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted plan. This subpart establishes procedures for requiring submission of a compliance plan and issuing an enforceable order pursuant to section 39.
§ 263.302 Determination and notification of failure to meet safety and soundness standard and request for compliance plan.
(a) Determination. The Board may, based upon an examination, inspection, or any other information that becomes available to the Board, determine that a bank has failed to satisfy the safety and soundness standards contained in the Interagency Guidelines Establishing Standards for Safety and Soundness or the Interagency Guidelines Establishing Standards for Safeguarding Customer Information, set forth in appendices D-1 and D-2 to part 208 of this chapter, respectively.
(b) Request for compliance plan. If the Board determines that a State member bank has failed a safety and soundness standard pursuant to paragraph (a) of this section, the Board may request, by letter or through a report of examination, the submission of a compliance plan, and the bank shall be deemed to have notice of the request three days after mailing of the letter by the Board or delivery of the report of examination.
§ 263.303 Filing of safety and soundness compliance plan.
(a) Schedule for filing compliance plan – (1) In general. A State member bank shall file a written safety and soundness compliance plan with the Board within 30 days of receiving a request for a compliance plan pursuant to § 263.302(b), unless the Board notifies the bank in writing that the plan is to be filed within a different period.
(2) Other plans. If a State member bank is obligated to file, or is currently operating under, a capital restoration plan submitted pursuant to section 38 of the FDI Act (12 U.S.C. 1831o), a cease-and-desist order entered into pursuant to section 8 of the FDI Act, a formal or informal agreement, or a response to a report of examination or report of inspection, it may, with the permission of the Board, submit a compliance plan under this section as part of that plan, order, agreement, or response, subject to the deadline provided in paragraph (a)(1) of this section.
(b) Contents of plan. The compliance plan shall include a description of the steps the State member bank will take to correct the deficiency and the time within which those steps will be taken.
(c) Review of safety and soundness compliance plans. Within 30 days after receiving a safety and soundness compliance plan under this subpart, the Board shall provide written notice to the bank of whether the plan has been approved or seek additional information from the bank regarding the plan. The Board may extend the time within which notice regarding approval of a plan will be provided.
(d) Failure to submit or implement a compliance plan – (1) Supervisory actions. If a State member bank fails to submit an acceptable plan within the time specified by the Board or fails in any material respect to implement a compliance plan, then the Board shall, by order, require the bank to correct the deficiency and may take further actions provided in section 39(e)(2)(B). Pursuant to section 39(e)(3), the Board may be required to take certain actions if the bank commenced operations or experienced a change in control within the previous 24-month period, or the bank experienced extraordinary growth during the previous 18-month period.
(2) Extraordinary growth. For purposes of paragraph (d)(1) of this section, extraordinary growth means an increase in assets of more than 7.5 percent during any quarter within the 18-month period preceding the issuance of a request for submission of a compliance plan, by a bank that is not well capitalized for purposes of section 38 of the FDI Act. For purposes of calculating an increase in assets, assets acquired through merger or acquisition approved pursuant to the Bank Merger Act (12 U.S.C. 1828(c)) will be excluded.
(e) Amendment of compliance plan. A State member bank that has filed an approved compliance plan may, after prior written notice to and approval by the Board, amend the plan to reflect a change in circumstance. Until such time as a proposed amendment has been approved, the bank shall implement the compliance plan as previously approved.
§ 263.304 Issuance of orders to correct deficiencies and to take or refrain from taking other actions.
(a) Notice of intent to issue order – (1) In general. The Board shall provide a bank prior written notice of the Board’s intention to issue an order requiring the bank to correct a safety and soundness deficiency or to take or refrain from taking other actions pursuant to section 39 of the FDI Act. The bank shall have such time to respond to a proposed order as provided by the Board under paragraph (c) of this section.
(2) Immediate issuance of final order. If the Board finds it necessary in order to carry out the purposes of section 39 of the FDI Act, the Board may, without providing the notice prescribed in paragraph (a)(1) of this section, issue an order requiring a bank immediately to take actions to correct a safety and soundness deficiency or take or refrain from taking other actions pursuant to section 39. A State member bank that is subject to such an immediately effective order may submit a written appeal of the order to the Board. Such an appeal must be received by the Board within 14 calendar days of the issuance of the order, unless the Board permits a longer period. The Board shall consider any such appeal, if filed in a timely matter, within 60 days of receiving the appeal. During such period of review, the order shall remain in effect unless the Board, in its sole discretion, stays the effectiveness of the order.
(b) Contents of notice. A notice of intent to issue an order shall include:
(1) A statement of the safety and soundness deficiency or deficiencies that have been identified at the bank;
(2) A description of any restrictions, prohibitions, or affirmative actions that the Board proposes to impose or require;
(3) The proposed date when such restrictions or prohibitions would be effective or the proposed date for completion of any required action; and
(4) The date by which the bank subject to the order may file with the Board a written response to the notice.
(c) Response to notice – (1) Time for response. A bank may file a written response to a notice of intent to issue an order within the time period set by the Board. Such a response must be received by the Board within 14 calendar days from the date of the notice unless the Board determines that a different period is appropriate in light of the safety and soundness of the bank or other relevant circumstances.
(2) Contents of response. The response should include:
(i) An explanation why the action proposed by the Board is not an appropriate exercise of discretion under section 39;
(ii) Any recommended modification of the proposed order; and
(iii) Any other relevant information, mitigating circumstances, documentation, or other evidence in support of the position of the bank regarding the proposed order.
(d) Agency consideration of response. After considering the response, the Board may:
(1) Issue the order as proposed or in modified form;
(2) Determine not to issue the order and so notify the bank; or
(3) Seek additional information or clarification of the response from the bank, or any other relevant source.
(e) Failure to file response. Failure by a bank to file with the Board, within the specified time period, a written response to a proposed order shall constitute a waiver of the opportunity to respond and shall constitute consent to the issuance of the order.
(f) Request for modification or rescission of order. Any bank that is subject to an order under this subpart may, upon a change in circumstances, request in writing that the Board reconsider the terms of the order, and may propose that the order be rescinded or modified. Unless otherwise ordered by the Board, the order shall continue in place while such request is pending before the Board.
§ 263.305 Enforcement of orders.
(a) Judicial remedies. Whenever a State member bank fails to comply with an order issued under section 39, the Board may seek enforcement of the order in the appropriate United States district court pursuant to section 8(i)(1) of the FDI Act.
(b) Failure to comply with order. Pursuant to section 8(i)(2)(A) of the FDI Act, the Board may assess a civil money penalty against any State member bank that violates or otherwise fails to comply with any final order issued under section 39 and against any institution-affiliated party who participates in such violation or noncompliance.
(c) Other enforcement action. In addition to the actions described in paragraphs (a) and (b) of this section, the Board may seek enforcement of the provisions of section 39 or this part through any other judicial or administrative proceeding authorized by law.
Subpart J – Removal, Suspension, and Debarment of Accountants From Performing Audit Services
§ 263.400 Scope.
This subpart, which implements section 36(g)(4) of the Federal Deposit Insurance Act (FDIA)(12 U.S.C. 1831m(g)(4)), provides rules and procedures for the removal, suspension, or debarment of independent public accountants and their accounting firms from performing independent audit and attestation services for insured state member banks, bank holding companies, and savings and loan holding companies required by section 36 of the FDIA (12 U.S.C. 1831m).
§ 263.401 Definitions.
As used in this subpart, the following terms shall have the meaning given below unless the context requires otherwise:
(a) Accounting firm means a corporation, proprietorship, partnership, or other business firm providing audit services.
(b) Audit services means any service required to be performed by an independent public accountant by section 36 of the FDIA and 12 CFR part 363, including attestation services. Audit services include any service performed with respect to the holding company of an insured bank that is used to satisfy requirements imposed by section 36 or part 363 on that bank.
(c) Banking organization means an insured state member bank, bank holding company, or savings and loan holding company that obtains audit services that are used to satisfy requirements imposed by section 36 or part 363 on an insured subsidiary bank or insured savings association of that holding company.
(d) Independent public accountant (accountant) means any individual who performs or participates in providing audit services.
§ 263.402 Removal, suspension, or debarment.
(a) Good cause for removal, suspension, or debarment – (1) Individuals. The Board may remove, suspend, or debar an independent public accountant from performing audit services for banking organizations that are subject to section 36 of the FDIA, if, after notice of and opportunity for hearing in the matter, the Board finds that the accountant:
(i) Lacks the requisite qualifications to perform audit services;
(ii) Has knowingly or recklessly engaged in conduct that results in a violation of applicable professional standards, including those standards and conflict of interest provisions applicable to accountants through the Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 745 (2002) (Sarbanes-Oxley Act), and developed by the Public Company Accounting Oversight Board and the Securities and Exchange Commission;
(iii) Has engaged in negligent conduct in the form of:
(A) A single instance of highly unreasonable conduct that results in a violation of applicable professional standards in circumstances in which an accountant knows, or should know, that heightened scrutiny is warranted; or
(B) Repeated instances of unreasonable conduct, each resulting in a violation of applicable professional standards, that indicate a lack of competence to perform audit services;
(iv) Has knowingly or recklessly given false or misleading information, or knowingly or recklessly participated in any way in the giving of false or misleading information, to the Board or any officer or employee of the Board;
(v) Has engaged in, or aided and abetted, a material and knowing or reckless violation of any provision of the Federal banking or securities laws or the rules and regulations thereunder, or any other law;
(vi) Has been removed, suspended, or debarred from practice before any Federal or state agency regulating the banking, insurance, or securities industries, other than by an action listed in § 263.403, on grounds relevant to the provision of audit services; or
(vii) Is suspended or debarred for cause from practice as an accountant by any duly constituted licensing authority of any state, possession, commonwealth, or the District of Columbia.
(2) Accounting firms. If the Board determines that there is good cause for the removal, suspension, or debarment of a member or employee of an accounting firm under paragraph (a)(1) of this section, the Board also may remove, suspend, or debar such firm or one or more offices of such firm. In considering whether to remove, suspend, or debar a firm or an office thereof, and the term of any sanction against a firm under this section, the Board may consider, for example:
(i) The gravity, scope, or repetition of the act or failure to act that constitutes good cause for removal, suspension, or debarment;
(ii) The adequacy of, and adherence to, applicable policies, practices, or procedures for the accounting firm’s conduct of its business and the performance of audit services;
(iii) The selection, training, supervision, and conduct of members or employees of the accounting firm involved in the performance of audit services;
(iv) The extent to which managing partners or senior officers of the accounting firm have participated, directly, or indirectly through oversight or review, in the act or failure to act; and
(v) The extent to which the accounting firm has, since the occurrence of the act or failure to act, implemented corrective internal controls to prevent its recurrence.
(3) Limited scope orders. An order of removal, suspension (including an immediate suspension), or debarment may, at the discretion of the Board, be made applicable to a particular banking organization or class of banking organizations.
(4) Remedies not exclusive. The remedies provided in this subpart are in addition to any other remedies the Board may have under any other applicable provisions of law, rule, or regulation.
(b) Proceedings to remove, suspend, or debar – (1) Initiation of formal removal, suspension, or debarment proceedings. The Board may initiate a proceeding to remove, suspend, or debar an accountant or accounting firm from performing audit services by issuing a written notice of intention to take such action that names the individual or firm as a respondent and describes the nature of the conduct that constitutes good cause for such action.
(2) Hearing under paragraph (b) of this section. An accountant or firm named as a respondent in the notice issued under paragraph (b)(1) of this section may request a hearing on the allegations in the notice. Hearings conducted under this paragraph shall be conducted in the same manner as other hearings under the Uniform Rules of Practice and Procedure (12 CFR part 263, subpart A).
(c) Immediate suspension from performing audit services – (1) In general. If the Board serves a written notice of intention to remove, suspend, or debar an accountant or accounting firm from performing audit services, the Board may, with due regard for the public interest and without a preliminary hearing, immediately suspend such accountant or firm from performing audit services for banking organizations, if the Board:
(i) Has a reasonable basis to believe that the accountant or firm has engaged in conduct (specified in the notice served on the accountant or firm under paragraph (b) of this section) that would constitute grounds for removal, suspension, or debarment under paragraph (a) of this section;
(ii) Determines that immediate suspension is necessary to avoid immediate harm to an insured depository institution or its depositors or to the depository system as a whole; and
(iii) Serves such respondent with written notice of the immediate suspension.
(2) Procedures. An immediate suspension notice issued under this paragraph will become effective upon service. Such suspension will remain in effect until the date the Board dismisses the charges contained in the notice of intention, or the effective date of a final order of removal, suspension, or debarment issued by the Board to the respondent.
(3) Petition to stay. Any accountant or firm immediately suspended from performing audit services in accordance with paragraph (c)(1) of this section may, within 10 calendar days after service of the notice of immediate suspension, file with the Secretary, Board of Governors of the Federal Reserve System, Washington, DC 20551 for a stay of such immediate suspension. If no petition is filed within 10 calendar days, the immediate suspension shall remain in effect.
(4) Hearing on petition. Upon receipt of a stay petition, the Secretary will designate a presiding officer who shall fix a place and time (not more than 10 calendar days after receipt of the petition, unless extended at the request of petitioner) at which the immediately suspended party may appear, personally or through counsel, to submit written materials and oral argument. Any Board employee engaged in investigative or prosecuting functions for the Board in a case may not, in that or a factually related case, serve as a presiding officer or participate or advise in the decision of the presiding officer or of the Board, except as witness or counsel in the proceeding. In the sole discretion of the presiding officer, upon a specific showing of compelling need, oral testimony of witnesses may also be presented. In hearings held pursuant to this paragraph there shall be no discovery and the provisions of §§ 263.6 through 263.12, 263.16, and 263.21 of this part shall apply.
(5) Decision on petition. Within 30 calendar days after the hearing, the presiding officer shall issue a decision. The presiding officer will grant a stay upon a demonstration that a substantial likelihood exists of the respondent’s success on the issues raised by the notice of intention and that, absent such relief, the respondent will suffer immediate and irreparable injury, loss, or damage. In the absence of such a demonstration, the presiding officer will notify the parties that the immediate suspension will be continued pending the completion of the administrative proceedings pursuant to the notice.
(6) Review of presiding officer’s decision. The parties may seek review of the presiding officer’s decision by filing a petition for review with the presiding officer within 10 calendar days after service of the decision. Replies must be filed within 10 calendar days after the petition filing date. Upon receipt of a petition for review and any reply, the presiding officer shall promptly certify the entire record to the Board. Within 60 calendar days of the presiding officer’s certification, the Board shall issue an order notifying the affected party whether or not the immediate suspension should be continued or reinstated. The order shall state the basis of the Board’s decision.
§ 263.403 Automatic removal, suspension, and debarment.
(a) An independent public accountant or accounting firm may not perform audit services for banking organizations if the accountant or firm:
(1) Is subject to a final order of removal, suspension, or debarment (other than a limited scope order) issued by the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, or the Office of Thrift Supervision under section 36 of the FDIA;
(2) Is subject to a temporary suspension or permanent revocation of registration or a temporary or permanent suspension or bar from further association with any registered public accounting firm issued by the Public Company Accounting Oversight Board or the Securities and Exchange Commission under sections 105(c)(4)(A) or (B) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7215(c)(4)(A) or (B)); or
(3) Is subject to an order of suspension or denial of the privilege of appearing or practicing before the Securities and Exchange Commission.
(b) Upon written request, the Board, for good cause shown, may grant written permission to such accountant or firm to perform audit services for banking organizations. The request shall contain a concise statement of the action requested. The Board may require the applicant to submit additional information.
§ 263.404 Notice of removal, suspension, or debarment.
(a) Notice to the public. Upon the issuance of a final order for removal, suspension, or debarment of an independent public accountant or accounting firm from providing audit services, the Board shall make the order publicly available and provide notice of the order to the other Federal banking agencies.
(b) Notice to the Board by accountants and firms. An accountant or accounting firm that provides audit services to a banking organization must provide the Board with written notice of:
(1) Any currently effective order or other action described in § 263.402(a)(1)(vi) through (a)(1)(vii) or § 263.403(a)(2) through (a)(3); and
(2) Any currently effective action by the Public Company Accounting Oversight Board under sections 105(c)(4)(C) or (G) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7215(c)(4)(C) or (G)).
(c) Timing of notice. Written notice required by this paragraph shall be given no later than 15 calendar days following the effective date of an order or action, or 15 calendar days before an accountant or firm accepts an engagement to provide audit services, whichever date is earlier.
§ 263.405 Petition for reinstatement.
(a) Form of petition. Unless otherwise ordered by the Board, a petition for reinstatement by an independent public accountant, an accounting firm, or an office of a firm that was removed, suspended, or debarred under § 263.402 may be made in writing at any time. The request shall contain a concise statement of the action requested. The Board may require the petitioner to submit additional information.
(b) Procedure. A petitioner for reinstatement under this section may, in the sole discretion of the Board, be afforded a hearing. The accountant or firm shall bear the burden of going forward with a petition and proving the grounds asserted in support of the petition. The Board may, in its sole discretion, direct that any reinstatement proceeding be limited to written submissions. The removal, suspension, or debarment shall continue until the Board, for good cause shown, has reinstated the petitioner or until the suspension period has expired. The filing of a petition for reinstatement shall not stay the effectiveness of the removal, suspension, or debarment of an accountant or firm.
PART 264 – EMPLOYEE RESPONSIBILITIES AND CONDUCT
§ 264.101 Cross-reference to employees’ ethical conduct standards and financial disclosure regulations.
Employees of the Board of Governors of the Federal Reserve System (Board) are subject to the executive branch-wide standards of ethical conduct at 5 CFR part 2635 and the Board’s regulation at 5 CFR part 6801, which supplements the executive branch-wide standards, and the executive branch-wide financial disclosure regulation at 5 CFR part 2634.
PART 264a – POST-EMPLOYMENT RESTRICTIONS FOR SENIOR EXAMINERS
§ 264a.1 What is the purpose and scope of this part?
This part identifies those officers and employees of the Federal Reserve that are subject to the special post-employment restrictions set forth in section 10(k) of the Federal Deposit Insurance Act (FDI Act) and implements those restrictions as they apply to officers and employees of the Federal Reserve.
§ 264a.2 Who is considered a senior examiner of the Federal Reserve?
For purposes of this part, an officer or employee of the Federal Reserve is considered to be the “senior examiner” for a particular state member bank, bank holding company, savings and loan holding company, or foreign bank if –
(a) The officer or employee has been authorized by the Board to conduct examinations or inspections on behalf of the Board;
(b) The officer or employee has been assigned continuing, broad and lead responsibility for examining or inspecting the state member bank, bank holding company, savings and loan holding company, or foreign bank; and
(c) The officer’s or employee’s responsibilities for examining, inspecting and supervising the state member bank, bank holding company, savings and loan holding company, or foreign bank –
(1) Represent a substantial portion of the officer’s or employee’s assigned responsibilities; and
(2) Require the officer or employee to interact routinely with officers or employees of the state member bank, bank holding company, savings and loan holding company, or foreign bank or its affiliates.
§ 264a.3 What special post-employment restrictions apply to senior examiners?
(a) Senior Examiners of State Member Banks. An officer or employee of the Federal Reserve who serves as the senior examiner of a state member bank for two or more months during the last twelve months of such individual’s employment with the Federal Reserve may not, within one year after leaving the employment of the Federal Reserve, knowingly accept compensation as an employee, officer, director or consultant from –
(1) The state member bank; or
(2) Any company (including a bank holding company) that controls the state member bank.
(b) Senior Examiners of Bank Holding Companies. An officer or employee of the Federal Reserve who serves as the senior examiner of a bank holding company for two or more months during the last twelve months of such individual’s employment with the Federal Reserve may not, within one year of leaving the employment of the Federal Reserve, knowingly accept compensation as an employee, officer, director or consultant from –
(1) The bank holding company; or
(2) Any depository institution that is controlled by the bank holding company.
(c) Senior Examiners of Foreign Banks. An officer or employee of the Federal Reserve who serves as the senior examiner of a foreign bank for two or more months during the last twelve months of such individual’s employment with the Federal Reserve may not, within one year of leaving the employment of the Federal Reserve, knowingly accept compensation as an employee, officer, director or consultant from –
(1) The foreign bank; or
(2) Any branch or agency of the foreign bank located in the United States; or
(3) Any other depository institution controlled by the foreign bank.
(d) Senior Examiners of Savings and Loan Holding Companies. An officer or employee of the Federal Reserve who serves as the senior examiner of a savings and loan holding company for two or more months during the last twelve months of such individual’s employment with the Federal Reserve may not, within one year of leaving the employment of the Federal Reserve, knowingly accept compensation as an employee, officer, director or consultant from –
(1) The savings and loan holding company; or
(2) Any depository institution that is controlled by the savings and loan holding company.
§ 264a.4 When do these special restrictions become effective and may they be waived?
The post-employment restrictions set forth in section 10(k) of the FDI Act and § 264a.3 do not apply to any officer or employee of the Federal Reserve, or any former officer or employee of the Federal Reserve, if –
(a) The individual ceased to be an officer or employee of the Federal Reserve before December 17, 2005; or
(b) The Chairman of the Board of Governors certifies, in writing and on a case-by-case basis, that granting the individual a waiver of the restrictions would not affect the integrity of the Federal Reserve’s supervisory program.
§ 264a.5 What are the penalties for violating these special post-employment restrictions?
(a) Penalties under section 10(k) of FDI Act. A senior examiner of the Federal Reserve who, after leaving the employment of the Federal Reserve, violates the restrictions set forth in § 264a.3 shall, in accordance with section 10(k)(6) of the FDI Act, be subject to one or both of the following penalties –
(1) An order –
(i) Removing the individual from office or prohibiting the individual from further participation in the affairs of the relevant state member bank, bank holding company, savings and loan holding company, foreign bank or other depository institution or company for a period of up to five years; and
(ii) Prohibiting the individual from participating in the affairs of any insured depository institution for a period of up to five years; and/or
(2) A civil monetary penalty of not more than $250,000.
(b) Imposition of penalties. The penalties described in paragraph (a) of this section shall be imposed by the appropriate Federal banking agency as determined under section 10(k)(6) of the FDI Act, which may be an agency other than the Federal Reserve.
(c) Scope of prohibition orders. Any senior examiner who is subject to an order issued under paragraph (a) of this section shall, as required by section 10(k)(6)(B) of the FDI Act, be subject to paragraphs (6) and (7) of section 8(e) of the FDI Act in the same manner and to the same extent as a person subject to an order issued under section 8(e).
(d) Procedures. The procedures applicable to actions under paragraph (a) of this section are provided in section 10(k)(6) of the FDI Act.
(e) Other penalties. The penalties set forth in paragraph (a) of this section are not exclusive, and a senior examiner who violates the restrictions in § 264a.3 also may be subject to other administrative, civil or criminal remedies or penalties as provided in law.
§ 264a.6 What other definitions and rules of construction apply for purposes of this part?
For purposes of this part –
(a) Bank holding company means any company that controls a bank (as provided in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.)).
(b) A person shall be deemed to act as a consultant for a bank or other company only if such person works directly on matters for, or on behalf of, such bank or other company.
(c) Control has the meaning given in section 2 of the Bank Holding Company Act, with respect to banking holding companies, and has the meaning given in section 10 of the Home Owners’ Loan Act, with respect to savings and loan holding companies.
(d) Depository institution has the meaning given in section 3 of the FDI Act and includes an uninsured branch or agency of a foreign bank, if such branch or agency is located in any State.
(e) Federal Reserve means the Board of Governors of the Federal Reserve System and the Federal Reserve Banks.
(f) Foreign bank means any foreign bank or company described in section 8(a) of the International Banking Act of 1978 (12 U.S.C. 3106(a)).
(g) Insured depository institution has the meaning given in section 3 of the FDI Act.
(h) Savings and loan holding company means any company that controls a savings association (as provided in section 10 of the Home Owners’ Loan Act (12 U.S.C. 1461 et seq.))
PART 264b – RULES REGARDING FOREIGN GIFTS AND DECORATIONS
§ 264b.1 Purpose and scope.
These rules govern when Board employees, their spouses, and their dependents may accept and retain gifts and decorations from foreign governments under the Foreign Gifts and Decorations Act of 1966, as amended (5 U.S.C. 7342) (“Act”).
§ 264b.2 Definitions.
When used in this part, the following terms have the meanings indicated:
(a) Board employees means:
(1) Members of the Board of Governors of the Federal Reserve System (“Board”), officers, and other employees of the Board, including experts or consultants while employed by, and acting on behalf of, the Board; and
(2) Spouses (unless separated) or dependents (within the meaning of section 152 of the Internal Revenue Code of 1986 (26 U.S.C. 152)) of such persons.
(b) Foreign government means:
(1) Any unit of foreign governmental authority, including any foreign national, State, local, or municipal government;
(2) Any international or multinational organization whose membership is composed of any unit of foreign government as described in paragraph (b)(1) of this section; and
(3) Any agent or representative of any such unit or organization, while acting as such.
(c) Gift means a tangible or intangible present (other than a decoration) tendered by, or received from, a foreign government.
(d) Decoration means an order, device, medal, badge, insignia, emblem, or award tendered by, or received from, a foreign government.
(e) Minimal value means retail value in the United States at the time of acceptance of $285 or less as of January 1, 2002, and at 3-year intervals thereafter, as redefined in regulations prescribed by the Administrator of General Services, in consultation with the Secretary of State, to reflect changes in the consumer price index for the immediately preceding 3-year period.
(f) Administrative Governor means the Board member serving as the Administrative Governor and includes persons designated by the Administrative Governor to exercise the authority granted under this part in the governor’s absence.
§ 264b.3 Restrictions on acceptance of gifts and decorations.
(a) Board employees are prohibited from requesting or otherwise encouraging the tender of a gift or decoration from a foreign government.
(b) Board employees are prohibited from accepting a gift or decoration from a foreign government, except in accordance with this part.
§ 264b.4 Gifts of minimal value.
(a) Board employees may accept and retain a gift of minimal value tendered and received as a souvenir or mark of courtesy. If more than one tangible gift is presented at or marks an event, the value of all such gifts must not exceed “minimal value.” If tangible gifts are presented at or mark separate events, their value must not exceed “minimal value” for each event, but may exceed “minimal value” for all events, even if the events occur on the same day.
(b) Board employees may determine at the time a gift is offered whether it is of minimal value, or they may submit an accepted gift as soon as practicable to the Office of the Secretary for valuation.
(c) Disagreements over whether a gift is of minimal value will be resolved by an independent appraisal under procedures established by the Office of the Secretary.
§ 264b.5 Gifts of more than minimal value.
(a) Educational scholarships or medical treatment. Board employees may accept and retain gifts of more than minimal value when such gifts are in the nature of an educational scholarship or medical treatment.
(b) Travel or travel expenses. Board employees may accept gifts of travel or expenses for travel taking place entirely outside the United States (such as transportation, food, and lodging) of more than minimal value if appropriate, consistent with the interests of the United States, and permitted by the Board under paragraph (b)(1) or (b)(2) of this section.
(1) Board employees may accept gifts of travel or expenses for travel under paragraph (b) of this section in accordance with specific instructions of the Board, as evidenced by the prior approval of the Administrative Governor. Board employees must request prior approval under procedures established by the Office of the Secretary.
(2) Board employees may accept gifts of travel or expenses for travel under paragraph (b) of this section without the prior approval of the Administrative Governor if such expenses are reported under § 264b.6(b) and the Administrative Governor approves their acceptance after the fact. Board employees must personally repay gifts of travel or expenses for travel of more than minimal value that are not approved by the Administrative Governor.
(c) Other gifts. (1) Board employees may typically regard the refusal of gifts of more than minimal value at the inception (when offered or received without a prior offer) as consistent with the interests and general policy of the United States.
(2) Board employees may accept gifts of more than minimal value when it appears that refusal would likely cause offense or embarrassment or otherwise adversely affect the foreign relations of the United States. Tangible gifts are considered to have been accepted on behalf of the United States and become the property of the United States on acceptance. Accordingly, they must be deposited and documented in accordance with § 264b.6(a) and can only be returned or otherwise processed by the Office of the Secretary under § 264b.8.
§ 264b.6 Requirements for gifts of more than minimal value.
(a) Tangible gifts. Board employees must deposit tangible gifts of more than minimal value with the Office of the Secretary within 60 days of acceptance and assist in preparing a statement that contains the following information for each gift:
(1) The name and position of the Board employee;
(2) A brief description of the gift and the circumstances justifying acceptance;
(3) The identity, if known, of the foreign government and the name and position of the individual who presented the gift;
(4) The date of acceptance of the gift;
(5) The estimated value in the United States of the gift at the time of acceptance; and
(6) The disposition or current location of the gift.
(b) Travel or travel expenses without prior approval. Board employees who accept a gift of travel or expenses for travel under § 264b.5(b)(2) without the prior approval of the Administrative Governor must submit a report to the Office of the Secretary within 30 days of acceptance that contains the following information:
(1) The name and position of the Board employee;
(2) A brief description of the gift, including its estimated value, and the circumstances justifying acceptance; and
(3) The identity, if known, of the foreign government and the name and position of the individual who presented the gift.
(c) Reports to the Secretary of State. The Office of the Secretary must report the information contained in the statements described in paragraphs (a) and (b) of this section to the Secretary of State, who must publish in the
§ 264b.7 Decorations.
(a) Board employees may accept, retain, and wear a decoration tendered or awarded by a foreign government in recognition of active field service in time of combat operations or for other outstanding or unusually meritorious performance, subject to the approval of the Administrative Governor. Requests for approval must be submitted to the Office of the Secretary and contain a statement of the circumstances surrounding the award and include any accompanying documentation. The recipient may retain the decoration pending action on the request.
(b) Decorations accepted by Board employees without the approval of the Administrative Governor are considered to have been accepted on behalf of the United States and must be deposited within 60 days of the decoration’s acceptance with the Office of the Secretary for disposition or retention under § 264b.8.
§ 264b.8 Disposition or retention of gifts and decorations deposited with the Office of the Secretary.
(a) The Office of the Secretary may dispose of gifts and decorations deposited under §§ 264b.6(a) and 264b.7(b) by returning them to the donors or by handling them in accordance with instructions from the General Services Administration under applicable law.
(b) The Office of the Secretary may approve and retain gifts and decorations deposited under §§ 264b.6(a) and 264b.7(b) for official use. The Office of the Secretary must dispose of a gift within 30 days of the termination of its official use in accordance with instructions from the General Services Administration under applicable law.
§ 264b.9 Enforcement.
(a) The Administrative Governor, after consultation with the General Counsel, must report to the Attorney General cases in which there is reason to believe that a Board employee has violated the Act.
(b) The Attorney General may bring a civil action in any district court of the United States against a Board employee who knowingly solicits or accepts a gift from a foreign government in violation of the Act, or who fails to deposit or report such a gift as required by the Act. The court may assess a maximum penalty of the retail value of a gift improperly solicited or received plus $5,000.
§ 264b.10 Certain grants excluded.
This part does not apply to grants and other forms of assistance to which § 108A of the Mutual Educational and Cultural Exchange Act of 1961 applies. See 22 U.S.C. 2458a.
PART 265 – RULES REGARDING DELEGATION OF AUTHORITY
Subpart A – General Provisions
§ 265.1 Authority, purpose, and scope.
(a) Pursuant to section 11(k) of the Federal Reserve Act (12 U.S.C. 248(k)), the Board of Governors of the Federal Reserve System (the Board) may delegate, by published order or rule, any of its functions other than those relating to rulemaking or pertaining principally to monetary and credit policies to Board members and employees, Reserve Banks, or administrative law judges. Pursuant to section 11(i) of the Federal Reserve Act (12 U.S.C. 248(i)), the Board may make all rules and regulations necessary to enable it to effectively perform the duties, functions, or services specified in that Act. Other provisions of Federal law also may authorize specific delegations by the Board.
(b) This part details the functions that the Board has delegated. Subpart A contains general provisions pertaining to delegations of authority, including review of action taken pursuant to delegated authority. Subpart B contains the specific functions delegated to Board members, Board employees and the Federal Reserve Banks. Except as otherwise indicated in this part, the Board will review a delegated action only if a Board member, at his or her own initiative, requests a review.
§ 265.2 Delegation of functions generally.
(a) The Board has determined to delegate authority to exercise the functions described in this part.
(b) The Chair of the Board shall assign responsibility for performing such delegated functions.
(c) Where a delegatee must act with the concurrence of a Board employee, or in consultation with a Board employee, that Board employee may subdelegate his or her authority to concur or be consulted on the delegated action to an employee within the same division or office.
§ 265.3 Board review of delegated actions.
(a) Request by Board member. The Board shall review any action taken at a delegated level upon the vote of one member of the Board, either on the member’s own initiative or on the basis of a petition for review by any person claiming to be adversely affected by the delegated action.
(b) Petition for review. A petition for review of a delegated action must be received by the Secretary of the Board not later than the fifth day following the date of the delegated action.
(c) Notice of review. The Secretary shall give notice of review by the Board of a delegated action to any person with respect to whom the action was taken not later than the tenth day following the date of the delegated action. Upon receiving notice, such person may not proceed further in reliance upon the delegated action until notified of the outcome of the review by the Board.
(d) By action of a delegatee. A delegatee may submit any matter to the Board for determination if the delegatee considers it appropriate because of the importance or complexity of the matter.
Subpart B – Delegations of Authority
§ 265.4 Functions delegated to Board members or staff within the Division of Board Members.
(a) Chair. The Chair is authorized:
(1) Bank for International Settlements. To appoint a first and second alternate director to the Board of Directors of the Bank for International Settlements.
(2) Term Deposit Facility (TDF). To authorize TDF test operations with maximum award amounts of up to $20 billion and with maximum offering rates of up to 5 basis points over the interest on excess reserves rate, to adjust the schedules and other terms and conditions for TDF test operations as necessary, to approve additional TDF test operations, to determine when TDF test operations should offer term deposits with an early withdrawal feature, and to establish, with respect to term deposits that are offered with an early withdrawal feature, an early withdrawal penalty that includes forfeiture of all interest on any term deposits withdrawn before the expiration of the term plus an additional penalty of 75 basis points at an annual rate applied to the principal over the entire term of the term deposit.
(3) Disclosures related to emergency lending programs. To approve:
(i) Periodic reports to Congress under section 13(3)(C)(ii) of the Federal Reserve Act (12 U.S.C. 343(3)(C)(ii)) for the Primary Dealer Credit Facility, Money Market Liquidity Facility, Commercial Paper Funding Facility, Paycheck Protection Program Liquidity Facility, Secondary Market Corporate Credit Facility, Municipal Liquidity Facility, Term Asset-Backed Securities Loan Facility, Main Street New Loan Facility, Main Street Expanded Loan Facility, Main Street Priority Loan Facility, Nonprofit Organization New Loan Facility, and Nonprofit Organization Expanded Loan Facility, and to approve technical or minor changes to the scope of information included in such reports; and
(ii) Seven-day reports to Congress under section 13(3)(C)(i) of the Federal Reserve Act (12 U.S.C. 343(3)(C)(ii)).
(b) Chair of the Committee on Supervision and Regulation. The Chair of the Committee on Supervision and Regulation is authorized:
(1) To act on requests for extensions of State member banks’ and bank holding companies’ advanced approaches first floor period start dates that are consistent with previous exemptions approved by the Board and that do not raise additional significant policy issues.
(2) [Reserved]
(c) Chair of the Committee on Federal Reserve Bank Affairs. The Chair of the Committee on Federal Reserve Bank Affairs is authorized to consider and grant or deny requests from the Federal Reserve Banks for exceptions to the Board’s policies on Federal Reserve Bank directors.
(d) Individual members. Any Board member designated by the Chair is authorized:
(1) Approval of amendments to notice of charges or cease and desist orders. To approve (after receiving recommendations of the Director of the Division of Supervision and Regulation and the General Counsel) amendments to any notice, temporary order, or proposed order previously approved by the Board in a specific formal enforcement matter (including a notice of charges or removal notice) or any proposed or temporary cease and desist order previously approved by the Board under section 8(b) and (c) of the Federal Deposit Insurance Act (12 U.S.C. 1818(b) and (c)).
(2) Requests for permission to appeal rulings. (i) To act, when requested by the Secretary, upon any request under § 263.10(e) of the Board’s Rules of Practice for Hearings (12 CFR 263.10(e)) for special permission to appeal from a ruling of the presiding officer on any motion made at a hearing conducted under the rules, and if special permission is granted, the merits of the appeal shall be presented to the Board for decision.
(ii) Notwithstanding § 265.3, the denial of special permission to appeal a ruling may be reviewed by the Board only if a Board member requests a review within two days of the denial. No person claiming to be adversely affected by the denial shall have any right to petition the Board or any Board member for review or reconsideration of the denial.
(3) Extension of time period for final Board action. To extend for an additional 180 days the 180-day period within which final Board action is required on an application pursuant to section 7(d) of the International Banking Act (12 U.S.C. 3105(d)).
(e) Exigent circumstances. The Chair is authorized to determine when an emergency situation exists for purposes of section 2(b)(2) of the Board’s Rules of Organization. If the Chair is unavailable or unable to determine that an emergency situation exists, then the Vice Chair is authorized to determine when an emergency situation exists.
(f) Three-member Action Committee. Any three Board members designated from time to time by the Chair are authorized:
(1) Absence of quorum. To act, upon certification by the Secretary of the Board of an absence of a quorum of the Board present in person, by unanimous vote on any matter that the Chair has certified must be acted upon promptly in order to avoid delay that would be inconsistent with the public interest except for matters:
(i) Relating to rulemaking;
(ii) Pertaining principally to monetary and credit policies; and
(iii) For which a statute expressly requires the affirmative vote of more than three Board members.
(2) [Reserved]
(g) Reports to Congress pursuant to the Small Business Regulatory Enforcement Fairness Act of 1996. The Assistant to the Board, Congressional Liaison Office, Division of Board Members, is authorized, in consultation with the General Counsel, to approve and submit the annual report to Congress describing the status of the Board’s compliance with sections 212(a)(1) through (5) of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 601 note), pursuant to section 212(a)(6) of the Act.
§ 265.5 Functions delegated to the Secretary of the Board.
The Secretary of the Board (or the Secretary’s delegatee) is authorized:
(a) Procedure – (1) Extension of time period for public participation in proposed regulations. To extend, when appropriate under the Board’s Rules of Procedure (12 CFR 262.2(a) and (b)), the time period for public participation with respect to proposed regulations of the Board.
(2) Extension of time period in notices, orders, rules, or regulations. (i) To grant or deny requests to extend any time period in any notice, order, rule, or regulation of the Board relating to filing information, comments, opposition, briefs, exceptions, or other matters, in connection with any application, request, or petition for the Board’s approval authority, determination, or permission, or any other action by the Board.
(ii) Notwithstanding § 265.3, no person claiming to be adversely affected by any such extension of time by the Secretary shall have the right to petition the Board or any Board member for review or reconsideration of the extension.
(3) Conforming citations and references in Board rules. (i) To conform references to administrative positions or units in Board rules with changes in the administrative structure of the Board and in the government and agencies of the United States.
(ii) To conform citations and references in Board rules with other regulatory or statutory changes adopted or promulgated by the Board or by the government or agencies of the United States.
(4) Technical corrections in Board rules and regulations. To make, with the concurrence of the General Counsel, technical corrections, such as spelling, grammar, construction, and organization (including making regular updates that are required by law and/or calculated via a formula prescribed by law, removal of obsolete provisions, and consolidation of related provisions), to the Board’s rules, regulations, orders, and other records of Board action.
(5) Procedural motions in administrative cases pending before the Board. To grant or deny procedural motions arising after an administrative case has been forwarded to the Board for final decision.
(b) Availability of information – (1) Freedom of Information Act requests. To make available, upon request, information in Board records and consider requests for confidential treatment of information in Board records under the Freedom of Information Act (5 U.S.C. 552) and under the Board’s Rules Regarding Availability of Information (12 CFR part 261).
(2) Review of denial of access to Board records; Freedom of Information Act and Privacy Act. To review and determine an appeal of denial of access to Board records under the Freedom of Information Act (5 U.S.C. 552), the Privacy Act (5 U.S.C. 552a), and the Board’s rules regarding such access (12 CFR parts 261 and 261a, respectively).
(3) File reports of rulemakings with Congress and the Government Accountability Office. To file reports of rulemakings with Congress and the Government Accountability Office pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.).
(c) Bank holding companies; savings and loan holding companies; change in bank control; mergers – (1) Reports on competitive factors in bank mergers. To furnish reports on competitive factors involved in a bank merger to the Comptroller of the Currency and the Federal Deposit Insurance Corporation under the provisions of the Federal Deposit Insurance Act (12 U.S.C. 1828(c)); the Bank Holding Company Act (12 U.S.C. 1842(a), 1843(c)(8) and (j)); the Bank Service Company Act (12 U.S.C. 1865(a) and (b)); the Change in Bank Control Act (12 U.S.C. 1817(j)); and the Federal Reserve Act (12 U.S.C. 321 et seq., 601-604a, 611 et seq.).
(2) Reserve Bank director interlocks. To take actions the Reserve Bank could take except for the fact that the Reserve Bank may not act because a director, senior officer, or principal shareholder of any bank holding company, bank, savings and loan holding company, or company involved in the transaction is a director of that Reserve Bank or branch of the Reserve Bank.
(3) [Reserved]
(4) Savings and loan holding companies. (i) To approve the establishment of a mutual holding company or a subsidiary holding company of a mutual holding company pursuant to section 10(o) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o)) and §§ 239.3 and 239.11 of Regulation MM (12 CFR 239.3 and 239.11), including issuing a charter, if the following conditions are met:
(A) The appropriate Reserve Bank and relevant divisions of the Board recommend approval; and
(B) No significant policy issue is raised on which the Board has not expressed its view.
(ii) To grant a request to deregister as a savings and loan holding company pursuant to section 10(b)(6) of the Home Owners’ Loan Act (12 U.S.C. 1467a(b)(6)) and § 238.4(d) of Regulation LL (12 CFR 238.4(d)).
(d) International banking – (1) Acquisition of foreign company or U.S. company financing exports. To grant, under sections 25 and 25A of the Federal Reserve Act (12 U.S.C. 601 and 604, and 611 et seq.) and section 4(c)(13) of the Bank Holding Company Act (12 U.S.C. 1843(c)(13)) and the Board’s Regulations K and Y (12 CFR parts 211 and 225), specific consent to the acquisition, either directly or indirectly, by a member bank, an Edge corporation, an agreement corporation, or a bank holding company, of stock of a company chartered under the laws of a foreign country or a company chartered under the laws of a State of the United States that is organized and operated for the purpose of financing exports from the United States, and to approve any such acquisition that may exceed the limitations of section 25A of the Federal Reserve Act (12 U.S.C. 611a, 615(c), and 619) based on the company’s capital and surplus, if all of the conditions in paragraphs (d)(1)(i) through (iii) of this section are met:
(i) The appropriate Reserve Bank and all relevant divisions of the Board’s staff recommend approval;
(ii) No significant policy issue is raised on which the Board has not expressed its view;
(iii) The acquisition does not result, either directly or indirectly, in the bank, corporation, or bank holding company acquiring effective control of the company, except that this condition need not be met if:
(A) The company is to perform nominee, fiduciary, or other services incidental to the activities of a foreign branch or affiliate of the bank holding company, or corporation; or
(B) The stock is being acquired from the parent bank, parent bank holding company, subsidiary Edge corporation, or subsidiary agreement corporation, as the case may be, and the selling entity holds the stock with the consent of the Board pursuant to Regulation K or Y (12 CFR parts 211 or 225), as applicable.
(2) [Reserved]
(e) Member banks – (1) Waiver of penalty for early withdrawals of time deposits. To permit depository institutions to waive the penalty for early withdrawal of time deposits under section 19(j) of the Federal Reserve Act (12 U.S.C. 371b) and § 204.2 of Regulation D (12 CFR 204.2) if the following conditions are met:
(i) The President declares an area of major disaster or emergency area pursuant to section 301 of the Disaster Relief Act of 1974 (42 U.S.C. 5141);
(ii) The waiver is limited to depositors suffering disaster or emergency related losses in the officially designated area; and
(iii) The appropriate Reserve Bank and all relevant divisions of the Board’s staff recommend approval.
(2) [Reserved]
(f) Location of institution. To determine the Federal Reserve District in which an institution is located pursuant to § 204.3(g)(2) of Regulation D (12 CFR 204.3(g)(2)) or § 209.2(c) of Regulation I (12 CFR 209.2(c)) if:
(1) The relevant Federal Reserve Banks and the institution agree on the specific Reserve Bank in which the institution should hold stock or with which the institution should maintain reserve balances; and
(2) The agreed-upon location does not raise any significant policy issues.
§ 265.6 Functions delegated to the General Counsel.
The General Counsel (or the General Counsel’s delegatee) is authorized:
(a) Procedure – (1) Reconsideration of Board action. Pursuant to § 262.3(k) of the Board’s Rules of Procedure (12 CFR 262.3(k)) to determine whether or not to grant a request for reconsideration or whether to deny a request for stay of the effective date of any action taken by the Board with respect to an action as provided in that part.
(2) Public meetings. To order, after consulting with the directors of other interested divisions of the Board and the appropriate Reserve Bank, that a public meeting or other proceeding be held in accordance with § 262.25 of the Board’s Rules of Procedure (12 CFR 262.25), in connection with any application or notice filed with the Board, and to designate the presiding officer in the proceeding under terms and conditions the General Counsel deems appropriate.
(3) Designation of Board counsel for hearings. To designate Board staff attorneys as Board counsel in any proceeding ordered by the Board in accordance with § 263.6 of the Board’s Rules of Practice for Hearings (12 CFR 263.6).
(b) Availability of Information – (1) Board records. To make available information of the Board of the nature and in the circumstances described in the Board’s Rules Regarding Availability of Information (12 CFR part 261).
(2) Disclosure to foreign authorities. To make the determinations required for disclosure of information to a foreign bank regulatory or supervisory authority, and to obtain, to the extent necessary, the agreement of such authority to maintain the confidentiality of such information to the extent possible under applicable law.
(3) Assistance to foreign authorities. To approve requests for assistance from any foreign bank regulatory or supervisory authority that is conducting an investigation regarding violations of any law or regulation relating to banking matters or currency transactions administered or enforced by such authority, and to make the determinations required for any investigation or collection of information and evidence pertinent to such request. In deciding whether to approve requests for assistance under this paragraph (b)(3), the General Counsel shall consider:
(i) Whether the requesting authority has agreed to provide reciprocal assistance with respect to banking matters within the jurisdiction of any appropriate Federal banking agency;
(ii) Whether compliance with the request would prejudice the public interest of the United States; and
(iii) Whether the request is consistent with the requirement that the Board conduct any such investigation in compliance with the laws of the United States and the policies and procedures of the Board.
(c) Bank holding companies; savings and loan holding companies; change in bank control; mergers – (1) Control determinations under section 4(c)(8) of the Bank Holding Company Act. To determine, or issue an order for a hearing to determine, whether a company engaged in financial, fiduciary, or insurance activities falls within the exemption in section 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)), permitting retention or acquisition of control thereof by a bank holding company.
(2) Data processing. In consultation with the Director of the Division of Supervision and Regulation, to review and act on requests for permission by bank holding companies to administer the 49 percent revenue limit on nonfinancial data processing activities on a business-line or multiple-entity basis in appropriate circumstances under § 225.28(b)(14)(ii) of Regulation Y (12 CFR 225.28(b)(14)(ii)).
(3) Notices under the Change in Bank Control Act. To revoke acceptance of and return as incomplete a notice filed under the Change in Bank Control Act (12 U.S.C. 1817(j)) or to extend the time during which action must be taken on a notice where the General Counsel determines, with the concurrence of the Director of the Division of Supervision and Regulation, that the notice is materially incomplete under that Act or Regulation Y (12 CFR part 225), or contains material information that is substantially inaccurate.
(d) Management interlocks – (1) General exemptions. After consultation with the Director of the Division of Supervision and Regulation, to grant exceptions from the prohibitions of Regulation L (12 CFR part 212) or subpart J of Regulation LL (12 CFR part 238 subpart J) under the general exemption of section 212.6 of Regulation L (12 CFR 212.6) or section 238.96 of Regulation LL (12 CFR 238.6).
(2) Legacy management interlocks. After consultation with the Director of the Division of Supervision and Regulation, to approve a request to extend a management interlock permissible under section 206 of the Depository Institution Management Interlocks Act (12 U.S.C. 3205).
(e) Enforcement actions. With the concurrence of the Director of the Division of Supervision and Regulation:
(1) To enter into a cease-and-desist order, removal and prohibition order, or civil money penalty assessment order with a bank holding company or any nonbanking subsidiary thereof, with a State member bank, with a savings and loan holding company, or with any other person or entity subject to the Board’s jurisdiction under section 8(b) or (e) of the Federal Deposit Insurance Act (12 U.S.C. 1818(b) or (e)), when the order has been consented to by the institution or individual subject to the order; or to issue a notice suspending or prohibiting an institution-affiliated party under section 8(g) of the Federal Deposit Insurance Act (12 U.S.C. 1818(g)) when the notice has been consented to by the individual subject to the notice;
(2) To stay, modify, terminate, or suspend an order or notice issued pursuant to paragraph (e)(1) of this section.
(3) To grant consent to a person subject to an order of removal and/or prohibition or suspension notice or order issued by the Board or other Federal financial institutions regulatory agency to become an institution-affiliated party of, to otherwise participate in the conduct of the affairs of, or to take an action with respect to any voting rights in, any Board-supervised institution or entity.
(4) To take, or authorize designated persons to take actions permitted under 12 U.S.C. 1818(n), 1820(c), and 12 U.S.C. 1844(f), including administering oaths and affirmations, taking depositions, and issuing, revoking, quashing, or modifying subpoenas duces tecum.
(f) International banking – (1) After-the-fact applications. With the concurrence of the Director of the Division of Supervision and Regulation, to grant a request by a foreign bank to establish a branch, agency, commercial lending company, or representative office through certain acquisitions, mergers, consolidations, or similar transactions, in conjunction with which:
(i) The foreign bank would be required to file an after-the-fact application for the Board’s approval under § 211.24(a)(6) of Regulation K (12 CFR 211.24(a)(6)); or
(ii) The General Counsel may waive the requirement for an after-the-fact application if:
(A) The surviving foreign bank commits to wind down the U.S. operations of the acquired foreign bank; and
(B) The merger or consolidation raises no significant policy or supervisory issues.
(2) To modify the requirement that a foreign bank that has submitted an application or notice to establish a branch, agency, commercial lending company, or representative office pursuant to § 211.24(a) of Regulation K (12 CFR 211.24(a)) shall publish notice of the application or notice in a newspaper of general circulation in the community in which the applicant or notificant proposes to engage in business, as provided in § 211.24(b)(2) of Regulation K (12 CFR 211.24(b)(2)).
(3) With the concurrence of the Director of the Division of Supervision and Regulation, to grant a request for an exemption under section 4(c)(9) of the Bank Holding Company Act (12 U.S.C. 1843(c)(9)), provided that the request raises no significant policy or supervisory issues that the Board has not already considered.
(4) To return applications and notices filed under the International Banking Act for informational deficits.
(5) To determine that an entity qualifies as a “special-purpose foreign government-owned bank” for purposes of § 211.24(d)(3) of Regulation K (12 CFR 211.24(d)(3)).
(g) Conflicts of interest waivers. To issue individual conflicts of interest waivers under 18 U.S.C. 208(b)(1) to employees and officials other than Board members.
(h) Deregistration requests. With the concurrence of the Director of the Division of Supervision and Regulation, to determine, pursuant to section 10(a)(1)(D)(ii) of the Home Owners’ Loan Act (12 U.S.C. 1467a(a)(1)(D)(ii)), that a company is not a savings and loan holding company by virtue of its control of a savings association that functions solely in a trust or fiduciary capacity as described in section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(D)), where no significant legal, policy, or supervisory issues are raised by the specific proposal.
(i) Small entity compliance guides. In consultation with the director of any other division responsible for drafting the associated rule, as appropriate, to approve and publish small entity compliance guides in accordance with section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 601 note).
(j) Internal debt conversion triggers. In consultation with the Director of the Division of Supervision and Regulation, to approve contractual language (“conversion trigger”) required to be included in the eligible internal debt securities (“eligible long-term debt”) issued pursuant to the Board’s total loss-absorbing capacity rule (“TLAC Rule”) by the U.S. intermediate holding companies of foreign global systemically important banking organizations required to be formed under 12 CFR 252.153(a) (“Covered IHCs”), to the extent that such language does not raise any significant legal, policy, or supervisory concerns. The authority delegated to the General Counsel in consultation with the Director of the Division of Supervision and Regulation to approve conversion triggers is limited to requests that meet the following criteria:
(1) The conversion trigger does not include any conditions for triggering the conversion other than the issuance of an internal debt conversion order by the Board;
(2) The instruments governing the long-term debt and related documents mitigate any impediments to conversion of the long-term debt into equity capital;
(3) The conversion trigger provides for the conversion of the long-term debt into common equity tier 1 capital;
(4) The conversion trigger requires the conversion of long-term debt in the amount specified by the Board’s internal debt conversion order; and
(5) Upon conversion of long-term debt pursuant to the conversion trigger, the converted long-term debt would no longer remain outstanding as a liability of the Covered IHC.
(k) Section 19 of the Federal Deposit Insurance Act. With the concurrence of the Director of the Division of Supervision and Regulation, to approve or disapprove requests under section 19 of the Federal Deposit Insurance Act (12 U.S.C. 1829) where no significant legal, policy or supervisory issues are raised by the specific proposal.
§ 265.7 Functions delegated to the Director of the Division of Supervision and Regulation.
The Director of the Division of Supervision and Regulation (or the Director’s delegatee) is authorized:
(a) Procedure – (1) Cease and desist orders. To refuse, with the prior concurrence of the appropriate Reserve Bank and the General Counsel, an application to the Board to stay, modify, terminate, or set aside any effective cease and desist order previously issued by the Board under section 8(b) of the Federal Deposit Insurance Act (12 U.S.C. 1818(b)), or any written agreement between the Board or the Reserve Bank and a bank holding company or any nonbanking subsidiary thereof, a savings and loan holding company or any nondepository subsidiary thereof, or a State member bank.
(2) Modification of commitments or conditions. To grant or deny requests for modifying, including extending the time for, performing a commitment or condition relied on by the Board or its delegatee in taking any action under the Bank Holding Company Act, the Home Owners’ Loan Act, section 18(c) of the Federal Deposit Insurance Act, the Change in Bank Control Act, the Federal Reserve Act, the International Banking Act, or the Dodd-Frank Wall Street Reform and Consumer Protection Act. In acting on such requests, the Director may take into account changed circumstances and good faith efforts to fulfill the commitments or conditions, and shall consult with the directors of other interested divisions where appropriate. The Director may not take any action that would be inconsistent with or result in an evasion of the provisions of the Board’s original action.
(3) Processing extensions. With the concurrence of the General Counsel, to extend the processing periods for the following applications and notices:
(i) The 60-day processing period for an acquisition of a bank or bank holding company filed under section 3 of the Bank Holding Company Act (12 U.S.C. 1842), pursuant to § 225.15(d)(2) of Regulation Y (12 CFR 225.15(d)(2));
(ii) The 60-day processing period for a nonbanking proposal filed under section 4 of the Bank Holding Company Act (12 U.S.C. 1843), pursuant to:
(A) Section 225.24(d)(2) of Regulation Y (12 CFR 225.24(d)(2)); and
(B) Section 4(j)(1)(C) of the Bank Holding Company Act (12 U.S.C. 1843(j)(1)(C)) and § 225.24(d)(3) of Regulation Y (12 CFR 225.24(d)(3));
(iii) The 60-day processing period for an acquisition of a savings association or savings and loan holding company filed under section 10(e) of the Home Owners’ Loan Act (12 U.S.C. 1467a(e)), pursuant to § 238.14(g)(2) of Regulation LL (12 CFR 238.14(g)(2));
(iv) The 60-day processing period for a nonbanking proposal filed under section 10(c) of the Home Owners’ Loan Act (12 U.S.C. 1467a(c)), pursuant to:
(A) Section 238.53(f)(2) of Regulation LL (12 CFR 238.53(f)(2)); and
(B) Section 238.53(f)(3) of Regulation LL (12 CFR 238.53(f)(3)); and
(v) For an additional 180 days, the 180-day period within which final Board action is required on an application pursuant to section 7(d) of the International Banking Act (12 U.S.C. 3105(d)).
(4) Notice of insufficient capital. To issue, with the concurrence of the General Counsel, a notice that a State member bank, bank holding company, or savings and loan holding company has insufficient capital and which directs the bank or company to file with its regional Reserve Bank a capital improvement plan under subpart E of the Board’s Rules of Practice for Hearings (12 CFR part 263, subpart E).
(5) Obtaining possession or control of securities; extending time period. To approve, under section 403.5(g) of the Treasury Department regulations (17 CFR 403.5) implementing the Government Securities Act of 1986, as amended (Pub. L. 95-571), the application of a member bank, a State branch or agency of a foreign bank, a foreign bank, or a commercial lending company owned or controlled by a foreign bank, to extend for one or more limited periods commensurate with the circumstances the 30-day time period specified in 17 CFR 403.5(c)(1)(iii), provided that the Director of the Division of Supervision and Regulation is satisfied that the applicant is acting in good faith and that exceptional circumstances warrant such action.
(b) Availability of information – (1) Confidential supervisory information. To make available information of the Board of the nature and in the circumstances described in § 261.22 of the Board’s Rules Regarding Availability of Information (12 CFR 261.22).
(2) Freedom of Information Act; availability of information. To make available, under the Board’s Rules Regarding Availability of Information (12 CFR part 261), reports and other information of the Board acquired pursuant to the Board’s Regulations G, T, U, and X (12 CFR parts 207, 220, 221, 224) of the nature and in circumstances described in § 261.15(a)(4) and (8) of these rules.
(c) Bank holding companies; savings and loan holding companies; financial holding companies; change in bank control; mergers – (1) Bank holding company and savings and loan holding company registration forms and annual reports. To promulgate registration forms and annual reports and other forms for use in connection with the Bank Holding Company Act and the Home Owners’ Loan Act, after receiving clearance from the Office of Management and Budget (where necessary), under section 5 of the Bank Holding Company Act (12 U.S.C. 1844) or section 10 of the Home Owners’ Loan Act (12 U.S.C. 1467a), and in accordance with 5 U.S.C. 553.
(2) Emergency action. To take actions the Reserve Bank could take under this part at § 265.20(c)(2)(ii) if immediate or expeditious action is required to avert failure of a bank or savings association or because of an emergency pursuant to sections 3(a) and 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1842(a), 1843(c)(8)), section 10(c) of the Home Owners’ Loan Act (12 U.S.C. 1467a(c)), or the Change in Bank Control Act (12 U.S.C. 1817(j)).
(3) Waiver of notice. To waive, dispense with, modify or excuse the failure to comply with the requirement for publication and solicitation of public comment regarding a notice filed under the Change in Bank Control Act (12 U.S.C. 1817(j)), with the concurrence of the General Counsel, provided a written finding is made that such disclosure would seriously threaten the safety or soundness of a bank holding company, savings and loan holding company, or a bank.
(4) Notices for addition or change of directors or officers. Under section 914(a) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 1831i) and subpart H of Regulation Y (12 CFR part 225, subpart H) or subpart H of Regulation LL (12 CFR part 238, subpart H), provided that no senior officer or director or proposed senior officer or director of the notificant is also a director of the Reserve Bank or a branch of the Reserve Bank:
(i) To determine the informational sufficiency of notices filed pursuant to § 225.72 of Regulation Y (12 CFR 225.72) or § 238.73 of Regulation LL (12 CFR 238.73); and
(ii) To waive the prior notice requirements of that section.
(5) ERISA violations. To provide the Department of Labor written notification of possible significant violations of the Employee Retirement Income Security Act (ERISA) (29 U.S.C. 1001 et seq.) by bank holding companies or savings and loan holding companies, in accordance with section 3004(b) of ERISA (29 U.S.C. 1204(b)) and the Interagency Agreement adopted to implement its provisions.
(6) Appraisal not required. To determine pursuant to 12 CFR 225.63(a)(13) that the services of an appraiser are not necessary in order to protect Federal financial and public policy interests in real estate-related financial transactions or to protect the safety and soundness of an institution.
(7) Financial holding company corrective action agreements. With the concurrence of the General Counsel, to authorize a financial holding company, or a foreign bank that has elected to be treated as a financial holding company, that is subject to section 4(m) of the Bank Holding Company Act (12 U.S.C. 1843(m)):
(i) To acquire shares of a company pursuant to authority in section 4(k) of the Bank Holding Company Act (12 U.S.C. 1843(k)) in order to continue to engage in the following categories of existing activities which require recurring transactions in the ordinary course:
(A) Merchant banking,
(B) Underwriting dealing in, or making a market in securities;
(C) Sponsoring, organizing, and managing customer-driven investment funds; and
(D) Hedging risks incurred in ongoing permissible activities;
(ii) To extend the time within which a financial holding company must execute a corrective agreement under section 4(m) of the Bank Holding Company Act (12 U.S.C. 1843(m));
(iii) To extend the time limits in, or otherwise modify, corrective agreements under section 4(m) of the Bank Holding Company Act (12 U.S.C. 1843(m)); and
(iv) To determine not to make public any corrective agreement under section 4(m) of the Bank Holding Company Act (12 U.S.C. 1843(m));
(8) Complementary physical commodity trading activities. With the concurrence of the General Counsel, to approve requests by financial holding companies to engage in complementary physical commodity trading activities, pursuant to section 4(k)(1)(B) of the Bank Holding Company Act (12 U.S.C. 1843(k)(1)(B)), as an activity that is complementary to permissible commodity derivatives activities, provided that the proposal meets the conditions imposed by the Board approving previous requests and the proposal does not raise any significant legal, policy, or supervisory issues.
(9) Extension of merchant banking investment holding periods. With the concurrence of the General Counsel, to approve requests by financial holding companies to hold merchant banking investments beyond the standard time periods established in § 225.172(b)(4) of Regulation Y (12 CFR 225.172(b)(4)), where no significant legal, policy, or supervisory issues are raised by the specific request.
(10) Single-counterparty credit limits rule exemptions. With the concurrence of the General Counsel, to act on exemption requests under section 165(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5365(e)) and subparts H and Q of Regulation YY (12 CFR part 252, subparts H and Q) where no significant legal, policy, or supervisory issues are raised.
(11) Stress tests. (i) Jointly with the Director of the Division of Financial Stability, with the concurrence of the Chair of the Board’s Committee on Supervision and Regulation:
(A) To develop and issue scenarios, including, but not limited to, the baseline scenario and the severely adverse scenario, that the Board would use to conduct analyses under § 238.132 of Regulation LL (12 CFR 238.132) or § 252.44 of Regulation YY (12 CFR 252.44) and that a company would use to conduct its stress tests under § 238.143 of Regulation LL (12 CFR 238.143) or § 252.14 or § 252.54 of Regulation YY (12 CFR 252.14 or 252.54), as appropriate, provided that no significant policy issues are raised; and
(B) To develop and issue additional scenarios or additional components for use in the severely adverse scenario under §§ 238.132(b) and 238.143(b)(2) and (3) of Regulation LL (12 CFR 238.132(b) and 238.143(b)(2) and (b)(3)), and §§ 252.14(b)(2) and (3), 252.44(b), and 252.54(b)(2) and (b)(3) of Regulation YY (12 CFR 252.14(b)(2) and (3), 252.44(b), and 252.54(b)(2) and (3)), that the Board would use to conduct analyses under § 238.132 of Regulation LL (12 CFR 238.132) or § 252.44 of Regulation YY (12 CFR 225.44) and that a company would use to conduct its stress tests under § 238.143 of Regulation LL (12 CFR 238.143) or § 252.14 or § 252.54 of Regulation YY (12 CFR 252.14 or 252.54), as appropriate, provided that no significant policy issues are raised;
(ii) With the concurrence of the Chair of the Committee on Supervision and Regulation:
(A) After consultation with the Board, to convey to a company the summary of the results of the Board’s analyses of the company under § 238.134 of Regulation LL (12 CFR 238.134) or § 252.46 of Regulation YY (12 CFR 252.46);
(B) After consultation with the Board and the Director of the Division of Financial Stability, to determine the content and timing of the public disclosure of the results of the Board’s analyses of a company under § 238.134 of Regulation LL (12 CFR 238.134) or § 252.46 of Regulation YY (12 CFR 252.46);
(C) To determine any appropriate updates to a company’s resolution plan based on the results of the Board’s analyses of the company under § 252.47 of Regulation YY (12 CFR 252.47); and
(D) To require a company to include one or more additional components in its severely adverse scenario in its stress test based on the company’s financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy pursuant to § 238.143(b)(2) of Regulation LL (12 CFR 238.143(b)(2)) and §§ 252.14(b)(2) and 252.54(b)(2) of Regulation YY (12 CFR 252.14(b)(2) and 252.54(b)(2));
(iii) After consultation with the Chair of the Committee on Supervision and Regulation:
(A) To evaluate whether a company has the capital necessary to absorb losses and continue its operation under baseline and severely adverse scenarios, and any additional scenarios, under § 238.134 of Regulation LL (12 CFR 238.134) or § 252.46 of Regulation YY (12 CFR 252.46);
(B) To conduct annual analyses of a company under § 238.132 of Regulation LL (12 CFR 238.132) or § 252.44 of Regulation YY (12 CFR 252.44); and
(C) To require a company with significant trading activity, as specified in the Capital Assessments and Stress Testing report (FR Y-14), or a subsidiary of such company, to include a trading and counterparty component in its severely adverse scenario in its stress test pursuant to § 238.143(b)(2) of Regulation LL (12 CFR 238.143(b)(2)) and §§ 252.14(b)(2) and 252.54(b)(2) of Regulation YY (12 CFR 252.14(b)(2) and 252.54(b)(2));
(iv) In consultation with the General Counsel, to respond to a company’s request for reconsideration that the company is required to include one or more additional components in its severely adverse scenario, including a trading or counterparty component, or to use one or more additional scenarios under § 238.143(b)(4) of Regulation LL (12 CFR 238.143(b)(4)) and §§ 252.14(b)(4) and 252.54(b)(4) of Regulation YY (12 CFR 252.14(b)(4) and 252.54(b)(4)); and
(v) The Director of the Division of Supervision and Regulation is also authorized to:
(A) Notify a company of the determination that the company is required to include one or more additional components in its severely adverse scenario, including a trading or counterparty component, or to use one or more additional scenarios under § 238.143(b)(4) of Regulation LL (12 CFR 238.143(b)(4)) and §§ 252.14(b)(4) and 252.54(b)(4) of Regulation YY (12 CFR 252.14(b)(4) and 252.54(b)(4));
(B) Coordinate with the appropriate primary financial regulatory agencies in conducting the analyses under § 238.132 of Regulation LL (12 CFR 238.132) or § 252.44 of Regulation YY (12 CFR 252.44);
(C) Provide the as-of date of any scenarios, additional scenarios, additional components, and the relevant data under § 238.143(b) of Regulation LL (12 CFR 238.143(b)), or § 252.14(b) or § 252.54(b) of Regulation YY (12 CFR 252.14(b) or 252.54(b)), as appropriate;
(D) Extend (and in the case of nonbank financial companies supervised by the Board or savings and loan holding companies, accelerate) the compliance date for companies under § 238.131 or § 238.142 of Regulation LL (12 CFR 238.131 or 238.142), or § 252.13, § 252.43, or § 252.53 of Regulation YY (12 CFR 252.13, 252.43, or 252.53), as appropriate;
(E) Extend any or all of the following time periods:
(1) The time period by which a company must conduct its stress test or the as-of date of the data under § 238.143(a) of Regulation LL (12 CFR 238.143(a)), or § 252.14(a) or § 252.54(a) of Regulation YY (12 CFR 252.14(a) or 252.54(a)), as appropriate;
(2) The time period by which a company must file a report to the Board under § 238.145(a) of Regulation LL (12 CFR 238.145(a)), or § 252.16(a) or § 252.57(a) of Regulation YY (12 CFR 252.16(a) or 252.57(a)), as appropriate; and
(3) The time period by which a company must disclose a summary of results of its stress tests under § 238.146 of Regulation LL (12 CFR 238.146), or § 252.17 or § 252.58 of Regulation YY (12 CFR 252.17 or 252.58), as appropriate;
(F) Require a company to submit additional information on a consolidated basis pursuant to § 238.133 of Regulation LL (12 CFR 238.133) or § 252.45 of Regulation YY (12 CFR 252.45) that the Director determines necessary to ensure that the Board has sufficient information to conduct its analysis under § 238.132 of Regulation LL (12 CFR 238.132) or § 252.44 of Regulation YY (12 CFR 252.44) or as necessary to project a company’s pro forma financial condition;
(G) Require a company to submit additional information under § 238.145 of Regulation LL (12 CFR 238.145), or § 252.16 or § 252.57 of Regulation YY (12 CFR 252.16 or 252.57), as appropriate; and
(H) Determine that disclosures made by a bank holding company do not adequately capture the potential impact of scenarios on the capital of a State member bank pursuant to § 252.17 of Regulation YY (12 CFR 252.17) and require that the State member bank make the same disclosure as required for State member banks that are not subsidiaries of bank holding companies.
(12) Volcker Rule conformance period extensions. With the concurrence of the General Counsel, to approve (but not deny) a request by a new banking entity for an extension of time to conform its activities and investments to the requirements of section 13 of the Bank Holding Company Act and its implementing regulations, pursuant to § 225.181(a)(3) of Regulation Y (12 CFR 225.181(a)(3)), provided that the approval criteria thereunder are met and the request raises no significant policy or supervisory issues.
(d) International banking – (1) Foreign bank reports. To require submission of a report of condition respecting any foreign bank in which a member bank holds stock acquired under § 211.8(b) of Regulation K (12 CFR 211.8(b)), pursuant to section 25 of the Federal Reserve Act (12 U.S.C. 602).
(2) Edge corporation reports. To require submission and publication of reports by an Edge corporation under section 25A of the Federal Reserve Act (12 U.S.C. 625).
(3) International banking matters. With the concurrence of the General Counsel, to approve applications, notices, exemption requests, waivers and suspensions, and other related matters under Regulation K (12 CFR part 211), where such matters do not raise any significant legal, supervisory, or policy issues.
(4) Allocated transfer risk reserves. To determine the need for establishing and the amount of any allocated transfer risk reserve against specific international assets, and notify the banking institutions of the determination and the amount of the reserve and whether the reserve may be reduced under subpart D of Regulation K (12 CFR part 211, subpart D).
(5) Conduct and coordination of examinations. To authorize the conduct of examinations of the U.S. offices and affiliates of foreign banks as provided in sections 7(c) and 10(c) of the International Banking Act (12 U.S.C. 3105(c) and 3107(c)), and, where appropriate, to coordinate those examinations with examinations of the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the State entity that is authorized to supervise or regulate a State branch, State agency, commercial lending company, or representative office.
(6) Election by a foreign bank to be treated as financial holding company. With the concurrence of the General Counsel, to determine that an election by a foreign bank to become or to be treated as a financial holding company is effective, provided that:
(i) The foreign bank meets the criteria for becoming or being treated as a financial holding company; and
(ii) The election raised no significant policy or supervisory issues.
(7) Enhanced prudential standards rule for foreign banking organizations. (i) With the concurrence of the Chair of the Committee on Supervision and Regulation and the General Counsel, to grant or deny a request to permit a foreign banking organization to use an alternative organizational structure or not transfer its ownership interest in a U.S. subsidiary to its intermediate holding company under subpart O of Regulation YY (12 CFR part 252, subpart O), subject, as appropriate, to any commitments or conditions, provided that the request raises no significant policy or supervisory issues.
(ii) In consultation with the General Counsel, to:
(A) Commitments. Grant or deny requests for modifying, including extending the time for, performing a commitment or condition relied on by the Board or its delegatee in taking any action under subparts M through O of Regulation YY (12 CFR part 252, subparts M-O). In acting on such requests, the Director may take into account changed circumstances and good faith efforts to fulfill the commitments or conditions, and shall consult with the directors of other interested divisions where appropriate. The Director may not take any action that would be inconsistent with or result in an evasion of the provisions of the Board’s original action;
(B) Stress testing. (1) Determine that an asset should not qualify as an eligible asset under §§ 252.146 and 252.158 of Regulation YY (12 CFR 252.146 and 252.158);
(2) Determine that a foreign banking organization or foreign savings and loan holding company must meet the additional standards, respectively, under § 238.162(b) of Regulation LL (12 CFR 238.162(b)) and §§ 252.146 and 252.158 of Regulation YY (12 CFR 252.146 and 252.158);
(3) Approve an enterprise-wide stress test and determine that it meets the stress test requirements under § 238.162(b) of Regulation LL (12 CFR 238.162(b)) and §§ 252.146 and 252.158 of Regulation YY (252.146 and 252.158);
(4) Require the U.S. branches and agencies of a foreign banking organization and, if the foreign banking organization has not established a U.S. intermediate holding company, any subsidiary of the foreign banking organization, to maintain a liquidity buffer or be subject to intragroup funding restrictions under § 252.158(d)(3) of Regulation YY (12 CFR 252.158(d)(3));
(C) Capital. Determine that a foreign banking organization would meet or exceed capital adequacy standards on a consolidated basis that are consistent with the Basel Capital Framework were the foreign banking organization subject to such standards under §§ 252.143(a)(2) and 252.154(a)(2) of Regulation YY (12 CFR 252.143(a)(2) and 252.154(a)(2));
(D) Risk management. Approve an alternative reporting structure for a U.S. chief risk officer based on circumstances specific to the foreign banking organization under §§ 252.144(c)(3)(iii) and 252.155(b)(3)(iii) of Regulation YY (12 CFR 252.144(c)(3)(iii) and 252.155(b)(3)(iii));
(E) Liquidity. (1) Require a foreign banking organization to calculate the collateral positions for its combined U.S. operations more frequently than required under § 252.156(g)(l)(i) of Regulation YY (12 CFR 252.156(g)(l)(i));
(2) Require a foreign banking organization to perform stress testing more frequently than is required under § 252.157(a)(2) of Regulation YY (12 CFR 252.157(a)(2)); and
(F) Additional information. Require a foreign banking organization to provide additional information under §§ 252.147(a)(3), 252.153(a)(3) and 252.158(c)(2) of Regulation YY (12 CFR 252.147(a)(3), 252.153(a)(3) and 252.158(c)(2)), as appropriate.
(e) Member banks – (1) Membership certification to FDIC. To certify, under section 4(b) of the Federal Deposit Insurance Act (12 U.S.C. 1814(b)), to the Federal Deposit Insurance Corporation that the factors specified in section 6 of the Federal Deposit Insurance Act (12 U.S.C. 1816) were considered with respect to the admission of a State-chartered bank to Federal Reserve membership.
(2) Dollar exchange. To permit any member bank to accept drafts or bill of exchange drawn upon it for the purpose of furnishing dollar exchange under section 13(12) of the Federal Reserve Act (12 U.S.C. 373).
(3) ERISA violations. To provide to the Department of Labor written notification of possible significant violations of the Employee Retirement Income Security Act (ERISA) (29 U.S.C. 1001 et seq.) by member banks, in accordance with section 3004(b) of ERISA (29 U.S.C. 1204(b)) and the Interagency Agreement adopted to implement its provisions.
(4) Examiners. To select or approve the appointment of Federal Reserve examiners, assistant examiners, and special examiners for the purpose of making examinations for or by the direction of the Board under 12 U.S.C. 325, 338, 625, 1844(c), and 3105(c)(1).
(5) Capital stock reduction; branch applications; declaration of dividends; investment in bank premises. To exercise the functions described in § 265.20(e)(5), (11), and (12)(reductions in capital, issuance of subordinated debt, and early retirement of subordinated debt) when the conditions specified in those sections preclude a Reserve Bank from acting on a member bank’s request for action or when the Reserve Bank concludes that it should not take action, and to exercise the functions in § 265.20(e)(3), (4), and (7) (approving branch applications, declaration of dividends, and investment in bank premises) in cases in which the Reserve Bank concludes that it should not take action.
(6) Security devices. To exercise the functions described in § 265.20(e)(8) in those cases in which the appropriate Reserve Bank concludes that it should not take action for good cause.
(7) Public welfare investments. (i) To permit a State member bank to make a public welfare investment in accordance with section 9(23) of the Federal Reserve Act (12 U.S.C. 338a) in any case in which the appropriate Reserve Bank does not have delegated authority to act, unless the proposal does not satisfy § 208.22(b)(1) of Regulation H (12 CFR 208.22(b)(1)). In acting on such requests, the Director shall consult with the directors of other interested divisions where appropriate; and
(ii) To determine, in connection with acting on a proposal pursuant to delegated authority as set forth in paragraph (e)(7)(i) of this section, that the aggregate amount of a State member bank’s public welfare investments will not pose a significant risk to the deposit insurance fund in accordance with section 9(23) of the Federal Reserve Act (12 U.S.C. 338a).
(8) Prior approval for capital distributions. With the concurrence of the Vice Chair for Supervision, to approve (but not deny) a request to make a distribution pursuant to § 217.303(g) of the Board’s Regulation Q (12 CFR 217.303(g)).
(f) Securities – (1) Registration statements by member banks. Under section 12(g) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)):
(i) To accelerate the effective date of a registration statement filed by a member bank with respect to its securities;
(ii) To accelerate termination of the registration of a security that is no longer held of record by 300 persons; and
(iii) To extend the time for filing a registration statement by a member bank.
(2) Exemption from registration. To issue notices with respect to application by a State member bank for exemption from registration under section 12(h) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(h)).
(3) Accelerating registration of security on national securities exchange. To accelerate the effective date of an application by a State member bank for registration of a security on a national securities exchange under section 12(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(d)).
(4) Unlisted trading in security of a State member bank. To issue notices with respect to an application by a national securities exchange for unlisted trading privileges in a security of a State member bank under section 12(f) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(f)).
(5) Transfer agent registration; acceleration; withdrawal or cancellation. (i) To accelerate, under section 17A(c)(2) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78q-1(c)(2)), the effective date of a registration statement for transfer agent activities filed by a member bank or a subsidiary thereof, a bank holding company or a subsidiary thereof that is a bank as defined in section 3(a)(6) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(6)) other than a bank specified in clause (i) or (iii) of section 3(a)(34)(B) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(34)(B)).
(ii) To withdraw or cancel, under section 17A(c)(3)(C) of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78q-1(c)(4)(B)), the transfer agent registration of a member bank or a subsidiary thereof, a bank holding company, or a subsidiary thereof that is a bank as defined in section 3(a)(6) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(6)) other than a bank specified in clause (i) or (iii) of section 3(a)(34)(B) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(34)(B)), that has filed a written notice of withdrawal with the Board or upon a finding that such transfer agent is no longer in existence or has ceased to do business as a transfer agent.
(6) Proxy solicitation; financial statements. (i) To permit the mailing of proxy and other soliciting materials by a State member bank before the expiration of the time prescribed therein under § 208.36 of Regulation H (12 CFR 208.36).
(ii) To permit the omission of financial statements from reports by a State member bank, or to require other financial statements in addition to, or in substitution for, the statements required therein under § 208.36 of Regulation H (12 CFR 208.36).
(7) Municipal securities dealers. Under section 23 of the Securities Exchange Act of 1934 (15 U.S.C. 78w).
(i) To grant or deny requests for waiver of examination and waiting period requirements for municipal securities principals and representatives under Municipal Securities Rulemaking Board Rule G-3;
(ii) To grant or deny requests for a determination that a natural person or municipal securities dealer subject to a statutory disqualification is qualified to act as a municipal securities representative or dealer under Municipal Securities Rulemaking Board Rule G-4;
(iii) To approve or disapprove clearing arrangements under Municipal Securities Rulemaking Board Rule G-8, in connection with the administration of these rules for municipal securities dealers for which the Board is the appropriate regulatory agency under section 3(a)(34) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(34)).
(8) Making reports available to SEC. To make available, upon request, to the Securities and Exchange Commission reports of examination of transfer agents, clearing agencies, and municipal securities dealers for which the Board is the appropriate regulatory agency for use by the Commission in exercising its supervisory responsibilities under the Act under section 17(c)(3) of the Securities Exchange Act of 1934 (15 U.S.C. 78q(c)(3)).
(9) Issuing examination manuals, forms, and other materials. To issue examination or inspection manuals, registration, report, agreement, and examination forms, guidelines, instructions, and other similar materials for use in administering sections 7, 8, 15B, and 17A(c) of the Securities Exchange Act of 1934 (15 U.S.C. 78g, 78h, 78o-4, and 78q-1(c)).
(10) Lists of OTC and foreign margin stocks. To approve issuance of the lists of OTC margin stocks and foreign margin stocks and add, omit, or remove any stock in circumstances indicating that such change is necessary or appropriate in the public interest under § 207.6(d) of Regulation G (12 CFR 207.6(d)), § 220.17(f) of Regulation T (12 CFR 220.17(f)), or § 221.7(d) of Regulation U (12 CFR 221.7(d)).
(g) Golden parachute payments. With the concurrence of the General Counsel, to approve an application to make a golden parachute payment or enter into an agreement to make a golden parachute payment under 12 CFR part 359.
(h) Prompt corrective action. With the approval of the General Counsel, to take the following actions pursuant to prompt corrective action under the rules implementing section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o) in connection with any institution or person, except a critically undercapitalized institution:
(1) Capital categories, capital restoration plans, and discretionary supervisory actions pursuant to §§ 208.42 through 208.44 of Regulation H (12 CFR 208.42 through 208.44);
(2) Notices and directives pursuant to § 263.202 of the Board’s Rules of Practice for Hearings (12 CFR 263.202);
(3) Reclassification of a capital category based on criteria other than capital pursuant to § 263.203 of the Board’s Rules of Practice for Hearings (12 CFR 263.203); and
(4) Dismissal of directors or senior officers pursuant to § 263.204 of the Board’s Rules of Practice for Hearings (12 CFR 263.204).
(i) Assessments for bank holding companies, savings and loan holding companies, and nonbank financial companies supervised by the Board. In consultation with the General Counsel, to take actions pursuant to Regulation TT (12 CFR part 246) to determine the elements of the assessment formula for each assessment period including the assessment rate, the amount of the assessment basis, and each company’s total assessable assets; to determine the amount of assessment for each assessed company, including allowing for pro-rata adjustments, payment of a lesser amount than would otherwise be required pursuant to the reservation of authority, and responding to an appeal by revising the assessment amount; to notify the assessed companies of the assessment; and to publish information regarding calculation of the assessments for each assessment period (including a description of how the assessment basis was determined) on the Board’s public website.
(j) Capital plans. (1) To take the following actions (or to provide concurrence to the appropriate Reserve Bank, where appropriate):
(i) To allow a bank holding company or savings and loan holding company to submit its capital plan after the 5th of January of a given year;
(ii) To object, in whole or in part, to the capital plan or provide the bank holding company or savings and loan holding company with a notice of non-objection to the capital plan;
(iii) To direct a bank holding company or savings and loan holding company to revise and resubmit its capital plan if:
(A) The capital plan is incomplete;
(B) There has been or will be a material change in the bank holding company’s or savings and loan holding company’s risk profile, financial condition, or corporate structure;
(C) The stressed scenarios developed by the bank holding company or savings and loan holding company are not sufficiently stressed; or
(D) The capital plan or bank holding company or savings and loan holding company raise any issues that would cause the Board or the Reserve Bank to object to the capital plan;
(iv) To waive the requirement that a bank holding company or savings and loan holding company resubmit its entire capital plan with respect to those portions of the plan that are unchanged;
(v) To extend or shorten the 30-day period for resubmission of a capital plan;
(vi) To determine that a bank holding company or savings and loan holding company is required to obtain prior approval for a capital distribution that would result in a material adverse change to the organization’s capital or liquidity structure or because earnings were materially underperforming projections;
(vii) To notify a bank holding company or savings and loan holding company in writing that it may not take advantage of the prior approval exception for well-capitalized bank holding companies or savings and loan holding companies; or
(viii) To approve or disapprove, within 30 days of receipt of receipt of a complete request, a proposed capital distribution; and
(ix) To affirm or withdraw objection to a capital plan based on a bank holding company’s or savings and loan holding company’s written request to reconsider an objection to a capital plan.
(2) With the concurrence of the Chair of the Committee on Supervision and Regulation, and after consultation with the Board and the Director of the Division of Financial Stability, to determine the content and timing of the public disclosure of the Board’s decision to object or not object to a bank holding company’s or savings and loan holding company’s capital plan and the summary of the Board’s analyses of that company, under § 225.8 of Regulation Y (12 CFR 225.8).
(3) Jointly with the Director of the Division of Financial Stability, with the concurrence of the Vice Chair for Supervision:
(i) To provide a firm subject to the Board’s capital plan rules with notice of its stress capital buffer requirement and an explanation of the results of the supervisory stress test pursuant to §§ 225.8(h)(1) of Regulation Y (12 CFR 115.8(h)(1)) and 238.170(h)(1) of Regulation LL (12 CFR 238.170(h)(1)); and
(ii) To provide a firm subject to the Board’s capital plan rules with its final stress capital buffer requirement and confirmation of its final planned capital distributions pursuant to §§ 225.8(h)(4)(i) of Regulation Y (12 CFR 225.8(h)(4)(i)) and 238.170(h)(4)(i) of Regulation LL (12 CFR 238.170(h)(4)(i)).
(k) Capital adequacy – (1) Delegations regarding the general provisions of subpart A of Regulation Q (12 CFR part 217, subpart A). (i) With the concurrence of the Chair of the Committee on Supervision and Regulation, and after consultation with the General Counsel:
(A) To determine under § 217.1(d)(2)(ii) of Regulation Q (12 CFR 217.1(d)(2)(ii)) whether a capital element may be included in a company’s common equity tier 1 capital, additional tier 1 capital, or tier 2 capital consistent with the loss absorption capacity of the element and in accordance with § 217.20(e) of Regulation Q (12 CFR 217.20(e)); and
(B) To determine under the definition of “financial institution” in § 217.2 of Regulation Q (12 CFR 217.2) whether a company is a financial institution based on its activities.
(ii) After consultation with the General Counsel:
(A) To require under § 217.1(d)(1) of Regulation Q (12 CFR 217.1(d)(1)) a company to hold an amount of regulatory capital greater than otherwise required under Regulation Q because the company’s capital requirements under Regulation Q are not commensurate with the company’s credit, market, operational or other risks;
(B) To determine under § 217.1(d)(2)(i) of Regulation Q (12 CFR 217.1(d)(2)(i)) whether an element of capital must be excluded in whole or in part from capital because the capital element has characteristics or terms that diminish its ability to absorb losses, or otherwise presents safety and soundness concerns;
(C) To require under § 217.1(d)(3) of Regulation Q (12 CFR 217.1(d)(3)) that a company assign a different risk-weighted asset amount to an exposure or deduct the amount of the exposure from its regulatory capital because the risk-weighted asset amount calculated under Regulation Q for the exposure is not commensurate with the risks associated with the exposure;
(D) To determine under § 217.1(d)(4) of Regulation Q (12 CFR 217.1(d)(4)) whether the leverage exposure amount, or the amount reflected in a company’s reported average total consolidated assets, for an on- or off-balance sheet exposure (under § 217.10 of Regulation Q (12 CFR 217.10)) is inappropriate for the exposure(s) or the circumstances of the company, and, based on this determination, require the company to adjust this amount in the numerator and the denominator for purposes of the company’s leverage ratio calculations;
(E) To determine under § 217.1(d)(5) of Regulation Q (12 CFR 217.1(d)(5)) whether the risk-based capital treatment for an exposure, or the treatment provided to an entity that is not consolidated on a company’s balance sheet, is commensurate with the risk of the exposure and the relationship of the company to the entity, and, based on this determination, require the company to treat the exposure or entity as if it were consolidated on the company’s balance sheet; and
(F) With respect to any deduction or limitation required under Regulation Q, to require under § 217.1(d)(6) of Regulation Q (12 CFR 217.1(d)(6)) a different deduction or limitation provided that such alternative deduction or limitation is commensurate with the company’s risk and consistent with safety and soundness.
(iii)(A) To determine under paragraph (5) of the definition of “distribution” in § 217.2 of Regulation Q (12 CFR 217.2) whether a transaction is in substance a distribution of capital;
(B) To act on a request from a company under the definition of “eligible credit derivative” in § 217.2 of Regulation Q (12 CFR 217.2) to find that a credit derivative (other than a credit default swap, nth-to-default swap, or total return swap) should be considered an eligible credit derivative;
(C) To determine under the definition of “main index” in § 217.2 of Regulation Q (12 CFR 217.2) whether an index is a main index because the equities represented by the index have comparable liquidity, depth of market, and size of bid-ask spreads as equities in the Standard & Poor’s 500 Index and FTSE All-World Index;
(D) To determine under the definition of “multilateral development bank” in § 217.2 of Regulation Q (12 CFR 217.2) whether a multilateral lending institution or regional development bank poses a comparable credit risk to other multilateral development banks;
(E) To determine under the definition of “qualifying central counterparty” in § 217.2 of Regulation Q (12 CFR 217.2) whether a central counterparty meets the requirements for qualification as a qualifying central counterparty;
(F) To determine under paragraph (8) of the definition of “traditional securitization” in § 217.2 of Regulation Q (12 CFR 217.2) whether a transaction is not a traditional securitization based on the transaction’s leverage, risk profile, or economic substance; and
(G) To determine under paragraph (9) of the definition of “traditional securitization” in § 217.2 of Regulation Q (12 CFR 217.2) whether a transaction is a traditional securitization based on the transaction’s leverage, risk profile, or economic substance.
(2) Delegation regarding the capital ratio requirements and buffers in subpart B of Regulation Q (12 CFR part 217, subpart B). To act on a request under § 217.11(a)(4)(iv) of Regulation Q (12 CFR 217.11(a)(4)(iv)) to permit a company to make a capital distribution or discretionary bonus payment that would otherwise not be permissible.
(3) Delegations regarding the definition of capital in subpart C of Regulation Q (12 CFR part 217, subpart C). (i) With the concurrence of the Chair of the Committee on Supervision and Regulation, and after consultation with the General Counsel, to act on a request from a company under § 217.20(e)(1) of Regulation Q (12 CFR 217.20(e)(1)) to include a capital element in its common equity tier 1 capital, additional tier 1 capital, or tier 2 capital.
(ii)(A) To determine under § 217.20(c)(l)(v)(C) and (d)(l)(v)(C) of Regulation Q (12 CFR 217.20(c)(l)(v)(C) and (d)(l)(v)(C)) whether a company would continue to hold capital commensurate to its risk following the exercise of a call option;
(B) To consult with the other banking agencies under § 217.20(e)(2) of Regulation Q (12 CFR 217.20(e)(2)) when considering whether a company may include a regulatory capital element in its common equity tier 1 capital, additional tier 1 capital, or tier 2 capital;
(C) To make publicly available under § 217.20(e)(3) of Regulation Q (12 CFR 217.20(e)(3)) a decision that a regulatory capital element may be included in a company’s common equity tier 1 capital, additional tier 1 capital, or tier 2 capital;
(D) To determine under § 217.22(a)(5)(i) of Regulation Q (12 CFR 217.22(a)(5)(i)) whether the deduction of a defined benefit pension fund net asset is not required to the extent that the company has unrestricted and unfettered access to the assets in the fund;
(E) To act on a request from a company under § 217.22(b)(2)(iv) of Regulation Q (12 CFR 217.22(b)(2)(iv)) to change to its AOCI opt-out election following a merger, acquisition, or purchase transaction;
(F) To act on a request from a company under § 217.22(c)(4), (5), or (6) or (d)(2)(i)(C) of Regulation Q (12 CFR 217.22(c)(4), (5), or (6) or (d)(2)(i)(C)) not to deduct investments in the capital of an unconsolidated financial institution either:
(1) To the extent the investment is related to a failed underwriting, or
(2) If the financial institution is in distress and the investment is made for the purpose of providing financial support to the financial institution;
(G) To act on a request from a company under § 217.22(d)(1)(iv) or (d)(2)(iii) of Regulation Q (12 CFR 217.22(d)(1)(iv) or (d)(2)(iii)) to change its election whether to exclude DTAs and DTLs relating to adjustments made to common equity tier 1 capital;
(H) To act on a request from a company under § 217.22(e)(5) of Regulation Q (12 CFR 217.22(e)(5)) to change its preference regarding the manner in which it nets DTLs against specific assets subject to deduction;
(I) To act on a request from a company under § 217.22(h)(2)(iii)(A) of Regulation Q (12 CFR 217.22(h)(2)(iii)(A)) to use a conservative estimate of the amount of its investment in its own capital instruments or the capital of an unconsolidated financial institution held through a position in an index; and
(J) To determine under § 217.22(h)(3)(iii)(C) of Regulation Q (12 CFR 217.22(h)(3)(iii)(C)) whether a company’s internal control process is adequate.
(iii)(A) To act on a company’s request under § 217.20(b)(l)(iii), (c)(l)(vi), or (d)(l)(x) of Regulation Q (12 CFR 217.20(b)(l)(iii), (c)(l)(vi), (d)(l)(x)) to redeem a security; and
(B) To act on a company’s request under § 217.20(c)(l)(v)(A) or (d)(l)(v)(A) of Regulation Q (12 CFR 217.20(c)(l)(v)(A), (d)(l)(v)(A)) to exercise a call option.
(4) Delegations regarding the standardized approach in subpart D of Regulation Q (12 CFR part 217, subpart D). (i) After consultation with the General Counsel, to determine under § 217.35(d)(3)(i)(E) of Regulation Q (12 CFR 217.35(d)(3)(i)(E)) that a risk weight higher than 20 percent for variable RW in formula K
(ii)(A) To determine under § 217.35(d)(1) of Regulation Q (12 CFR 217.35(d)(1)) whether there has been a material change in the financial condition of a CCP;
(B) To act on a request under § 217.35(d)(2) of Regulation Q (12 CFR 217.35(d)(2)) for a company to use a risk-weighted asset amount for default fund contributions to a CCP that is not QCCP other than a 1,250 percent risk weight; and
(C) In the case of a system-wide failure of a settlement or clearing system, or a CCP, to waive under § 217.38(c) of Regulation Q (12 CFR 217.38(c)) risk-based capital requirements for unsettled and failed transactions.
(iii)(A) To act on a request from a company under § 217.37(c) of Regulation Q (12 CFR 217.37(c)) to use its own estimates of haircuts, including:
(1) Acting on a request by a company under § 217.37(c)(4)(i)(E) of Regulation Q (12 CFR 217.37(c)(4)(i)(E)) to make changes to the company’s policies and procedures; and
(2) Requiring a company under § 217.37(c)(4)(i)(F) of Regulation Q (12 CFR 217.37(c)(4)(i)(F)) to use a different period of significant financial stress in the calculation of own estimates of haircuts; and
(B) To determine under § 217.41(c) of Regulation Q (12 CFR 217.41(c)) whether or not a company has demonstrated a comprehensive understanding of the features of a securitization exposure.
(5) Delegations regarding the advanced approaches risk-based capital rules in subpart E of Regulation Q (12 CFR part 217, subpart E). (i) With the concurrence of the Chair of the Committee on Supervision and Regulation, and after consultation with the General Counsel, to act on a request by a company under § 217.121(c) and (d) of Regulation Q (12 CFR 217.121(c) and (d)) to use the advanced approaches to calculate its risk-based capital requirements and notify the company of the date that it must begin to do so if the action would not raise significant policy issues.
(ii) After consultation with the General Counsel:
(A) To require a company (that no longer meets the qualification requirements in subpart E of Regulation Q (12 CFR part 217, subpart E)) under § 217.123(b)(3) of Regulation Q (12 CFR 217.123(b)(3)) to calculate its advanced approaches total risk-weighted assets with modifications determined by the Director if the Director determines that the advanced approaches total risk-weighted assets are not commensurate with the company’s credit, market, operational, or other risk; and
(B) To determine under § 217.133(d)(3)(i) of Regulation Q (12 CFR 217.133(d)(3)(i)) that a risk weight higher than 20 percent for variable RW in formula K
(iii)(A) To determine under § 217.100(c)(1) of Regulation Q (12 CFR 217.100(c)(1)) that not applying a provision of Regulation Q would, in all circumstances, unambiguously generate a risk-based capital requirement for each such exposure greater than that which would otherwise be required;
(B) To determine that a non-U.S. subsidiary of a U.S. company may use the retail definition of default defined in a non-U.S. jurisdiction under the definition of “default” in § 217.101 of Regulation Q (12 CFR 217.101);
(C) To determine for purposes of the definition of eligible double default guarantor in § 217.101 of Regulation Q (12 CFR 217.101) whether the guarantor is subject to consolidated supervision and regulation comparable to that imposed on U.S. depository institutions or securities broker-dealers;
(D) To extend any of the following periods:
(1) A company’s parallel run start date under § 217.121 of Regulation Q (12 CFR 217.121);
(2) For up to an additional 12 months, the time in which a company may use subpart D of Regulation Q (12 CFR part 217, subpart D) to determine the risk-weighted asset amounts for a merged or acquired company’s exposures under § 217.124(a) of Regulation Q (12 CFR 217.124(a)); and
(3) For up to an additional 12 months, the time in which a company may use an acquired company’s advanced systems to determine total risk-weighted assets for the merged or acquired company’s exposures under § 217.124(b)(1) of Regulation Q (12 CFR 217.124(b)(1));
(E) To assess compliance with any supervisory guidance on qualification requirements for purposes of § 217.121(b)(1) of Regulation Q (12 CFR 217.121(b)(1));
(F) To waive the requirement under § 217.121(b)(2) of Regulation Q (12 CFR 217.121(b)(2)) that a company submit a parallel run implementation plan to the Board at least 60 days before it proposes to begin its parallel run;
(G) To act on a request by a company under § 217.122(g)(2)(ii)(A)(1) of Regulation Q (12 CFR 217.122(g)(2)(ii)(A)(1)) to use a historical observation period of less than five years for internal operational loss event data to address transitional situations, such as integrating a new business line;
(H) To act on a request by a company under § 217.122(g)(2)(ii)(A)(3) of Regulation Q (12 CFR 217.122(g)(2)(ii)(A)(3)) to refrain from collecting internal operational loss event data for individual operational losses below established dollar threshold amounts;
(I) To act on a request by a company under § 217.122(g)(3)(i)(D) of Regulation Q (12 CFR 217.122(g)(3)(i)(D)) to use internal estimates of dependence among operational losses across and within units of measure;
(J) To act on a request by a State member bank under § 217.122(g)(3)(ii) of Regulation Q (12 CFR 217.122(g)(3)(ii)) to generate an estimate of the company’s operational risk exposure using an alternative approach to that specified in § 217.122(g)(3)(i) of Regulation Q (12 CFR 217.122(g)(3)(i));
(K) To determine under § 217.123(b) of Regulation Q (12 CFR 217.123(b)) that a company that has conducted a satisfactory parallel run fails to comply with the qualification requirements in § 217.122 of Regulation Q (12 CFR 217.122) and notify the company in writing of the determination;
(L) To determine under § 217.123(b) of Regulation Q (12 CFR 217.123(b)) whether a company’s plan to return to compliance with the qualification requirements in § 217.122 of Regulation Q (12 CFR 217.122) is satisfactory;
(M) To establish requirements under § 217.131(e)(l)(i) of Regulation Q (12 CFR 217.131(e)(l)(i)) for the estimation of a margin loan’s probability of default (“PD”) and loss given default (“LGD”);
(N) In the case of a system-wide failure of a settlement or clearing system, or a central counterparty, to waive under § 217.136(c) of Regulation Q (12 CFR 217.136(c)) risk-based capital requirements for unsettled and failed transactions; and
(O) To act on a request by a company under § 217.161(b)(2) of Regulation Q (12 CFR 217.161(b)(2)) to use operational risk mitigants other than insurance.
(iv)(A) To act on a request for approval of any model or optional approach available under subpart E of Regulation Q (12 CFR part 217, subpart E), including without limitation:
(1) Any counterparty credit risk model or methodology (own estimates of haircuts, simple VaR methodology, internal models methodology, or advanced credit valuation adjustment (“CVA”) approach) under §§ 217.122(d) and 217.132 of Regulation Q (12 CFR 217.122(d) and 217.132), including:
(i) Acting on a request by a company under § 217.132(b)(2)(iii)(A)(5) of Regulation Q (12 CFR 217.132(b)(2)(iii)(A)(5)) to make changes to the company’s policies and procedures;
(ii) Requiring a company under § 217.132(b)(2)(iii)(A)(6) of Regulation Q (12 CFR 217.132(b)(2)(iii)(A)(6)) to use a different period of significant financial stress in the calculation of own internal estimates for haircuts;
(iii) Acting on a request by a company under § 217.132(d)(1) introductory text and (d)(1)(iv) of Regulation Q (12 CFR 217.132(d)(1) introductory text and (d)(1)(iv)) to use the internal models methodology, cease using the internal models methodology for a transaction type, or make a material change to its internal model;
(iv) Acting on a request by a company under § 217.132(d)(2)(iv) and (d)(10) of Regulation Q (12 CFR 217.132(d)(2)(iv) and (d)(10)) to use a more conservative estimate of exposure at default (“EAD”);
(v) Determining that a company must set a higher “alpha” under § 217.132(d)(2)(iv)(C) of Regulation Q (12 CFR 217.132(d)(2)(iv)(C)) based on the company’s specific characteristics of and counterparty credit risk or model performance;
(vi) Acting on a request by a company under § 217.132(d)(3) of Regulation Q (12 CFR 217.132(d)(3)) to calculate the distributions of exposures upon which the EAD calculation is based;
(vii) Requiring a company under § 217.132(d)(3)(viii) of Regulation Q (12 CFR 217.132(d)(3)(viii)) to modify its stress calibration to better reflect actual historic losses of the portfolio;
(viii) Acting on a request by a company under § 217.132(d)(5)(i) of Regulation Q (12 CFR 217.132(d)(5)(i)) to include the effect of a collateral agreement within an internal model used to calculate EAD;
(ix) Requiring a company under § 217.132(d)(5)(iii)(C) of Regulation Q (12 CFR 217.132(d)(5)(iii)(C)) to set a longer holding period (for margin period of risk for a netting set that is subject to a collateral agreement) if the Director determines that a longer period is appropriate due to the nature, structure, or characteristics of the transaction or is commensurate with the risks associated with the transaction;
(x) Acting on a request by a company under § 217.132(d)(6) of Regulation Q (12 CFR 217.132(d)(6)) to calculate alpha as the ratio of economic capital from a full simulation of counterparty exposure across counterparties that incorporates a joint simulation of market and credit risk factors (numerator) and economic capital based on expected positive exposure (“EPE”) (denominator), subject to a floor of 1.2;
(xi) Acting on a request by a company under § 217.132(e) of Regulation Q (12 CFR 217.132(e)) to calculate its CVA risk-weighted asset amounts for a class of counterparties using the advanced CVA approach;
(xii) Acting on a request by a company under § 217.132(e)(6)(ii)(D) of Regulation Q (12 CFR 217.132(e)(6)(ii)(D)) to use a conservative estimate when determining LGD
(xiii) Requiring a company under § 217.132(e)(6)(v)(B) of Regulation Q (12 CFR 217.132(e)(6)(v)(B)) to use a different period of significant financial stress in the calculation of the CVA
(2) Any model or approach relating to cleared transactions under §§ 217.122(d) and 217.133 of Regulation Q (12 CFR 217.122(d) and 217.133), including:
(i) Requiring under § 217.133(d)(1) of Regulation Q (12 CFR 217.133(d)(1)) a company that is a clearing member to determine the risk-weighted asset amount for a default fund contribution to a CCP more frequently than quarterly if in the opinion of the Director of the Division of Supervision and Regulation, there is a material change in the financial condition of the CCP; and
(ii) Acting on a request under § 217.133(d)(2) of Regulation Q (12 CFR 217.133(d)(2)) for a company to use a risk-weighted asset amount for default fund contributions to a CCP that is not QCCP other than a 1,250 percent risk weight;
(3) Any model or approach relating to the double default treatment under §§ 217.122(e) and 217.135 of Regulation Q (12 CFR 217.122(e) and 217.135), including acting on a request by a company under § 217.135(a)(6) of Regulation Q (12 CFR 217.135(a)(6)) to implement a process to detect excessive correlation between the creditworthiness of the obligor of a hedged exposure and a protection provider;
(4) A company’s own internal estimates of market price volatility and foreign exchange volatility under § 217.145(b)(4) of Regulation Q (12 CFR 217.145(b)(4)); and
(5) The internal models approach for equity exposures under §§ 217.122(f) and 217.153(b) of Regulation Q (12 CFR 217.122(f) and 217.153(b));
(B) To determine under § 217.131(e)(4) of Regulation Q (12 CFR 217.131(e)(4)) whether a portfolio of exposures is or is not material; and
(C) To assess for purposes of § 217.141(c)(1) of Regulation Q (12 CFR 217.141(c)(1)) whether a company has a comprehensive understanding of the features of a securitization exposure that would materially affect the performance of the exposure.
(6) Delegations regarding the market risk rule in subpart F of Regulation Q (12 CFR part 217, subpart F). (i) With the concurrence of the Chair of the Committee on Supervision and Regulation, and after consultation with the General Counsel, to act on a request by a company to be excluded from the market risk rule under § 217.201(b)(3) of Regulation Q (12 CFR 217.201(b)(3)) if the action would not raise significant policy issues.
(ii) After consultation with the General Counsel, to require a company:
(A) Under § 217.201(c)(1) of Regulation Q (12 CFR 217.201(c)(1)) to hold an amount of capital greater than otherwise required under subpart F of Regulation Q (12 CFR part 217, subpart F) upon a determination that the company’s capital requirement for market risk as calculated under Regulation Q is not commensurate with the market risk of the company’s covered positions;
(B) Under § 217.201(c)(2) of Regulation Q (12 CFR 217.201(c)(2)) to assign a different risk-based capital requirement to one or more covered positions or portfolios that more accurately reflects the risk of the positions or portfolios; and
(C) Under § 217.201(c)(3) of Regulation Q (12 CFR 217.201(c)(3)) to calculate risk-based capital requirements for specific positions or portfolios under subpart F of Regulation Q (12 CFR part 217, subpart F), or under subparts D or E of Regulation Q (12 CFR part 217, subparts D or E), as appropriate, to more accurately reflect the risks of the positions.
(iii) To act regarding any model approval, disapproval, rescission, or supervision under subpart F of Regulation Q (12 CFR part 217, subpart F), including the authority to:
(A) Exclude from trading assets or liabilities structural foreign currency positions of a company or any hedge of a covered position that is outside the scope of the company’s hedging strategy under § 217.202 of Regulation Q (12 CFR 217.202);
(B) Act on a request from a company under § 217.203(c)(1) of Regulation Q (12 CFR 217.203(c)(1)) to approve its internal model(s) to calculate its risk-based capital requirement;
(C) Rescind approval under § 217.203(c)(3) of Regulation Q (12 CFR 217.203(c)(3)) of a company’s internal model(s) to calculate its risk-based capital requirement;
(D) Act on a request from a company under § 217.204(a)(2)(vi)(B) of Regulation Q (12 CFR 217.204(a)(2)(vi)(B)) to use alternative techniques to measure the risk of de minimis exposures;
(E) Act on a request from a company under § 217.204(b)(2) of Regulation Q (12 CFR 217.204(b)(2)) to use a different adjustment of its VaR-based measure;
(F) Review and determine the appropriateness of a company’s omission of risk factors under § 217.205(a)(4) of Regulation Q (12 CFR 217.205(a)(4)) and the use of proxies under § 217.205(a)(5) of Regulation Q (12 CFR 217.205(a)(5));
(G) Review and determine under § 217.205(b)(1) of Regulation Q (12 CFR 217.205(b)(1)) the appropriateness of any conversions of VaR to other holding periods by a company;
(H) Review and determine under § 217.205(b)(2)(ii) of Regulation Q (12 CFR 217.205(b)(2)(ii)) the appropriateness of a company’s alternative weighting schemes;
(I) Approve or disapprove under § 217.205(c) of Regulation Q (12 CFR 217.205(c)) any requirements relating to a company’s division of subportfolios;
(J) Approve or disapprove under § 217.206(b)(3) of Regulation Q (12 CFR 217.206(b)(3)) any changes to a company’s policies and procedures that describe how the company determines the period of significant financial stress used to calculate its stressed VaR-based measure;
(K) Require a company under § 217.206(b)(4) of Regulation Q (12 CFR 217.206(b)(4)) to use a different period of significant financial stress in the calculation of the stressed VaR-based measure;
(L) Act on a request by a company under § 217.208(a) of Regulation Q (12 CFR 217.208(a)) to include certain portfolios of equity positions in its incremental risk model;
(M) Act on a request by a company under § 217.209(a)(1) of Regulation Q (12 CFR 217.209(a)(1)) to use the comprehensive risk approach for one or more portfolios of correlation trading positions and the related approval under § 217.209(a)(2)(ii) of Regulation Q (12 CFR 217.209(a)(2)(ii)) regarding a company’s comprehensive risk capital requirement;
(N) Determine under § 217.210(e)(3) of Regulation Q (12 CFR 217.210(e)(3)) whether an index is a main index because the equities represented by the index have comparable liquidity, depth of market, and size of bid-ask spreads as equities in the Standard & Poor’s 500 Index and FTSE All-World Index; and
(O) Determine under § 217.210(f)(1) of Regulation Q (12 CFR 217.210(f)(1)) whether or not a company has demonstrated a comprehensive understanding of the features of a securitization exposure.
(7) Delegations of Authority under Basel I-based Capital Guidelines (Appendix A to Regulation Y, 12 CFR part 225). (i) To approve under section II.A.l.c.ii.(2) of appendix A to Regulation Y, 12 CFR part 225, a bank or bank holding company’s redemption of perpetual preferred stock; and
(ii) To approve under section II.A.2. of appendix A to Regulation Y, 12 CFR part 225, a bank or bank holding company’s redemption of subordinated debt or mandatorily convertible securities prior to the stated maturity.
(l) Concentration Limit Actions (Regulation XX (12 CFR part 251)). (1) To approve requests from financial companies seeking to use an accounting standard or method of estimation other than GAAP to calculate and report liabilities pursuant to section 14 of the Bank Holding Company Act (12 U.S.C. 1852) and Regulation XX (12 CFR part 251);
(2) To calculate and publish total financial sector liabilities for the preceding calendar year and the average of financial sector liabilities for the preceding two calendar years, for use in calculating whether a firm exceeds 10 percent of the liabilities of all financial firms in the United States pursuant to section 14 of the Bank Holding Company Act (12 U.S.C. 1852); and
(3) To provide prior written consent for purposes of section 14 of the Bank Holding Company Act (12 U.S.C. 1852) to a financial company to consummate an acquisition of a de minimis transaction, to the extent that the transaction otherwise meets all other criteria for delegated action related to financial, managerial, convenience and needs, and other review factors.
(m) Savings and loan holding companies. (1) With concurrence of the General Counsel:
(i) To extend the time limits in, or otherwise modify, an agreement entered into by a savings and loan holding company pursuant to § 238.66 of Regulation LL (12 CFR 238.66).
(ii) To determine that publication of an agreement entered into by a savings and loan holding company pursuant to § 238.66 of Regulation LL (12 CFR 238.66) would be contrary to the public interest under the publication requirements of the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.).
(iii) To act on requests for exemptions or otherwise make determinations under section 11 of the Home Owners’ Loan Act (12 U.S.C. 1468), as implemented in Regulation W (12 CFR part 223), to the same extent authorized with respect to insured depository institutions and their affiliates and bank holding companies.
(2) With the Director of the Division of Consumer and Community Affairs, to designate the responsible Reserve Bank of a savings and loan holding company when the standard delegation would not result in an efficient allocation of supervisory resources or would not otherwise be appropriate.
(n) Swaps margin and swaps push-out. To approve internal margin models for entities for which the Board is the prudential regulator, in accordance with § 237.8 of Regulation KK (12 CFR 237.8).
(o) Certain determinations under Regulations LL, YY, and QQ. In consultation with the General Counsel, to:
(1) Determine that an asset meets the criteria to be a highly liquid asset under the Board’s prudential standards in Regulation LL (12 CFR 238.124(b)(3)(i)) and Regulation YY (12 CFR 252.35(b)) to the extent that such determination is consistent with the criteria specified in such regulations and does not raise any significant legal, policy, or supervisory concerns;
(2) Determine that a foreign banking organization may comply with the requirements in Regulation YY (12 CFR 252.3(c)) through a subsidiary to the extent that such determination is consistent with the criteria specified in Regulation YY and does not raise any significant legal, policy or supervisory concerns; and
(3) Identify which holding company in a multi-tiered holding company will be a covered company under Regulation QQ (12 CFR part 243) to the extent such identification is consistent with the criteria specified in Regulation QQ (12 CFR 243.2) and does not raise any significant legal, policy, or supervisory concerns.
(p) Approving certain requests under the Capital Rule (Regulation Q, 12 CFR part 217) related to the exposure amount of derivative contracts. To the extent that the determination or request does not raise any significant legal, policy, or supervisory issue:
(1) To act on a request under § 217.34(f) of Regulation Q (12 CFR 217.34(f)) as to whether a holding period greater than 5 days is appropriate for variable H due to the nature, structure, or characteristics of the transaction or that is commensurate with the risks associated with the transaction;
(2) To act on a request under § 217.132(c)(1) of Regulation Q (12 CFR 217.132(c)(1)) from a banking organization to change its election between the use of the standardized approach to counterparty credit risk under § 217.132(c)(5) of Regulation Q (12 CFR 217.132(c)(5)) and the internal models methodology under § 217.132(d) of Regulation Q (12 CFR 217.132(d)) for its derivative transactions;
(3) To require under § 217.132(c)(2)(iii)(H) of Regulation Q (12 CFR 217.132(c)(2)(iii)(H)) that a banking organization include a derivative contract in multiple hedging sets if the risk of the derivative contract materially depends on more than one of interest rate, exchange rate, credit, equity, or commodity risk factors;
(4) To act on a request under § 217.132(d)(10) of Regulation Q (12 CFR 217.132(d)(10)) from a banking organization to use a more conservative estimate of EAD for purposes of the internal models methodology;
(5) To require under § 217.133(d)(1) of Regulation Q (12 CFR 217.133(d)(1)) that a banking organization determine the risk-weighted asset amount for its default fund contribution to a central counterparty (CCP) on the basis that there has been a material change in the financial condition of the CCP;
(6) To act on a request under § 217.133(d)(2) of Regulation Q (12 CFR 217.133(d)(2)) from a banking organization to use a risk-weighted asset amount for a default fund contribution to a CCP that is not a qualifying central counterparty (QCCP) other than 1,250 percent risk weight; and
(7) To act on a request under § 217.133(d)(6)(vi) of Regulation Q (12 CFR 217.133(d)(6)(vi)) from a banking organization to determine the risk-weighted asset amount for a default fund contribution to a QCCP according to § 217.35(d)(3)(ii) (12 CFR 217.35(d)(3)(ii)) rather than § 217.133(d) (12 CFR 217.133(d)).
(q) Insurance Policy Advisory Committee. To organize and administer the Insurance Policy Advisory Committee (“IPAC”), including by publishing future requests for IPAC applications in the
§ 265.8 Functions delegated to the Director of the Division of Consumer and Community Affairs.
The Director of the Division of Consumer and Community Affairs (or the Director’s delegatee) is authorized:
(a) Examination and enforcement activities. For the consumer protection and consumer affairs statutes and regulations for which the Board has supervisory and enforcement responsibility, including but not limited to the Truth in Lending Act, Home Mortgage Disclosure Act, Community Reinvestment Act, Equal Credit Opportunity Act, Fair Housing Act, and the Federal Trade Commission Act’s prohibition on unfair and deceptive acts and practices:
(1) To oversee policy development regarding compliance by State member banks and other supervised entities, including by establishing criteria for the execution of examination and enforcement activities delegated to the Reserve Banks and monitoring those activities; and
(2) To issue examination or inspection manuals; report, agreement, and examination forms; examination procedures, guidelines, instructions, and other similar materials.
(b) Community Advisory Council. To call meetings of and consult with the Community Advisory Council, approve the agenda for such meetings, publish
(c) Determining inconsistencies between State and Federal laws. To determine whether a State law is inconsistent with the following Federal acts and regulations to the extent that the laws are applicable to motor vehicle dealers, as defined in section 1029 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5519):
(1) Sections 111, 171(a) and 186(a) of the Truth in Lending Act (15 U.S.C. 1610(a), 1666j(a), 1667e(a)) and §§ 226.28 of Regulation Z (12 CFR 226.28) and 213.9 of Regulation M (12 CFR 213.9);
(2) Section 919 of the Electronic Fund Transfer Act (15 U.S.C. 1693q), § 205.12 of Regulation E (12 CFR 205.12); and
(3) Section 705(f) of the Equal Credit Opportunity Act (15 U.S.C. 1691d(f) and § 202.11 of Regulation B (12 CFR 202.11).
(d) Interpreting the Fair Credit Reporting Act. To issue interpretations pursuant to section 621(e) of the Fair Credit Reporting Act (15 U.S.C. 1681s(e));
(e) [Reserved]
(f) Community Reinvestment Act determinations. To make determinations, pursuant to section 804 of the Community Reinvestment Act of 1977 (12 U.S.C. 2903), approving or disapproving:
(1) Strategic plans and any amendments thereto pursuant to § 228.27(g) and (h) of Regulation BB (12 CFR 228.27(g) and (h)); and
(2) Requests for designation as a wholesale or limited purpose bank or the revocation of such designation, pursuant to § 228.25(b) of Regulation BB (12 CFR 228.25(b)).
(g) Public hearings. To conduct hearings or other proceedings required or permitted by law, concerning consumer law or other matters within the responsibilities of the Division of Consumer and Community Affairs, in consultation with other interested divisions of the Board where appropriate.
(h) Designation of responsible Reserve Bank for savings and loan holding companies. With the Director of the Division of Supervision and Regulation, to designate the responsible Reserve Bank of a savings and loan holding company when the standard designation would not result in an efficient allocation of supervisory resources or would not otherwise be appropriate.
§ 265.9 Functions delegated to the Director of the Division of International Finance.
The Director of the Division of International Finance (or the Director’s delegatee) is authorized:
(a) Establishment of foreign accounts. To approve the establishment of foreign accounts and the terms of any account-related agreements with the Federal Reserve Bank of New York under section 14(e) of the Federal Reserve Act (12 U.S.C. 358).
(b) [Reserved]
§ 265.10 Functions delegated to the Director of the Division of Monetary Affairs.
The Director of the Division of Monetary Affairs (or the Director’s delegatee) is authorized:
(a) Term Deposit Facility (TDF) test operations. With the concurrence of the General Counsel, and in consultation with the Chair if feasible, to adjust the terms and conditions of individual TDF test operations that raise significant technical or operational issues, including but not limited to the authority to:
(1) Delay the open of a TDF operation;
(2) Extend the close of a TDF operation;
(3) Reschedule a TDF operation; and
(4) Delay the announcement of TDF operation results.
(b) Regulation D. With the concurrence of the General Counsel, to approve the annual indexation of the reserve requirement exemption, low reserve tranche, nonexempt deposit cutoff, and reduced reporting limit amounts under Regulation D (12 CFR part 204), so long as no change is proposed to any of the formulas by which these amounts are calculated.
§ 265.11 Functions delegated to the Director of the Division of Reserve Bank Operations and Payment Systems.
The Director of the Division of Reserve Bank Operations and Payment Systems (or the Director’s delegatee) is authorized:
(a) Designated financial market utilities. (1) To issue a notice of no objection to a designated financial market utility relating to an advance notice of proposed material change submitted under section 806(e) of the Dodd-Frank Act (12 U.S.C. 5465(e)) and section 234.4 of Regulation HH (12 CFR 234.4).
(2) To extend the review period for proposed changes that raise novel or complex issues and to request additional information from the designated financial market utility for consideration of the notice.
(b) Regulation II. (1) In consultation with the Director of the Division of Supervision and Regulation and the General Counsel, to approve the publication of annual lists of institutions that fall above and below the small issuer exemption asset threshold under Regulation II (12 CFR part 235).
(2) In consultation with the General Counsel, to approve the publication of annual lists of the average interchange fees each network provides to non-exempt and exempt issuers.
§ 265.12 Functions delegated to the Secretary of the Federal Open Market Committee.
The Secretary of the Federal Open Market Committee (or the Deputy Secretary in the Secretary’s absence) is authorized:
(a) Records of policy actions. To approve for inclusion in the Board’s Annual Report to Congress, records of policy actions of the Federal Open Market Committee.
(b) [Reserved]
§ 265.13 Functions delegated to the Director of the Division of Financial Stability.
The Director of the Division of Financial Stability (or the Director’s delegatee) is authorized:
(a) Bank holding companies; savings and loan holding companies; financial holding companies; change in bank control; mergers – (1) Stress tests. (i) Jointly with the Director of the Division of Supervision and Regulation, with the concurrence of the Chair of the Committee on Supervision and Regulation:
(A) To develop and issue scenarios, including, but not limited to, the baseline scenario and the severely adverse scenario, that the Board would use to conduct analyses under § 238.132 of Regulation LL (12 CFR 238.132) or § 252.44 of Regulation YY (12 CFR 252.44) and that a company would use to conduct its stress tests under § 238.143 of Regulation LL (12 CFR 238.143) or § 252.14 or § 252.54 of Regulation YY (12 CFR 252.14 or 252.54), as appropriate, provided that no significant policy issues are raised; and
(B) To develop and issue additional scenarios or additional components for use in the severely adverse scenario under § 238.132(b) and 238.143(b)(2) and (3) of Regulation LL (12 CFR 238.132(b) and 238.143(b)(2) and (3)), and §§ 252.14(b)(2) and (3), 252.44(b), and 252.54(b)(2) and (3) of Regulation YY (12 CFR 252.14(b)(2) and (3), 252.44(b), and 252.54(b)(2) and (3)), that the Board would use to conduct analyses under § 238.132 of Regulation LL (12 CFR 238.132) or § 252.44 of Regulation YY (12 CFR 225.44) and that a company would use to conduct its stress tests under § 238.143 of Regulation LL (12 CFR 238.143) or § 252.14 or § 252.54 of Regulation YY (12 CFR 252.14 or 252.54), as appropriate, provided that no significant policy issues are raised;
(2) [Reserved]
(b) Capital plans. (1) Jointly with the Director of the Division of Supervision and Regulation, with the concurrence of the Vice Chair for Supervision:
(i) To provide a firm subject to the Board’s capital plan rules with notice of its stress capital buffer requirement and an explanation of the results of the supervisory stress test pursuant to §§ 225.8(h)(1) of Regulation Y (12 CFR 115.8(h)(1)) and 238.170(h)(1) of Regulation LL (12 CFR 238.170(h)(1)); and
(ii) To provide a firm subject to the Board’s capital plan rules with its final stress capital buffer requirement and confirmation of its final planned capital distributions pursuant to §§ 225.8(h)(4)(i) of Regulation Y (12 CFR 225.8(h)(4)(i)) and 238.170(h)(4)(i) of Regulation LL (12 CFR 238.170(h)(4)(i)).
(2) [Reserved]
§§ 265.14-265.19 [Reserved]
§ 265.20 Functions delegated to Federal Reserve Banks.
Except as otherwise provided in this section, each Federal Reserve Bank is authorized as to a member bank or other indicated organization for which the Reserve Bank is responsible for receiving applications or registration statements or to take other actions as indicated:
(a) Procedure – (1) Member bank affiliate’s reports. To extend the time for good cause shown, within which an affiliate of a State member bank must file reports under section 9(17) of the Federal Reserve Act (12 U.S.C. 334).
(2) Edge corporation’s divestiture of stock. To extend the time in which an Edge Act corporation must divest itself of stock acquired in satisfaction of a debt previously contracted under section 25A(7) of the Federal Reserve Act (12 U.S.C. 615).
(3) Edge corporation’s corporate existence. To extend the period of corporate existence of an Edge corporation under section 25A(20) of the Federal Reserve Act (12 U.S.C. 628).
(4) Bank holding company and savings and loan holding company registration statement. To extend the time within which a bank holding company or savings and loan holding company must file a registration statement under section 5(a) of the Bank Holding Company Act (12 U.S.C. 1844(a)) or section 10(b) of the Home Owners’ Loan Act (12 U.S.C. 1467a(b)).
(5) Bank holding company divestiture of nonbanking interests. To extend the time within which a bank holding company must divest itself of interests in nonbanking organizations under section 4(a) of the Bank Holding Company Act (12 U.S.C. 1843(a)).
(6) Bank holding company divestiture of DPC interests. To extend the time within which a bank holding company or any of its subsidiaries must divest itself of interests acquired in satisfaction of a debt previously contracted:
(i) Under section 4(c)(2) of the Bank Holding Company Act (12 U.S.C. 1843(c)(2)) or § 225.22(c)(1) of Regulation Y (12 CFR 225.22(c)(1)); or
(ii) Under sections 2(a)(5)(D) and 3(a) of the Bank Holding Company Act (12 U.S.C. 1841(a)(5)(D) and 1842(a)).
(7) Member bank’s surrender of Reserve Bank stock upon withdrawal from membership. To extend the time within which a member bank that has given notice of intention to withdraw from membership must surrender its Federal Reserve Bank stock and its certificate of membership under § 209.3(e) of Regulation H (12 CFR 209.3(e)).
(8) Members bank’s reports of condition. To extend the time for publication of reports of condition under Regulation H (12 CFR part 208) for good cause shown.
(9) Bank holding company’s and savings and loan holding company’s annual reports. To grant to a bank holding company or savings and loan holding company a 90-day extension of time in which to file an annual report, and for good cause shown grant an additional extension of time not to exceed 90 days under section 5(c) of the Bank Holding Company Act (12 U.S.C. 1844(c)) or section 10(b)(2) of the Home Owners’ Loan Act (12 U.S.C. 1467a(b)(2)).
(10) Regulation K; divestiture of impermissible interests. To extend the time within which an investor, under § 211.8(e) and (f) of Regulation K (12 CFR 211.8(e) and (f)), must divest of investments in entities engaged in impermissible activities or interests acquired to prevent a loss upon a debt previously contracted in good faith.
(11) Bank holding company’s or savings and loan holding company’s acquisition of shares, opening new bank, consummating merger. To extend the time within which a bank holding company or savings and loan holding company may acquire shares, open a new bank to be acquired, or consummate a merger in connection with an application approved by the Board, if no material change relevant to the proposal has occurred since its approval.
(12) Member bank’s establishing domestic or foreign branch; Edge or agreement corporation’s establishing branch or agency. To extend the times within which:
(i) A member bank may establish a domestic branch;
(ii) A member bank may establish a foreign branch; or
(iii) An Edge or agreement corporation may establish a branch or agency, if no material change has occurred in the bank’s (or corporation’s) general condition since the application was approved.
(13) Purchase of stock by Edge or agreement corporation, member bank, or bank holding company. To extend the time within which an Edge or agreement corporation, member bank, or a bank holding company may accomplish a purchase of stock if no material change has occurred in the general condition of the corporation, the member bank, or bank holding company since such authorization under sections 25 or 25A of the Federal Reserve Act or section 4(c)(13) of the Bank Holding Company Act (12 U.S.C. 615, 628, 1843(c)(13)).
(14) Federal Reserve membership. To extend the time within which Federal Reserve membership must be accomplished, if no material change has occurred in the bank’s general condition since the application was approved.
(15) Enforcement actions; written agreements; cease and desist orders. With the concurrence of the Director of the Division of Supervision and Regulation and the General Counsel:
(i) To enter into a written agreement with a bank holding company or any nonbanking subsidiary thereof, with a savings and loan holding company or any subsidiary thereof (other than a savings association), with a State member bank, with a foreign bank that has elected to be treated as a financial holding company, or with any person or entity subject to the Board’s supervisory jurisdiction under section 8(b) of the Federal Deposit Insurance Act (12 U.S.C. 1818(b)) concerning the prevention or correction of an unsafe or unsound practice in conducting the business of the bank holding company or its nonbanking subsidiary, savings and loan holding company or its subsidiary (other than a savings association), or State member bank, or foreign bank that has elected to be treated as a financial holding company, or other entity, or concerning the correction or prevention of any violation of law, rule, or regulation, including section 4(m) of the Bank Holding Company Act (12 U.S.C. 1843(m)), or any condition imposed in writing by the Board in connection with the granting of any application or other request by the bank or company; and
(ii) To stay, modify, terminate, or suspend an agreement entered into pursuant to this paragraph (a)(15), other than to extend time limits in a corrective agreement with a financial institution under section 4(m) of the Bank Holding Company Act (12 U.S.C. 1843(m)).
(iii) To stay, modify, terminate, or suspend an outstanding cease and desist order that has become final pursuant to 12 U.S.C. 1818(b). Any agreement authorized under this paragraph may, by its terms, be enforceable to the same extent and in the same manner as an effective and outstanding cease and desist order that has become final pursuant to 12 U.S.C. 1818(b).
(16) Appointment of assistant Federal Reserve agents. To approve the appointment of assistant Federal Reserve agents (including representatives or alternate representatives of such agents) under section 4(21) of the Federal Reserve Act (12 U.S.C. 306).
(17) Relief from or modification of commitments. To grant or deny requests for relieving or modifying (including extending the time for performing) a commitment relied upon by the Reserve Bank in taking any action under the Bank Holding Company Act, section 18(c) of the Federal Deposit Insurance Act (12 U.S.C. 1828(c)), the Change in Bank Control Act, the Federal Reserve Act, the International Banking Act, the Federal Deposit Insurance Act, or the Home Owners’ Loan Act, so long as the requests do not raise any significant legal, supervisory, or policy issues. In acting on such requests, the Reserve Bank may take into account changed circumstances and good faith efforts to fulfill the commitments, and shall consult with Board staff as appropriate. The Reserve Bank may not take any action that would be inconsistent with or result in an evasion of the provisions of the original action.
(b) Availability of Information; Board records. To make available information of the Board of the nature and in the circumstances described in §§ 261.21(a) and 261.22(a) of the Board’s Rules Regarding Availability of Information (12 CFR 261.21(a) and 261.22(a)).
(c) Holding companies; change in bank control; mergers – (1) Require reports under oath. To require reports under oath to determine whether a company is complying with section 5(c) of the Bank Holding Company Act (12 U.S.C. 1844(c)) or section 10(b)(2) of the Home Owners’ Loan Act (12 U.S.C. 1467a(b)(2)).
(2) Acquisition of going concern – authorization of consummation; early consummation. (i) To notify a bank holding company or savings and loan holding company that, because the circumstances surrounding the application to acquire a going concern indicate that additional information is required or that the acquisition should be considered by the Board, the acquisition should not be consummated until specifically authorized by the Reserve Bank or by the Board.
(ii) To permit a bank holding company or savings and loan holding company to make a proposed acquisition of a going concern before the expiration of the 30-day period referred to in § 225.24(d)(1) of Regulation Y (12 CFR 225.24(d)(1)) or § 238.53(f)(1)(i) of Regulation LL (12 CFR 238.53(f)(1)(i)) because exigent circumstances justify consummation of the acquisition at an earlier time.
(3) Petition for review of decision that adverse comments are not substantive; permit proposed de novo activities; authorization of consummation. Under subpart C of Regulation Y (12 CFR part 225, subpart C) or subpart F of Regulation LL (12 CFR part 238, subpart F) and subject to § 265.3 (12 CFR 265.3), if a person submitting adverse comments that the Reserve Bank has decided are not substantive files a petition for review by the Board of that decision:
(i) To permit a bank holding company to engage de novo in activities specified in § 225.28(b) of Regulation Y (12 CFR 225.28(b)), or a savings and loan holding company to engage de novo in activities specified in §§ 238.53 and 238.54 of Regulation LL (12 CFR 238.53 and 238.54), or retain shares in a company established de novo and engaging in such activities, if the Reserve Bank’s evaluation of the considerations specified in section 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)) or section 10(c) of the Home Owners’ Loan Act (12 U.S.C. 1467a(c)) leads it to conclude that the proposal can reasonably be expected to produce benefits to the public.
(ii) To notify a bank holding company or savings and loan holding company that the proposal should not be consummated until specifically authorized by the Reserve Bank or by the Board or that the proposal should be processed in accordance with the procedures in subpart C of Regulation Y (12 CFR part 225, subpart C) or subpart F of Regulation LL (12 CFR part 238, subpart F).
(4) Nonbanking activities. (i) To approve requests by bank holding companies to engage in check cashing for checks drawn on unaffiliated banks, real estate title abstracting, or acting as a certification authority for digital signatures and authenticating the identity of persons conducting financial and nonfinancial transactions, as an activity that is closely related to banking for purposes of section 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)), when the proposal meets the conditions imposed by the Board in approving previous requests, and no significant legal, policy, or supervisory issues are raised by the specific proposal.
(ii) To approve requests by foreign banks subject to the Bank Holding Company Act by operation of section 8(a) of the International Banking Act (12 U.S.C. 3106(a)) to engage in acting as a certification authority for digital signatures and authenticating the identity of persons conducting financial and nonfinancial transactions, as an activity that is closely related to banking for purposes of section 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)), when the proposal meets the conditions imposed by the Board in approving previous requests, and no significant legal, policy, or supervisory issues are raised by the specific proposal.
(5) Permit or stay of modification or location of activities. To permit or stay a proposed de novo modification or relocation of activities engaged in by a bank holding company or a savings and loan holding company on the same basis as de novo proposals under paragraph (c)(3) of this section.
(6) Notices under the Change in Bank Control Act. With respect to a bank holding company, a savings and loan holding company, or a State member bank:
(i) To determine the informational sufficiency of notices and reports filed under the Change in Bank Control Act (12 U.S.C. 1817(j));
(ii) To extend periods for consideration of notices;
(iii) To determine whether a person who is or will be subject to a presumption described in § 225.41(c)(2) of Regulation Y (12 CFR 225.41(c)(2)) or § 238.31(c)(2) of Regulation LL (12 CFR 238.31(c)(2)) should file a notice regarding a proposed transaction; and
(iv) To issue a notice of intention not to disapprove a proposed change in control if all the following conditions are met:
(A) No member of the Board has indicated an objection prior to the Reserve Bank’s action;
(B) No senior officer or director of an involved party is also a director of a Federal Reserve Bank or branch;
(C) All relevant departments of the Reserve Bank concur;
(D) If the proposal involves shares of a State member bank or a bank holding company controlling a State member bank, the appropriate bank supervisory authorities have indicated that they have no objection to the proposal, or no objection has been received from them within the time allowed by the act; and
(E) No significant policy issue under the Change in Bank Control Act (12 U.S.C. 1817(j)), § 225.41 of Regulation Y (12 CFR 225.41), or § 238.31 of Regulation LL (12 CFR 238.41) is raised by the proposal as to which the Board has not expressed its view.
(7) Failure to comply with publication requirement under the Change in Bank Control Act. To waive, dispense with, modify, or excuse the failure to comply with the requirement for publication and solicitation of public comment regarding a notice filed under the Change in Bank Control Act (12 U.S.C. 1817(j)), with the concurrence of the Director of the Division of Supervision and Regulation and the General Counsel, provided that a written finding is made that such disclosure or solicitation would seriously threaten the safety or soundness of a bank holding company, savings and loan holding company, savings association, or bank under paragraph (2) of the Change in Bank Control Act (12 U.S.C. 1817(j)(2)).
(8) Legacy nonbanking activities. To determine that termination of nonbanking activities conducted pursuant to the proviso in section 4(a)(2) of the Bank Holding Company Act (12 U.S.C. 1843(a)(2)) by a particular bank holding company is not warranted, provided the Reserve Bank is satisfied all of the following conditions are met:
(i) The company or its successor is “a company covered in 1970”;
(ii) The nonbanking activities that the bank holding company seeks to continue do not present any significant unsettled policy issues; and
(iii) The bank holding company was lawfully engaged in such activities as of June 30, 1968, and has been engaged in such activities continuously thereafter.
(9) Opening of additional nonbanking offices. To approve applications by a bank holding company under section 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)) and subpart C of Regulation Y (12 CFR part 225, subpart C) to open additional offices to engage in nonbanking activities for which the bank holding company previously received approval pursuant to Board order, unless one of the conditions specified in paragraphs (c)(12)(i) through (iv) of this section is present.
(10) Volcker Rule. In consultation with Board staff, to approve (but not deny) an application by a banking entity for an extension of the period of time during which it must reduce its ownership interest in a covered fund to no more than 3 percent, if all of the following criteria are met:
(i) No significant issues have been identified regarding the firm’s compliance program;
(ii) The banking entity has represented that all of the requirements under section 13 of the Bank Holding Company Act (12 U.S.C. 1851) and its implementing regulations (12 CFR part 248) for organizing and offering a covered fund have been met;
(iii) The banking entity provides a plan for reducing the permitted investment in a covered fund through redemption, sale, dilution, or other methods by the end of the extension period; and
(iv) The primary Federal agency responsible for enforcing compliance with section 13 of the Bank Holding Company Act (12 U.S.C. 1851) by the banking entity that invests in or sponsors the covered fund (if other than the Federal Reserve) does not object to the extension.
(11) Notices for addition or change of directors or officers. Under section 914(a) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 1831i) and subpart H of Regulation Y (12 CFR part 225, subpart H)) and subpart H of Regulation LL (12 CFR part 238, subpart H), provided that no senior officer or director or proposed senior officer or director of the notificant is also a director of the Reserve Bank or a branch of the Reserve Bank:
(i) To determine the informational sufficiency of notices filed pursuant to § 225.72 of Regulation Y (12 CFR 225.72) or § 238.73 of Regulation LL (12 CFR 238.73); and
(ii) To waive the prior notice requirements of those sections.
(12) Applications requiring Board approval; competitive factors reports for bank mergers and savings association mergers. To approve applications requiring prior approval of the Board and furnish to the Comptroller of the Currency and the Federal Deposit Insurance Corporation reports on competitive factors involved in a bank merger or savings association merger required to be approved by one of those agencies, unless one or more of the following conditions is present:
(i) A member of the Board has indicated an objection prior to the Reserve Bank’s action; or
(ii) The Board has indicated that such delegated authority shall not be exercised by the Reserve Bank in whole or in part; or
(iii) A written substantive objection to the application has been properly made; or
(iv) The application raises a significant policy issue or legal question on which the Board has not established its position; or
(v)(A)With respect to holding company formations, acquisitions or mergers of holding companies, or acquisitions or mergers of insured depository institutions, except as set forth in paragraph (c)(12)(v)(B) of this section, upon consummation, the proposal would result in the control by a banking organization of over 35 percent of total deposits in banking offices in the relevant geographic market or an increase of at least 200 points in the Herfindahl-Hirschman Index (HHI) for deposits in a highly concentrated market (a market with a post-merger HHI of at least 1800) when including:
(1) All thrift deposits at 50 percent weight, except for deposits of thrifts determined by the Reserve Bank, with the concurrence of the Director of the Division of Research and Statistics, to be commercially active, which are included at 100 percent weight; and
(2) The deposits of credit unions determined by the Reserve Bank, with the concurrence of the Director of the Division of Research and Statistics, to offer consumer banking products, operate street-level branches, and have broad membership criteria in the relevant geographic market, which are included at 50 percent weight; or
(B) With respect to the formation of a savings and loan holding company, the merger of savings and loan holding companies, or the acquisition by a savings and loan holding company of a savings association, upon consummation, the proposal would result in the control by a banking organization of over 35 percent of total deposits in banking offices in the relevant geographic market or an increase of at least 200 points in the HHI for deposits in a highly concentrated market (a market with a post-merger HHI of at least 1800) when including:
(1) All thrift deposits at 100 percent weight; and
(2) The deposits of credit unions determined by the Reserve Bank, with the concurrence of the Director of the Division of Research and Statistics, to offer consumer banking products, operate street-level branches, and have broad membership criteria in the relevant geographic market, which are included at 50 percent weight; or
(vi) With respect to nonbank acquisitions, the nonbanking activities involved do not clearly fall within activities that the Board has designated as permissible for bank holding companies under § 225.28(b) of Regulation Y (12 CFR 225.28(b)); or
(vii) With respect to formations, acquisitions, or mergers involving depository institution holding companies, banks, or nonbank companies (except for internal corporate reorganizations), the proposed transaction represents an acquisition of assets equaling or exceeding $10 billion and would result in an organization with total assets equaling or exceeding $100 billion; or there is evidence that the transaction would result in a significant increase in interconnectedness, complexity, cross-border activities, or other risk factors related to the stability of the United States banking or financial system.
(13) Waivers. (i) To inform an acquiring bank holding company, in connection with a notice submitted by the bank holding company pursuant to § 225.12(d)(2) of Regulation Y (12 CFR 225.12(d)(2)), that an application under § 225.11 of Regulation Y (12 CFR 225.11) is required.
(ii) To inform an acquiring savings and loan holding company, in connection with a notice submitted by the savings and loan holding company pursuant to § 238.12(d)(1) of Regulation LL (12 CFR 238.12(d)(1)), that an application under § 238.11 of Regulation LL (12 CFR 238.11) is required.
(14) Savings and loan holding companies in mutual form. (i) To act on reorganization notices filed pursuant to section 10(o) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o)) and § 239.3 of Regulation MM (12 CFR 239.3), including with respect to the establishment of a mutual holding company, if no significant legal, policy, or supervisory issues are raised by the proposal.
(ii) To act on applications to establish a subsidiary holding company of a mutual holding company filed pursuant to section 10(o) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o)) and § 239.11 of Regulation MM (12 CFR 239.11), if no significant legal, policy, or supervisory issues are raised by the proposal.
(iii) To take any action related to an application by a mutual holding company to convert from mutual to stock form filed pursuant to section 10(o) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o)) and subpart E of Regulation MM (12 CFR part 239, subpart E) if no significant legal, policy, or supervisory issues are raised by the proposal.
(iv) To act on notices to repurchase stock filed pursuant to section 10(o) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o)) and § 239.63(d) of Regulation MM (12 CFR 239.63(d)), if no significant legal, policy, or supervisory issues are raised by the proposal.
(v) To extend for an additional 60 days the 30-day period within which the Board may object to a notice to repurchase stock filed pursuant to section 10(o) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o)) and § 239.63(d) of Regulation MM (12 CFR 239.63(d)).
(vi) To act on applications to acquire savings associations, savings and loan holding companies, and other corporations filed pursuant to section 10(o) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o)) and § 239.7 of Regulation MM (12 CFR 239.7), if no significant legal, policy, or supervisory issues are raised by the proposal.
(vii) To act on notices and applications to engage in activities filed pursuant to section 10(o) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o)) and § 239.8 of Regulation MM (12 CFR 239.8), if no significant legal, policy, or supervisory issues are raised by the proposal.
(viii) To act on notices of indemnification filed pursuant to section 10(o) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o)) and § 239.40 of Regulation MM (12 CFR 239.40), if no significant legal, policy, or supervisory issues are raised by the proposal.
(ix) To act on notices of waiver by mutual holding companies of the right to receive dividends declared by subsidiaries of the mutual holding company filed pursuant to section 10(o) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o)) and § 239.8(d) of Regulation MM (12 CFR 239.8(d)), if no significant legal, policy, or supervisory issues are raised by the proposal.
(x) To act on applications relating to charter and bylaw amendments of mutual holding companies and subsidiary holding companies filed pursuant to section 10(o) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o)) and §§ 239.14, 239.15, 239.22, and 239.23 of Regulation MM (12 CFR 239.14, 239.15, 239.22, and 239.23), if no significant legal, policy, or supervisory issues are raised by the proposal.
(xi) To act on notices of transfer of stock and issuance of stock to insiders, associates of insiders, or tax-qualified or non-tax-qualified employee stock benefit plans filed pursuant to section 10(o) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o)) and §§ 239.7(b) and 239.8(e) of Regulation MM (12 CFR 239.7(b) and 239.8(e)), if no significant legal, policy, or supervisory issues are raised by the proposal.
(xii) To act on notices of disposition of stock of certain subsidiaries filed pursuant to section 10(o) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o)) and § 239.7(b) of Regulation MM (12 CFR 239.7(b)), if no significant legal, policy, or supervisory issues are raised by the proposal.
(xiii) To act on applications to engage in voluntary supervisory conversions filed pursuant to section 10(o) of the Home Owners’ Loan Act (12 U.S.C. 1467a(o)) and § 239.65 of Regulation MM (12 CFR 239.65), if no significant legal, policy, or supervisory issues are raised by the proposal.
(xiv) To approve requests from subsidiary holding companies of mutual holding companies to conduct stock issuances pursuant to § 239.24 of Regulation MM (12 CFR 239.24), persons other than its mutual holding company parent pursuant to § 239.24 of Regulation MM (12 CFR 239.24), including approval of nonconforming stock issuances pursuant to § 239.24(c)(6)(ii) of Regulation MM (12 CFR 239.24(c)(6)(ii)) and determinations that certain procedural and substantive requirements are inapplicable pursuant to § 239.24(d) of Regulation MM (12 CFR 239.24(d)), where such requests do not raise any significant legal, policy, or supervisory issues.
(xv) To approve plans of dissolution filed by mutual holding companies and subsidiary holding companies of mutual holding companies pursuant to § 239.16 of Regulation MM (12 CFR 239.16), if no significant legal, policy, or supervisory issues are raised by the proposal.
(d) International banking – (1) Member bank, Edge corporation, or agreement corporation establishing foreign branch. With regard to a prior notice to establish a branch in a foreign country under § 211.3 of Regulation K (12 CFR 211.3) –
(i) To waive the notice period if immediate action is required and there is no significant legal, supervisory, or policy issue;
(ii) To suspend the notice period;
(iii) To determine not to object to the notice, provided that no significant legal, supervisory, or policy issue is raised by the proposal; or
(iv) To require the notificant to file an application for the Board’s specific consent.
(2) Acquisitions by a foreign branch. To approve, under § 211.4(a)(8) of Regulation K (12 CFR 211.4(a)(8)), a proposal by a foreign branch of a member bank to acquire all of the shares of a company that engages solely in activities in which the member bank is permitted to engage or that are incidental to the activities of the foreign branch, provided that no significant legal, supervisory, or policy issue is raised.
(3) Application to establish Edge corporation. To approve the application by a U.S. banking organization to establish an Edge corporation under section 25A of the Federal Reserve Act (12 U.S.C. 611 et seq.) and § 211.5 of Regulation K (12 CFR 211.5) if all of the following criteria are met:
(i) The U.S. banking organization meets the capital adequacy guidelines and is otherwise in satisfactory condition;
(ii) The proposed Edge corporation will be a wholly owned subsidiary of a single banking organization; and
(iii) No significant legal, supervisory, or policy issues are raised by the proposal.
(4) Issuance of permit to Edge corporation and amendments to articles of association and charter. To issue to an Edge corporation under section 25A of the Federal Reserve Act (12 U.S.C. 614) and § 211.5 of Regulation K (12 CFR 211.5) a permit to commence business and to approve amendments to the articles of association and charter of an Edge corporation.
(5) Investments in Edge and agreement corporations. To approve, pursuant to § 211.5(a)(3) of Regulation K (12 CFR 211.5(a)(3)) an application by a member bank to invest more than 10 percent of its capital and surplus in the aggregate amount of stock held in all Edge or agreement corporations; provided that:
(i) The member bank’s total investment, including retained earnings of the Edge and agreement corporation, does not exceed 20 percent of the bank’s capital and surplus and would not exceed that level as a result of the proposal; and
(ii) The proposal raises no significant legal, supervisory, or policy issues.
(6) Foreign ownership of an Edge corporation. To approve, under § 211.5(d) of Regulation K (12 CFR 211.5(d)), a foreign institution’s acquisition, directly or indirectly, of a majority of the shares of the capital stock of an Edge corporation, provided that no significant legal, supervisory, or policy issue is raised.
(7) Change in control of an Edge corporation. With regard to a notice to acquire, directly or indirectly, 25 percent or more of the voting securities, or otherwise to acquire control, of an Edge corporation, under § 211.5(e) of Regulation K (12 CFR 211.5(e)):
(i) To waive the notice period if immediate action is required and no significant legal, supervisory, or policy issue is raised;
(ii) To extend the notice period;
(iii) To determine not to object to the notice if no significant legal, supervisory, or policy issue is raised; or
(iv) To require the notificant to file an application for the Board’s specific consent.
(8) Granting specific consent. To grant prior specific consent to an investor for –
(i) A long range investment plan, under § 211.9(a)(4) of Regulation K (12 CFR 211.9(a)(4)); or
(ii) An investment in its first subsidiary or its first joint venture, under § 211.9(a)(5) of Regulation K (12 CFR 211.9(a)(5)), where such investment does not exceed the general consent limitations under § 211.9(b) of Regulation K (12 CFR 211.9(b)).
(9) Investment in export trading company. To issue a notice of intention not to disapprove a proposed investment in an export trading company if all the following criteria are met:
(i) The proposed export trading company will be a wholly owned subsidiary of a single investor, or ownership will be shared with an individual or individuals involved in the operation of the export trading company;
(ii) A bank holding company investor and its lead bank meet the minimum capital adequacy guidelines of the Board, the Comptroller of the Currency, or the Federal Deposit Insurance Corporation or have enacted capital enhancement plans that have been determined by the appropriate supervisory authority to be acceptable;
(iii) The proposed activities of the export trading company do not include product research or design, product modification, or activities not specifically covered by the list of services contained in 4(c)(14)(F)(ii) of the Bank Holding Company Act (12 U.S.C. 1843(c)(14)(F)(ii)); and
(iv) No other significant policy issue is raised on which the Board has not previously expressed its view under section 4(c)(14) of the Bank Holding Company Act (12 U.S.C. 1843(c)(14)) and subpart C of Regulation K (12 CFR part 211, subpart C).
(10) Authority under prior-notice procedures. (i) With regard to a prior notice to make an investment under § 211.9(f) of Regulation K (12 CFR 211.9(f)):
(A) To waive the notice period if immediate action is required and there is no significant legal, supervisory, or policy issue raised;
(B) To suspend the notice period;
(C) To determine not to object to the notice if there is no significant legal, supervisory, or policy issue raised; or
(D) To require the notificant to file an application for the Board’s specific consent.
(ii)-(iv) [Reserved]
(v) With regard to a prior notice of a foreign bank to establish certain U.S. offices under § 211.24(a)(2)(i) of Regulation K (12 CFR 211.24(a)(2)(i)):
(A) To waive the notice period if immediate action is required and there is no significant legal, supervisory, or policy issue raised;
(B) To suspend the notice period;
(C) To determine not to object to the notice if there is no significant legal, supervisory, or policy issue raised; or
(D) To require the notificant to file an application for the Board’s specific consent.
(11) Activities usual in connection with banking or other financial operations abroad. (i) To approve a prior notice, under § 211.10(a)(14) of Regulation K (12 CFR 211.10(a)(14)), to engage in underwriting and distribution of equity securities outside the United States, provided that the proposal raises no significant legal, supervisory, or policy issue.
(ii) To approve a prior notice, under § 211.10(a)(15) of Regulation K (12 CFR 211.10(a)(15)), to engage in dealing in equity securities outside the United States, provided that the proposal raises no significant legal, supervisory, or policy issue.
(iii) To approve a prior notice, under § 211.10(a)(15)(iv)(B) of Regulation K (12 CFR 211.10(a)(15)(iv)(B)), to use internal hedging models, provided that the proposal raises no significant legal, supervisory, or policy issue.
(iv) To approve a prior notice, under § 211.10(a)(18) of Regulation K (12 CFR 211.10(a)(18), to engage in futures commission merchant activities on an mutual exchange or clearinghouse that requires members to guarantee or otherwise contract to cover losses suffered by the other members, provided that the Board has previously approved the exchange, the application is on the same terms and conditions on which the Board based its approval of the exchange, and no significant legal, supervisory, or policy issue is raised.
(12) Change in foreign bank home state. With respect to a foreign bank’s change of home state under § 211.22(b) of Regulation K (12 CFR 211.22(b)) and provided no significant legal, supervisory, or policy issue is raised:
(i) To waive the notice period; or
(ii) To determine not to object to the notice.
(13) Waiver of 30-day prior notification period. To waive the 30-day prior notification period with respect to a foreign bank’s change of home state under § 211.22(b)(1) of Regulation K (12 CFR 211.22(b)(1)).
(14) Offices of foreign banks. (i) To approve the establishment of a branch, agency, commercial lending company, or representative office by a foreign bank in the United States, pursuant to § 211.24(a)(1) of Regulation K (12 CFR 211.24(a)(1)), if the Board has already determined that the foreign bank is subject to consolidated comprehensive supervision and provided that the application raises no significant legal, supervisory, or policy issue.
(ii) To allow a foreign bank to establish a temporary office of a branch or agency, pursuant to § 211.24(a)(5) of Regulation K (12 CFR 211.24(a)(5)), provided there is no direct public access to such office and no significant legal, supervisory, or policy issue is raised.
(15) Agreement with foreign bank concerning deposits of out-of-home-state branch. To enter into an agreement or undertaking with a foreign bank that it shall receive only such deposits at its out-of-home-state branch as would be permissible for an Edge corporation under section 5 of the International Banking Act (12 U.S.C. 3103).
(16) Dividends of property other than cash by an Edge corporation. To approve (but not deny) a request by an Edge corporation to declare or pay a dividend of property other than cash if the request does not raise a significant legal, supervisory, or policy issue.
(e) Member banks – (1) Approval of membership applications. To approve applications for membership in the Federal Reserve System under section 9 of the Federal Reserve Act (12 U.S.C. 321 et seq.) and Regulation H (12 CFR part 208) if the Reserve Bank is satisfied that approval is warranted after considering the factors set forth in 12 CFR 208.3(b).
(2) Waiver of notice of intention to withdraw from membership. To approve or deny applications by State banks for waiver of the required six months’ notice of intention to withdraw from Federal Reserve membership under section 9(10) of the Federal Reserve Act (12 U.S.C. 328).
(3) Approval of branch applications. To approve a State member bank’s establishment of a domestic branch under section 9 of the Federal Reserve Act (12 U.S.C. 321 et seq.) and Regulation H (12 CFR part 208) if the Reserve Bank is satisfied that approval is warranted after considering the factors set forth in 12 CFR 208.6(b).
(4) Declaration of dividends in excess of net profits. To permit a State member bank under section 9(6) of the Federal Reserve Act (12 U.S.C. 324) to declare dividends in excess of the amounts allowed in § 208.5(c) of Regulation H (12 CFR 208.5(c)) if the Reserve Bank is satisfied that approval is warranted after giving consideration to:
(i) The bank’s capitalization in relation to the character and condition of its assets and to its deposit liabilities and other corporate responsibilities, including the volume of its risk assets and of its marginal and inferior quality assets, all considered in relation to the strength of its management; and
(ii) The bank’s capitalization after payment of the proposed dividends.
(5) Reduction of capital stock. To permit a State member bank under section 9(11) of the Federal Reserve Act (12 U.S.C. 329) to reduce its capital stock below the amounts set forth in § 208.5(d) of Regulation H (12 CFR 208.5(d)) if the State member bank’s capitalization thereafter will be:
(i) In conformity with the requirements of Federal law; and
(ii) Adequate in relation to the character and condition of its assets and to its deposit liabilities and other corporate responsibilities, including the volume of its risk assets and of its marginal and inferior quality assets, all considered in relation to the strength of its management.
(6) Acceptance of drafts and bills of exchange. To permit a member bank or a Federal or State branch or agency of a foreign bank that is subject to reserve requirements under section 7 of the International Banking Act (12 U.S.C. 3105) to accept drafts or bills of exchange under section 13(7) of the Federal Reserve Act (12 U.S.C. 372) in an aggregate amount at any one time up to 200 percent of its paid-up and unimpaired capital stock and surplus, if the Reserve Bank is satisfied that such permission is warranted after giving consideration to the institution’s capitalization in relation to the character and condition of its assets and to its deposit liabilities and other corporate responsibilities, including the volume of its risk assets and of its marginal and inferior quality assets, all considered in relation to the strength of its management.
(7) Investment in bank premises in excess of capital stock. To permit a State member bank to invest in bank premises under section 24A of the Federal Reserve Act (12 U.S.C. 371d) in an amount in excess of that set forth in § 208.21(a) of Regulation H (12 CFR 208.21(a)), if the Reserve Bank is satisfied that approval is warranted after giving consideration to the bank’s capitalization in relation to the character and condition of its assets and to its deposit liabilities and other corporate responsibilities, including the volume of its risk assets and of its marginal and inferior quality assets, all considered in relation to the strength of its management.
(8) Security devices. To determine whether security devices and procedures of State member banks are deficient in meeting the requirements of Regulation H (12 CFR part 208) and whether such requirements should be varied in the circumstances of a particular banking office, and whether to require corrective action.
(9) Classifying member banks for election of directors. To classify member banks for the purposes of electing Federal Reserve Bank class A and class B directors under section 4(16) of the Federal Reserve Act (12 U.S.C. 304), giving consideration to:
(i) The statutory requirement that each of the three groups shall consist as nearly as may be of banks of similar capitalization; and
(ii) The desirability that every member bank have the opportunity to vote for a class A or a class B director at least once every three years.
(10) Waiver of penalty for deficient reserves. To waive the penalty for deficient reserves by a member bank if, after a review of all the circumstances relating to the deficiency, the Reserve Bank concludes that waiver is warranted, except that in no case may a penalty be waived if the deficiency in reserves arises out of the bank’s gross negligence or conduct inconsistent with the principles and purposes of reserve requirements.
(11) Retirement of subordinated debt. To approve the retirement prior to maturity of capital notes described in § 204.2(a)(1)(vii)(C) of Regulation D (12 CFR 204.2(a)(1)(vii)(C)) and issued by a State member bank, provided the Reserve Bank is satisfied that the capital position of the bank will be adequate after the proposed redemption.
(12) Public welfare investments. (i) To permit a State member bank to make a public welfare investment in accordance with section 9(23) of the Federal Reserve Act (12 U.S.C. 338a), provided that the proposal satisfies § 208.22(b)(1) of Regulation H (12 CFR 208.22(b)(1)) and no significant legal, supervisory, or policy issue is raised; and
(ii) To determine, in connection with acting on a proposal pursuant to delegated authority as set forth in paragraph (e)(12)(i) of this section, that the aggregate amount of a State member bank’s public welfare investments will not pose a significant risk to the deposit insurance fund in accordance with section 9(23) of the Federal Reserve Act (12 U.S.C. 338a).
(13) Dividends of property other than cash by a State member bank. To approve (but not deny) a request by a State member bank to declare or pay a dividend of property other than cash if the request does not raise a significant legal, supervisory, or policy issue.
(f) Securities. To approve applications by a registered lender for termination of the registration under § 221.3(b)(2) of Regulation U (12 CFR 221.3(b)(2)).
(g) Management interlocks. After consultation with the General Counsel, to decide not to disapprove notices to establish director interlocks with diversified savings and loan holding companies under section 205(8) of the Depository Institution Management Interlocks Act (12 U.S.C. 3204(8)).
(h) Qualified family partnerships. To act on requests for determinations of qualified family partnership status under section 2(o)(10) of the Bank Holding Company Act (12 U.S.C. 1841(o)(10)).
(i) Financial holding companies. In consultation with Board staff, to make effective elections filed by U.S. bank holding companies to become financial holding companies.
(j) Savings and loan holding companies. (1) With the approval of the Director of the Division of Supervision and Regulation and the General Counsel, to enter into corrective action agreements with savings and loan holding companies pursuant to § 238.66 of Regulation LL (12 CFR 238.66).
(2) To act on notices of capital distributions filed pursuant to section 10(f) of the Home Owners’ Loan Act (12 U.S.C. 1467a(f)) and § 238.103 of Regulation LL (12 CFR 238.103).
(3) To act on elections to engage in financial holding company activities filed pursuant to section 10(c) of the Home Owners’ Loan Act (12 U.S.C. 1467a(c)) and subpart G of Regulation LL (12 CFR part 238, subpart G), if no significant legal, policy, or supervisory issues are raised by the proposal.
(4) To act on notices and applications to engage in activities filed pursuant to section 10(c) of the Home Owners’ Loan Act (12 U.S.C. 1467a(c)) and subparts F and G of Regulation LL (12 CFR part 238, subparts F and G), if no significant legal, policy, or supervisory issues are raised by the proposal.
(5) To grant requests by companies to deregister as savings and loan holding companies, if no significant legal, policy, or supervisory issues are raised by the proposal.
(k) Financial operations of the Bank for International Settlements. The Federal Reserve Bank of New York is authorized to assent or dissent, as appropriate, to financial operations of the Bank for International Settlements conducted in the U.S. market or in U.S. dollars.
(l) Regulatory capital rule – (1) Delegations regarding the definition of capital. (i) With the concurrence of the Director of the Division of Supervision and Regulation, to:
(A) Act on a company’s request under § 217.20(b)(l)(iii), § 217.20(c)(l)(vi), or § 217.20(d)(l)(x) of Regulation Q (12 CFR 217.20(b)(l)(iii), 217.20(c)(l)(vi), or 217.20(d)(l)(x)) to redeem a security; and
(B) Act on a company’s request under § 217.20(c)(l)(v)(A) or § 217.20(d)(l)(v)(A) of Regulation Q (12 CFR 217.20(c)(l)(v)(A) and 217.20(d)(l)(v)(A)) to exercise a call option.
(2) Delegations regarding standardized approach risk-weighted assets. (i) With the concurrence of the Director of the Division of Supervision and Regulation, to:
(A) Act on a request from a company under § 217.37(c) of Regulation Q (12 CFR 217.37(c)) to use its own estimates of haircuts, including:
(1) Acting on a request by a company under § 217.37(c)(4)(i)(E) of Regulation Q (12 CFR 217.37(c)(4)(i)(E)) to make changes to the company’s policies and procedures; and
(2) Requiring a company under § 217.37(c)(4)(i)(F) of Regulation Q (12 CFR 217.37(c)(4)(i)(F)) to use a different period of significant financial stress in the calculation of own estimates of haircuts; and
(B) Determine under § 217.41(c) of Regulation Q (12 CFR 217.41(c)) whether or not a company has demonstrated a comprehensive understanding of the features of a securitization exposure.
(3) Delegations regarding advanced approaches risk-weighted assets. (i) With the concurrence of the Director of the Division of Supervision and Regulation, to:
(A) Act on a request for approval of any model or optional approach available under subpart E of Regulation Q (12 CFR part 217, subpart E), including, without limitation:
(1) Any counterparty credit risk model or methodology (own estimates of haircuts, simple VaR methodology, internal models methodology, or advanced CVA approach) under §§ 217.122(d) and 217.132 of Regulation Q (12 CFR 217.122(d) and 217.132), including:
(i) Acting on a request by a company under § 217.132(b)(2)(iii)(A)(5) of Regulation Q (12 CFR 217.132(b)(2)(iii)(A)(5)) to make changes to the company’s policies and procedures;
(ii) Requiring a company under § 217.132(b)(2)(iii)(A)(6) of Regulation Q (12 CFR 217.132(b)(2)(iii)(A)(6)) to use a different period of significant financial stress in the calculation of own internal estimates for haircuts;
(iii) Acting on a request by a company under § 217.132(d)(1) introductory text and (d)(1)(iv) of Regulation Q (12 CFR 217.132(d)(1) introductory text and (d)(1)(iv)) to use the internal models methodology, cease using the internal models methodology for a transaction type, or to make a material change to its internal model;
(iv) Acting on a request by a company under § 217.132(d)(2)(iv) and (d)(10) of Regulation Q (12 CFR 217.132(d)(2)(iv) and (d)(10)) to use a more conservative estimate of Exposure at Default;
(v) Determining that a company must set a higher “alpha” under § 217.132(d)(2)(iv)(C) of Regulation Q (12 CFR 217.132(d)(2)(iv)(C)) based on the company’s specific characteristics of and counterparty credit risk or model performance;
(vi) Acting on a request by a company under § 217.132(d)(3) of Regulation Q (12 CFR 217.132(d)(3)) to calculate the distributions of exposures upon which the EAD calculation is based;
(vii) Requiring a company under § 217.132(d)(3)(viii) of Regulation Q (12 CFR 217.132(d)(3)(viii)) to modify its stress calibration to better reflect actual historic losses of the portfolio;
(viii) Acting on a request by a company under § 217.132(d)(5)(i) of Regulation Q (12 CFR 217.132(d)(5)(i)) to include the effect of a collateral agreement within an internal model used to calculate EAD;
(ix) Requiring a company under § 217.132(d)(5)(iii)(C) of Regulation Q (12 CFR 217.132(d)(5)(iii)(C)) to set a longer holding period (for margin period of risk for a netting set that is subject to a collateral agreement) if the Director determines that a longer period is appropriate due to the nature, structure, or characteristics of the transaction or is commensurate with the risks associated with the transaction;
(x) Acting on a request by a company under § 217.132(d)(6) of Regulation Q (12 CFR 217.132(d)(6)) to calculate alpha as the ratio of economic capital from a full simulation of counterparty exposure across counterparties that incorporates a joint simulation of market and credit risk factors (numerator) and economic capital based on EPE (denominator), subject to a floor of 1.2;
(xi) Acting on a request by a company under § 217.132(e) of Regulation Q (12 CFR 217.132(e)) to calculate its CVA risk-weighted asset amounts for a class of counterparties using the advanced CVA approach;
(xii) Acting on a request by a company under § 217.132(e)(6)(ii)(D) of Regulation Q (12 CFR 217.132(e)(6)(ii)(D)) to use a conservative estimate when determining LGD
(xiii) Requiring a company under § 217.132(e)(6)(v)(B) of Regulation Q (12 CFR 217.132(e)(6)(v)(B)) to use a different period of significant financial stress in the calculation of the CVA
(2) Any model or approach relating to cleared transactions under §§ 217.122(d) and 217.133 of Regulation Q (12 CFR 217.122(d) and 217.133), including:
(i) Under § 217.133(d)(1) of Regulation Q (12 CFR 217.133(d)(1)) a company that is a clearing member to determine the risk-weighted asset amount for a default fund contribution to a CCP more frequently than quarterly if in the opinion of the Director of the Division of Supervision and Regulation, there is a material change in the financial condition of the CCP; and
(ii) Acting on a request under § 217.133(d)(2) of Regulation Q (12 CFR 217.133(d)(2)) for a company to use a risk-weighted asset amount for default fund contributions to a CCP that is not a QCCP other than a 1,250 percent risk weight;
(3) Any model or approach relating to the double default treatment under §§ 217.122(e) and 217.135 of Regulation Q (12 CFR 217.122(e) and 217.135), including acting on a request by a company under § 217.135(a)(6) of Regulation Q (12 CFR 217.135(a)(6)) to implement a process to detect excessive correlation between the creditworthiness of the obligor of a hedged exposure and a protection provider;
(4) A company’s own internal estimates of market price volatility and foreign exchange volatility under § 217.145(b)(4) of Regulation Q (12 CFR 217.145(b)(4)); and
(5) The internal models approach for equity exposures under §§ 217.122(f) and 217.153(b) of Regulation Q (12 CFR 217.122(f) and 217.153(b));
(B) Determine under § 217.131(e)(4) of Regulation Q (12 CFR 217.131(e)(4)) whether a portfolio of exposures is or is not material; and
(C) Assess for purposes of § 217.141(c)(1) of Regulation Q (12 CFR 217.141(c)(1)) whether a company has a comprehensive understanding of the features of a securitization exposure that would materially affect the performance of the exposure.
(4) Delegations regarding market risk risk-weighted assets. (i) With the concurrence of the Director of the Division of Supervision and Regulation, to act regarding any model approval, disapproval, rescission, or supervision under subpart F of Regulation Q (12 CFR part 217, subpart F), including the authority to:
(A) Exclude from the definition of “covered position” structural foreign currency positions of a company, or any hedge of a trading position that is outside the scope of the company’s hedging strategy, under § 217.202(b) of Regulation Q (12 CFR 217.202(b));
(B) Act on a request from a company under § 217.203(c)(1) of Regulation Q (12 CFR 217.203(c)(1)) to approve its internal model(s) to calculate its risk-based capital requirement;
(C) Rescind approval under § 217.203(c)(3) of Regulation Q (12 CFR 217.203(c)(3)) of a company’s internal model(s) to calculate its risk-based capital requirement;
(D) Act on a request from a company under § 217.204(a)(2)(vi)(B) of Regulation Q (12 CFR 217.204(a)(2)(vi)(B)) to use alternative techniques to measure the risk of de minimis exposures;
(E) Act on a request from a company under § 217.204(b)(2) of Regulation Q (12 CFR 217.204(b)(2)) to use a different adjustment of its VaR-based measure;
(F) Review and determine the appropriateness of a company’s omission of risk factors under § 217.205(a)(4) of Regulation Q (12 CFR 217.205(a)(4)) and the use of proxies under § 217.205(a)(5) of Regulation Q (12 CFR 217.205(a)(5));
(G) Review and determine under § 217.205(b)(1) of Regulation Q (12 CFR 217.205(b)(1)) the appropriateness of any conversions of VaR to other holding periods by a company;
(H) Review and determine under § 217.205(b)(2)(ii) of Regulation Q (12 CFR 217.205(b)(2)(ii)) the appropriateness of a company’s alternative weighting schemes;
(I) Approve or disapprove under § 217.205(c) of Regulation Q (12 CFR 217.205(c)) any requirements relating to a company’s division of subportfolios;
(J) Approve or disapprove under § 217.206(b)(3) of Regulation Q (12 CFR 217.206(b)(3)) any changes to a company’s policies and procedures that describe how the company determines the period of significant financial stress used to calculate its stressed VaR-based measure;
(K) Require a company under § 217.206(b)(4) of Regulation Q (12 CFR 217.206(b)(4)) to use a different period of significant financial stress in the calculation of the stressed VaR-based measure;
(L) Act on a request by a company under § 217.208(a) of Regulation Q (12 CFR 217.208(a)) to include certain portfolios of equity positions in its incremental risk model;
(M) Act on a request by a company under § 217.209(a)(1) of Regulation Q (12 CFR 217.209(a)(1)) to use the comprehensive risk approach for one or more portfolios of correlation trading positions and the related approval under § 217.209(a)(2)(ii) of Regulation Q (12 CFR 217.209(a)(2)(ii)) regarding a company’s comprehensive risk capital requirement;
(N) Determine under § 217.210(e)(3) of Regulation Q (12 CFR 217.210(e)(3)) whether an index is a main index because the equities represented by the index have comparable liquidity, depth of market, and size of bid-ask spreads as equities in the Standard & Poor’s 500 Index and FTSE All-World Index; and
(O) Determine under § 217.210(f)(1) of Regulation Q (12 CFR 217.210(f)(1)) whether or not a company has demonstrated a comprehensive understanding of the features of a securitization exposure.
PART 266 – LIMITATIONS ON ACTIVITIES OF FORMER MEMBERS AND EMPLOYEES OF THE BOARD
§ 266.1 Basis and scope.
This part, issued under authority of section 11(i) of the Federal Reserve Act (12 U.S.C. 248(i)), and pursuant to section 552 of title 5 of the United States Code, which requires that every agency shall publish in the
§ 266.2 Definitions.
(a) Employee means a regular officer or employee of the Board; it does not include a consultant to the Board.
(b) Official responsibility, with respect to a matter, means administrative, supervisory, or decisional authority, whether intermediate or final, exercisable alone or with others, personally or through subordinates, to approve, disapprove, decide, or recommend Board action or to express staff opinions in dealings with the public.
(c) Appear personally includes personal appearance or attendance before, or personal communication, either written or oral, with the Board or a Federal Reserve Bank of any member or employee thereof, or personal participation in the formulation or preparation of any material presented or communicated to, or filed with, the Board, in connection with any application or interpretation arising under the statutes or regulations administered by the Board or the Federal Reserve Banks, except that requests for general information or explanations of Board policy or interpretation shall not be construed to be a personal appearance.
§ 266.3 Limitations.
(a) Matters on which Board member or employee worked. No former member or employee of the Board shall appear personally before the Board or a Federal Reserve Bank on behalf of anyone other than the United States, an agency thereof, or a Federal Reserve Bank, in connection with any judicial or other proceedings, application, request for ruling or determination, or other particular matter involving a specific party or parties in which the United States, an agency thereof, or a Federal Reserve Bank is also a party or has a direct and substantial interest and in which he participated personally and substantially as a member or employee of the Board through approval, disapproval, decision, recommendation, advice, investigation or otherwise.
(b) Matters within Board member or employee’s official responsibility. No former member or employee of the Board shall appear personally before the Board or a Federal Reserve Bank on behalf of anyone other than the United States, an agency thereof, or a Federal Reserve Bank, in connection with any judicial or other proceeding, application, request for ruling or determination, or other particular matter involving a specific party or parties in which the United States, an agency thereof, or a Federal Reserve Bank is also a party or has a direct and substantial interest, and which matter was in process during his tenure of office or period of employment and under his official Board responsibility, at any time within a period of one year after the termination of such responsibility.
(c) Consultation as to propriety of appearance before the Board. Any former member or employee of the Board who wishes to personally appear before the Board or a Federal Reserve Bank on behalf of any party other than the United States or an agency thereof or a Federal Reserve Bank at any time within two years from termination of employment with the Board is advised to consult the General Counsel or the Secretary of the Board as to the propriety of such appearance.
(d) Rulemaking proceedings. Nothing in this section shall preclude a former member or employee of the Board from representing another person in any Board or Federal Reserve Bank proceeding governed by a rule, regulation, standard, or policy of the Board solely by reason of the fact that such former member or employee participated in or had official responsibility in the formation or adoption of such rule, regulation, standard, or policy.
(e) Effective date. This part shall become effective November 6, 1973. Notwithstanding the foregoing, the limitations of this part shall not apply to any activities with respect to a specific matter before the Board in which any former Board member or employee may be engaged on September 21, 1973, the date of publication of this part, until the expiration of 60 days following the effective date of this part or of such additional period as the Secretary of the Board may determine to be appropriate in order to avoid inequity.
§ 266.4 Suspension of appearance privilege.
If any person knowingly and willfully fails to comply with the provisions of this part, the Board may decline to permit such person to appear personally before it or a Federal Reserve Bank for such periods of time as it may determine and may impose such other sanctions as the Board may deem just and proper.
§ 266.5 Criminal penalties.
Any former member or employee of the Board who engages in actions in contravention of paragraph (a) or (b) of § 266.3 may be subject to criminal penalties for violation of section 207 of the United States Criminal Code (18 U.S.C. 207).
PART 267 – PROCEDURES FOR DEBT COLLECTION
§ 267.1 Purpose and scope.
This part establishes Board procedures for the collection of certain debts owed to the United States.
(a) Except as provided in paragraph (b) of this section, this part applies to collections by the Board from persons, organizations, or entities indebted to the United States.
(b) This part does not apply to any debts whose collection is exclusively provided for or prohibited by another statute or applicable regulation, or to any debt of a current Board employee or other debtor where the Board has chosen to proceed solely under its existing internal debt collection policy. This part does not in any way limit or affect the Board’s authority under 12 U.S.C. 244 and 12 U.S.C. 248. Nothing in this part precludes the collection of debts through any other legally-available means, or precludes the Board from engaging in litigation as provided under 12 U.S.C. 248(p), 1818(i), or any other applicable law.
(c) When the Board determines to collect a debt using the procedures under these regulations, in addition to the procedures set forth in this part and subject to paragraph (b) of this section, the Board shall also follow, as applicable, the procedures set forth in 31 CFR part 285 and the Federal Claims Collection Standards (FCCS) (31 CFR chapter IX and parts 900 through 904) for the collection of debts owed to the United States.
(d) Nothing in this part precludes the compromise, suspension, or termination of collection actions, where appropriate, under standards implementing the Debt Collection Improvement Act (DCIA) (31 U.S.C. 3711 et seq.), the FCCS, or any other applicable law, including rules, regulations, and policies adopted by the Board pursuant to authority granted to it under the Federal Reserve Act.
(e) Nothing in this part shall create any right or benefit, substantive or procedural, enforceable at law or in equity by a party against the United States, its agencies, its officers, or any other person, nor shall the Board’s failure to comply with any of the provisions of this part be available to any debtor as a defense. Nothing in this part shall permit a debtor to collaterally attack a final administrative decision rendered under any other applicable statute or regulation, or a judgment by a competent court.
§ 267.2 Definitions.
Except where the context clearly indicates otherwise, the following definitions shall apply to this part.
Administrative offset means withholding funds payable by the United States to, or held by the United States for, a person to satisfy a claim.
Agency incudes all executive departments and agencies or instrumentalities in the executive branch, and any other entity referenced in 5 U.S.C. 5514(a)(5)(B).
Board means the Board of Governors of the Federal Reserve System.
Centralized offset is an offset initiated by referral to the Secretary of the Treasury (including a debt collection center designated by the Department of the Treasury) by a creditor agency of a debt for purposes of collection under the Treasury’s centralized offset program.
Debt or claim means an amount of money, funds, or property that has been determined by a Board official, in connection with the operational or regulatory activities of the Board, to be owed to the United States from any person, organization or entity (except another Federal entity), including any type of debt referenced in 31 U.S.C. 3701(b). For purposes of this part, a debt or claim owed to the Board, including a debt or claim for repayment of Board-funded benefits administered through the Office of Employee Benefits of the Federal Reserve System, is a debt owed to the United States. A debt does not include any amounts owed by a current Board employee that the Board chooses to collect solely under its debt collection policy.
Debtor means a person who owes a debt, and includes any individual, organization, or entity except another agency.
Delinquent, with respect to a debt or claim, shall have the meaning given to such term at 31 CFR 900.2(b).
Eligible, with respect to a debt or claim, means that referral of the debt or claim for collection is not precluded by any statute or regulation, or by any guidance issued by the U.S. Department of the Treasury.
Garnishment means the process of withholding amounts from the disposable pay of a person employed outside the Federal Government, and the paying of those amounts to a creditor in satisfaction of a withholding order.
Salary offset means an administrative offset to collect a debt under 5 U.S.C. 5514 by deduction(s) at one or more officially established pay intervals from the current pay account of a Federal employee without his or her consent.
§ 267.3 Referral of debts for collection action, including offset.
(a) In general. To the extent not inconsistent with any applicable law or with any rule, regulation, or policy adopted by the Board in the exercise of authority granted to it under the Federal Reserve Act, the Board will refer debts covered by this regulation and which are eligible debts over 120 days delinquent to which this part applies to the U.S. Department of the Treasury for appropriate debt collection action, including but not limited to centralized offset, and offset of tax refunds. The Board may also refer any eligible debt less than 120 days delinquent to the U.S. Department of the Treasury for appropriate collection action.
(b) Proceedings prior to referral. At least 60 days prior to referring a debt in accordance with paragraph (a) of this section, the Board will send the debtor the notice described in 31 CFR 901.3(b)(4)(ii)(A), and afford the debtor the procedural protections described in 31 CFR 901.3(b)(4)(ii)(B) and 31 U.S.C. 3720A(b). However, the Board is not required to duplicate any prior notice or review opportunities that it has already afforded the debtor prior to referral.
(c) Non-centralized offset. The Board may request an agency other than the U.S. Department of the Treasury to conduct non-centralized offset. Except in the situations described in 31 CFR 901.3(b)(4)(iii)(A)-(C), the Board will follow the procedures described in paragraph (b) of this section prior to making such a request. When making the request, the Board will certify in writing to the paying agency that the debtor owes the past due, legally enforceable delinquent debt in the amount stated, and that the Board has fully complied with these regulations.
§ 267.4 Administrative wage garnishment.
The Board may collect debts, or refer debts for collection, from the wages of persons employed outside of the Federal Government by administrative wage garnishment in accordance with the requirements of 31 U.S.C. 3720D. Prior to such garnishment, the debtor will be provided a hearing in accordance with the procedures described at 31 CFR 285.11(f).
§ 267.5 Salary offset.
(a) Applicability. (1) This section covers government-wide collection of a delinquent debt by administrative offset under 5 U.S.C. 5514 from salary payments of federal government employees other than current Board employees.
(2) This section does not apply where an employee consents to the recovery of a debt from his or her federal government salary.
(b) Notice. A Federal Government employee from whom the Board proposes to collect a debt under this section will be provided written notice from the Board at least 30 days before any deductions begin. Such notice will state:
(1) The Board’s determination that a debt is owed, including the origin, nature, and amount of that debt;
(2) The Board’s intention to collect the debt by means of deduction from the employee’s disposable pay (as defined in 5 CFR 550.1103);
(3) The frequency and amount of the intended deduction (stated as a fixed dollar amount or as a percentage of pay), and the Board’s intention to continue the deductions until the debt is paid in full or otherwise resolved;
(4) An explanation of the Board’s policy concerning interest, penalties, and administrative costs, including a statement that such assessments must be made unless excused in accordance with the Federal Claims Collections Standards published in 31 CFR parts 900 through 904;
(5) The employee’s right to inspect and copy Government records relating to the debt or, if the employee or his or her representative cannot personally inspect the records, to request and receive a copy of such records;
(6) If not previously provided, the opportunity (under terms agreeable to Board) to establish a schedule for the voluntary repayment of the debt or to enter into a written agreement to establish a schedule for repayment of the debt in lieu of offset;
(7) The employee’s right to a hearing conducted by an official arranged by the Board if a petition is filed as prescribed by the Board;
(8) The method and time period for petitioning for a hearing, including the contact information of the official to whom such a petition should be sent;
(9) That the timely filing of a petition for a hearing will stay the commencement of collection proceedings;
(10) That a final decision on the hearing (if one is requested) will be issued at the earliest practical date, but not later than 60 days after the filing of the petition requesting the hearing unless the employee requests and the hearing official grants a delay in the proceedings;
(11) That any knowingly false or frivolous statements, representations, or evidence may subject the employee to:
(i) Disciplinary procedures appropriate under chapter 75 of title 5, United States Code, part 752 of title 5, Code of Federal Regulations, or any other applicable statutes or regulations;
(ii) Penalties under the False Claims Act, sections 3729 through 3731 of title 31, United States Code, or any other applicable statutory authority; or
(iii) Criminal penalties under sections 286, 287, 1001, and 1002 of title 18, United States Code or any other applicable statutory authority.
(12) Any other rights and remedies available to the employee under statutes or regulations governing the program for which the collection is being made; and
(13) Unless there are applicable contractual or statutory provisions to the contrary, that amounts paid on or deducted for the debt which are later waived or found not owed to the United States will be promptly refunded to the employee.
(c) Petitions for hearing – (1) Time to petition. A Federal Government employee from whom the Board proposes to collect a debt under this section may request a hearing concerning the existence or amount of the debt or the offset schedule established by the Board by sending a written petition addressed to the official designated in the notice described in paragraph (b) of this section on or before the fifteenth day following receipt of such notice. A hearing will be granted on a petition that is not filed within such period only if the petitioner shows that the delay was because of circumstances beyond his or her control or because of failure to receive notice of the time limit (unless otherwise aware of it). In all other cases of late or non-filing of such a petition, the employee will be deemed to have waived the right to a hearing and will be subject to salary offset under this section.
(2) Contents of petition. The petition must:
(i) Be signed by the employee;
(ii) State why the employee believes the Board’s determination concerning the existence of amount of the debt is in error;
(iii) Fully identify and explain with reasonable specificity all the facts, evidence and witnesses, if any, which the employee believes support his or her position.
(iv) Specify, if the employee desires an oral hearing, why the matter cannot be resolved by a paper hearing, which is a determination based upon a review of a written record, for example, because the existence or amount of the debt depends on the hearing official’s determination of the credibility of witnesses.
(d) Form of hearings – (1) Hearing official. A hearing under this section will be conducted by an administrative law judge or another individual not under the supervision or control of the Board.
(2) Notice of hearing. After the employee requests a hearing, the hearing official must issue a notice to the employee and the Board of the type of hearing that will occur. If an oral hearing will occur, the notice will state the date, time, and location of the hearing. If a paper hearing will occur, the employee and the Board will be notified and required to submit evidence and arguments in writing to the hearing official by the date specified in the notice, after which the record will be closed. The employee’s failure to appear for an oral hearing or timely submit evidence and arguments as provided for in the notice will be deemed a waiver of the right to a hearing unless the hearing official determines that the failure was due to good cause shown.
(3) Oral hearing. An employee who requests an oral hearing under this section will be provided such a hearing if the hearing official determines that the matter cannot be resolved by review of documentary evidence alone because an issue of credibility or veracity is involved. Where an oral hearing is appropriate, the hearing need not take the form of an evidentiary hearing, as long as both the employee and the Board are afforded a reasonable opportunity to present their case. Oral hearings may take the form of, but are not limited to:
(i) Informal meetings in which the employee and Board representative are given full opportunity to present evidence, witnesses, and argument;
(ii) Informal meetings in which the hearing official interviews the employee and Board representative; or
(iii) Formal written submissions with an opportunity for oral presentation.
(4) Paper hearing. If the hearing official determines that an oral hearing is not necessary, he or she will make the determination based upon a review of the formal written record, including any documentation submitted by the employee or the Board.
(5) Record. The hearing official shall maintain a summary record of any hearing conducted under this section.
(e) Decision on hearing. Unless the employee requests and the hearing official grants a delay in the proceedings, at the earliest practicable date, but in any event no later than 60 days after the filing of the petition requesting the hearing, the hearing official will issue a written decision to the employee. The decision will state the Board’s position concerning the existence and amount of the debt, facts purporting to evidence the nature and origin of the alleged debt, the hearing official’s analysis, findings and conclusions, in light of the hearing, as to the employee’s and/or Board’s grounds, the amount and validity of the debt as determined by the hearing official, and the repayment schedule, if not established by written agreement between the employee and the Board. If the hearing official determines that a debt may not be collected under this section, but the Board finds that the debt is still valid, the Board may still seek collection of the debt through other means, including but not limited to offset of other Federal payments.
(f) Deductions under this section. The method of collection under this section is salary offset from disposable pay (as defined in 5 CFR 550.1103), except as described in this paragraph. The size of installment deductions shall ordinarily bear a reasonable relationship to the size of the debt and the employee’s ability to pay. However, the amount deducted for any period under this section may not exceed 15 percent of disposable pay, unless the employee has agreed in writing to the deduction of a greater amount or a higher deduction has been ordered by a court under section 124 of Public Law 97-276 (97 stat. 1195). Ordinarily, debts must be collected in one lump sum where possible. However, if the employee is financially unable to pay in one lump sum or the amount of the debt exceeds 15 percent of disposable pay (or other applicable limitation as provided in this paragraph) for an officially established pay interval, collection must be made in installments. Such installment deductions must be made over a period not greater than the anticipated period of active duty or employment, as the case may be, except as provided in paragraph (g) of this section.
(g) Separating or separated employees. If the employee retires or resigns or if his or her employment or period of active duty ends before collection of the debt is completed, offset may be performed under 31 U.S.C. 3716 from subsequent payments of any nature (e.g. final salary payment, lump-sum leave, etc.) due the employee from the paying agency as of the date of separation to the extent necessary to liquidate the debt. Such offset may also be performed where appropriate against later payments of any kind due the former employee from the United States if the debt cannot be liquidated by offset from any final payment due the former employee as of the date of separation. Nothing in this section shall affect any limitation on alienation of benefits administered by the Federal Reserve System’s Office of Employee Benefits.
(h) Non-waiver and refunds of payments. An employee’s involuntary payment of all or any portion of a debt being collected under 5 U.S.C. 5514 must not be construed as a waiver of any rights which the employee may have under 5 U.S.C. 5514 or any other provision of contract or law, unless there are statutory or contractual provisions to the contrary. Any amounts paid or deducted under this section will be promptly refunded when a debt is waived or otherwise found not owing to the United States (unless expressly prohibited by statute or regulation), or the employee’s paying agency is directed by an administrative or judicial order to refund amounts deducted from his or her current pay. Refunds do not bear interest unless required or permitted by law or contract.
§ 267.6 Interest, penalties, and administrative costs.
Except with respect to debts referenced in 31 U.S.C. 3717(g), the Board will charge interest, costs, and a six percent penalty on debts covered by this regulation in accordance with 31 CFR 901.9. The Board will not impose interest charges on the portion of the debt that is paid within 30 days after the date on which interest began to accrue, nor impose penalty charges on the portion of the debt that is paid within 90 days after the date on which penalty began to accrue. The Board will not impose any charges during periods during which collection activity has been suspended pending any review provided for in this part if the reviewing official determines that collection of such charges is against equity and good conscience or is not in the best interest of the United States. The Board may, in its discretion, also waive interest, penalties, and cost charges for good cause shown by the debtor (for example, the debtor is unable to pay any significant portion of the debt within a reasonable period of time, or collection of these charges will jeopardize collection of the principal of the debt) or otherwise as authorized in 31 CFR 901.9(g) and 902.2.
PART 268 – RULES REGARDING EQUAL OPPORTUNITY
Subpart A – General Provisions and Administration
§ 268.1 Authority, purpose and scope.
(a) Authority. The regulations in this part (12 CFR part 268) are issued by the Board of Governors of the Federal Reserve System (Board) under the authority of sections 10(4) and 11(i), (k), and (l) of the Federal Reserve Act (partially codified in 12 U.S.C. 244 and 248(i), (k) and (1)).
(b) Purpose and scope. This part sets forth the Board’s policy, program and procedures for providing equal opportunity to Board employees and applicants for employment without regard to race, color, religion, sex, national origin, age, disability, or genetic information. It also sets forth the Board’s policy, program and procedures for prohibiting discrimination on the basis of disability in programs and activities conducted by the Board.
§ 268.2 Definitions.
The definitions contained in this section shall have the following meanings throughout this part unless otherwise stated.
(a) Commission or EEOC means the Equal Employment Opportunity Commission.
(b) Title VII means title VII of the Civil Rights Act (42 U.S.C. 2000e et seq.).
Subpart B – Board Program To Promote Equal Opportunity
§ 268.101 General policy for equal opportunity.
(a) It is the policy of the Board to provide equal opportunity in employment for all persons, to prohibit discrimination in employment because of race, color, religion, sex, national origin, age, disability, or genetic information and to promote the full realization of equal opportunity in employment through a continuing affirmative program.
(b) No person shall be subject to retaliation for opposing any practice made unlawful by Title VII of the Civil Rights Act (title VII) (42 U.S.C. 2000e et seq.), the Age Discrimination in Employment Act (ADEA) (29 U.S.C. 621 et seq.), the Equal Pay Act (29 U.S.C. 206(d)), the Rehabilitation Act (29 U.S.C. 791 et seq.), or the Genetic Information Nondiscrimination Act (GINA) (42 U.S.C. 2000ff et seq.) or for participating in any stage of administrative or judicial proceedings under those statutes.
§ 268.102 Board program for equal employment opportunity.
(a) The Board shall maintain a continuing affirmative program to promote equal opportunity and to identify and eliminate discriminatory practices and policies. In support of this program, the Board shall:
(1) Provide sufficient resources to its equal opportunity program to ensure efficient and successful operation;
(2) Provide for the prompt, fair and impartial processing of complaints in accordance with this part and the instructions contained in the Commission’s Management Directives;
(3) Conduct a continuing campaign to eradicate every form of prejudice or discrimination from the Board’s personnel policies, practices and working conditions;
(4) Communicate the Board’s equal employment opportunity policy and program and its employment needs to all sources of job candidates without regard to race, color, religion, sex, national origin, age disability, or genetic information, and solicit their recruitment assistance on a continuing basis;
(5) Review, evaluate and control managerial and supervisory performance in such a manner as to insure a continuing affirmative application and vigorous enforcement of the policy of equal opportunity, and provide orientation, training and advice to managers and supervisors to assure their understanding and implementation of the equal employment opportunity policy and program;
(6) Take appropriate disciplinary action against employees who engage in discriminatory practices;
(7) Make reasonable accommodation to the religious needs of employees and applicants for employment when those accommodations can be made without undue hardship on the business of the Board;
(8) Make reasonable accommodation to the known physical or mental limitations of qualified applicants and employees with a disability unless the accommodation would impose an undue hardship on the operations of the Board’s program;
(9) Provide recognition to employees, supervisors, managers and units demonstrating superior accomplishment in equal employment opportunity;
(10) Establish a system for periodically evaluating the effectiveness of the Board’s overall equal employment opportunity effort;
(11) Provide the maximum feasible opportunity to employees to enhance their skills through on-the-job training, work-study programs and other training measures so that they may perform at their highest potential and advance in accordance with their abilities;
(12) Inform its employees and recognized labor organizations of the Board’s affirmative equal opportunity policy and program and enlist their cooperation; and
(13) Participate at the community level with other employers, with schools and universities and with other public and private groups in cooperative action to improve employment opportunities and community conditions that affect employability.
(b) In order to implement its program, the Board shall:
(1) Develop the plans, procedures and regulations necessary to carry out its program.
(2) Establish or make available an alternative dispute resolution program. Such program must be available for both the precomplaint process and the formal complaint process.
(3) Appraise its personnel operations at regular intervals to assure their conformity with the Board’s program, this part and the instructions contained in the Commission’s management directives relating to advice for ensuring compliance with the provisions of title VII, the Equal Pay Act, the Age Discrimination in Employment Act, GINA, and the Rehabilitation Act.
(4) Designate a Director for Equal Employment Opportunity (EEO Programs Director), EEO Officer(s), and such Special Emphasis Program Managers/Coordinators (e.g., People with Disabilities Program, Federal Women’s Program and Hispanic Employment Program), clerical and administrative support as may be necessary to carry out the functions described in this part in all organizational units of the Board and at all Board installations. The EEO Programs Director shall be under the immediate supervision of the Chair. The EEO Programs Director may also serve as the Director of the Office of Diversity and Inclusion.
(5) Make written materials available to all employees and applicants informing them of the variety of equal employment opportunity programs and administrative and judicial remedial procedures available to them and prominently post such written materials in all personnel and EEO offices and throughout the workplace.
(6) Ensure that full cooperation is provided by all Board employees to EEO Counselors and Board EEO personnel in the processing and resolution of pre-complaint matters and complaints within the Board and that full cooperation is provided to the Commission in the course of appeals, including, granting the Commission routine access to personnel records of the Board when required in connection with an investigation.
(7) Publicize to all employees and post at all times the names, business telephone numbers and business addresses of the EEO Counselors (unless the counseling function is centralized, in which case only the telephone number and address need be publicized and posted), a notice of the time limits and necessity of contacting a Counselor before filing a complaint and the telephone numbers and addresses of the EEO Programs Director, EEO Officer(s) and the Special Emphasis Program Managers/Coordinators.
(c) The EEO Programs Director shall be responsible for:
(1) Advising the Board of Governors with respect to the preparation of national and regional equal employment opportunity plans, procedures, regulations, reports and other matters pertaining to the policy in § 268.101 and the Board’s program;
(2) Evaluating from time to time the sufficiency of the total Board program for equal employment opportunity and reporting to the Board of Governors with recommendations as to any improvement or correction needed, including remedial or disciplinary action with respect to managerial, supervisory or other employees who have failed in their responsibilities;
(3) When authorized by the Board of Governors, making changes in programs and procedures designed to eliminate discriminatory practices and to improve the Board’s program for equal employment opportunity;
(4) Providing for counseling of aggrieved individuals and for the receipt and processing of individual and class complaints of discrimination; and
(5) Assuring that individual complaints are fairly and thoroughly investigated and that final action is taken in a timely manner in accordance with this part.
(d) Directives, instructions, forms and other Commission materials referenced in this part may be obtained in accordance with the provisions of 29 CFR 1610.7.
§ 268.103 Complaints of discrimination covered by this part.
(a) Individual and class complaints of employment discrimination and retaliation prohibited by title VII (discrimination on the basis of race, color, religion, sex and national origin), the ADEA (discrimination on the basis of age when the aggrieved person is at least 40 years of age), the Rehabilitation Act (discrimination on the basis of disability), the Equal Pay Act (sex-based wage discrimination), or GINA (discrimination on the basis of genetic information) shall be processed in accordance with this part. Complaints alleging retaliation prohibited by the statutes listed in this paragraph (a) are considered to be complaints of discrimination for purposes of this part.
(b) This part applies to all Board employees and applicants for employment at the Board, and to all employment policies or practices affecting Board employees or applicants for employment.
(c) This part does not apply to Equal Pay Act complaints of employees whose services are performed within a foreign country or certain United States territories as provided in 29 U.S.C. 213(f).
§ 268.104 Pre-complaint processing.
(a) Aggrieved persons who believe they have been discriminated against on the basis of race, color, religion, sex, national origin, age, disability, or genetic information must consult a Counselor prior to filing a complaint in order to try to informally resolve the matter.
(1) An aggrieved person must initiate contact with a Counselor within 45 days of the date of the matter alleged to be discriminatory or, in the case of a personnel action, within 45 days of the effective date of the action.
(2) The Board or the Commission shall extend the 45-day time limit in paragraph (a)(1) of this section when the individual shows that he or she was not notified of the time limits and was not otherwise aware of them, that he or she did not know and reasonably should not have known that the discriminatory matter or personnel action occurred, that despite due diligence he or she was prevented by circumstances beyond his or her control from contacting the counselor within the time limits, or for other reasons considered sufficient by the Board or the Commission.
(b)(1) At the initial counseling session, Counselors must advise individuals in writing of their rights and responsibilities, including the right to request a hearing or an immediate final decision after an investigation by the Board in accordance with § 268.107(f), election rights pursuant to § 268.302, the right to file a notice of intent to sue pursuant to § 268.201(a) and a lawsuit under the ADEA instead of an administrative complaint of age discrimination under this part, the duty to mitigate damages, administrative and court time frames, and that only the claims raised in precomplaint counseling (or issues or claims like or related to issues or claims raised in pre-complaint counseling) may be alleged in a subsequent complaint filed with the Board. Counselors must advise individuals of their duty to keep the Board and the Commission informed of their current address and to serve copies of appeal papers on the Board. The notice required by paragraphs (d) or (e) of this section shall include a notice of the right to file a class complaint. If the aggrieved person informs the Counselor that he or she wishes to file a class complaint, the Counselor shall explain the class complaint procedures and the responsibilities of a class agent.
(2) Counselors shall advise aggrieved persons that, where the Board agrees to offer ADR in the particular case, they may choose between participation in the alternative dispute resolution program and the counseling activities provided for in paragraph (c) of this section.
(c) Counselors shall conduct counseling activities in accordance with instructions contained in Commission Management Directives. When advised that a complaint has been filed by an aggrieved person, the Counselor shall submit a written report within 15 days to the EEO Programs Director and the aggrieved person concerning the issues discussed and actions taken during counseling.
(d) Unless the aggrieved person agrees to a longer counseling period under paragraph (e) of this section, or the aggrieved person chooses an alternative dispute resolution procedure in accordance with paragraph (b)(2) of this section, the Counselor shall conduct the final interview with the aggrieved person within 30 days of the date the aggrieved person contacted the Board’s Office of Diversity and Inclusion to request counseling. If the matter has not been resolved, the aggrieved person shall be informed in writing by the Counselor, not later than the thirtieth day after contacting the Counselor, of the right to file a discrimination complaint with the Board. This notice shall inform the complainant of the right to file a discrimination complaint within 15 days of receipt of the notice, of the appropriate official with whom to file a complaint and of the complainant’s duty to assure that the Programs Director is informed immediately if the complainant retains counsel or a representative.
(e) Prior to the end of the 30-day period, the aggrieved person may agree in writing with the Board to postpone the final interview and extend the counseling period for an additional period of no more than 60 days. If the matter has not been resolved before the conclusion of the agreed extension, the notice described in paragraph (d) of this section shall be issued.
(f) Where the aggrieved person chooses to participate in an alternative dispute resolution procedure in accordance with paragraph (b)(2) of this section, the pre-complaint processing period shall be 90 days. If the claim has not been resolved before the 90th day, the notice described in paragraph (d) of this section shall be issued.
(g) The Counselor shall not attempt in any way to restrain the aggrieved person from filing a complaint. The Counselor shall not reveal the identity of an aggrieved person who consulted the Counselor, except when authorized to do so by the aggrieved person, or until the Board has received a discrimination complaint under this part from that person involving the same matter.
§ 268.105 Individual complaints.
(a) A complaint must be filed with the agency that allegedly discriminated against the complainant.
(b) A complaint must be filed within 15 days of receipt of the notice required by § 268.104 (d), (e) or (f).
(c) A complaint must contain a signed statement from the person claiming to be aggrieved or that person’s attorney. This statement must be sufficiently precise to identify the aggrieved individual and the Board and to describe generally the action(s) or practice(s) that form the basis of the complaint. The complaint must also contain a telephone number and address where the complainant or the representative can be contacted.
(d) A complainant may amend a complaint at any time prior to the conclusion of the investigation to include issues or claims like or related to those raised in the complaint. After requesting a hearing, a complainant may file a motion with the administrative judge to amend a complaint to include issues or claims like or related to those raised in the complaint.
(e) The Board shall acknowledge receipt of a complaint or an amendment to a complaint in writing and inform the complainant of the date on which the complaint or amendment was filed. The Board shall advise the complainant in the acknowledgment of the EEOC office and its address where a request for a hearing shall be sent. Such acknowledgment shall also advise the complainant that:
(1) The complainant has the right to appeal the final action on or dismissal of a complaint; and
(2) The Board is required to conduct an impartial and appropriate investigation of the complaint within 180 days of the filing of the complaint unless the parties agree in writing to extend the time period. When a complaint has been amended, the Board shall complete its investigation within the earlier of 180 days after the last amendment to the complaint or 360 days after the filing of the original complaint, except that the complainant may request a hearing from an administrative judge on the consolidated complaints any time after 180 days from the date of the first filed complaint.
§ 268.106 Dismissals of complaints.
(a) Prior to a request for a hearing in a case, the Board shall dismiss an entire complaint:
(1) That fails to state a claim under § 268.103 or § 268.105(a), or states the same claim that is pending before or has been decided by the Board or the Commission;
(2) That fails to comply with the applicable time limits contained in §§ 268.104, 268.105 and 268.204(c), unless the Board extends the time limits in accordance with § 268.604(c), or that raises a matter that has not been brought to the attention of a Counselor and is not like or related to a matter that has been brought to the attention of a Counselor;
(3) That is the basis of a pending civil action in a United States District Court in which the complainant is a party provided that at least 180 days have passed since the filing of the administrative complaint, or that was the basis of a civil action decided by a United States District Court in which the complainant was a party;
(4) [Reserved]
(5) That is moot or alleges that a proposal to take a personnel action, or other preliminary step to taking a personnel action, is discriminatory, unless the complaint alleges that the proposal or preliminary step is retaliatory;
(6) Where the complainant cannot be located, provided that reasonable efforts have been made to locate the complainant and the complainant has not responded within 15 days to a notice of proposed dismissal sent to his or her last known address;
(7) Where the Board has provided the complainant with a written request to provide relevant information or otherwise proceed with the complaint, and the complainant has failed to respond to the request within 15 days of its receipt or the complainant’s response does not address the Board’s request, provided that the request included a notice of the proposed dismissal. Instead of dismissing for failure to cooperate, the complaint may be adjudicated if sufficient information for that purpose is available;
(8) That alleges dissatisfaction with the processing of a previously filed complaint; or
(9) Where the Board, strictly applying the criteria set forth in Commission decisions, finds that the complaint is part of a clear pattern of misuse of the EEO process for a purpose other than the prevention and elimination of employment discrimination. A clear pattern of misuse of the EEO process requires:
(i) Evidence of multiple complaint filings; and
(ii) Allegations that are similar or identical, lack specificity or involve matters previously resolved; or
(iii) Evidence of circumventing other administrative processes, retaliating against the Board’s in-house administrative processes or overburdening the EEO complaint system.
(b) Where the Board believes that some but not all of the claims in a complaint should be dismissed for the reasons contained in paragraphs (a)(1) through (9) of this section, the Board shall notify the complainant in writing of its determination, the rationale for that determination and that those claims will not be investigated, and shall place a copy of the notice in the investigative file. A determination under this paragraph is reviewable by an administrative judge if a hearing is requested on the remainder of the complaint, but is not appealable until final action is taken on the remainder of the complaint.
§ 268.107 Investigation of complaints.
(a) The investigation of complaints filed against the Board shall be conducted by the Board.
(b) In accordance with instructions contained in Commission Management Directives, the Board shall develop an impartial and appropriate factual record upon which to make findings on the claims raised by the written complaint. An appropriate factual record is one that allows a reasonable fact finder to draw conclusions as to whether discrimination occurred. The Board may use an exchange of letters or memoranda, interrogatories, investigations, fact-finding conferences or any other fact-finding methods that efficiently and thoroughly address the matters at issue. The Board may incorporate alternative dispute resolution techniques into its investigative efforts in order to promote early resolution of complaints.
(c) The procedures in paragraphs (c)(1) through (3) of this section apply to the investigation of complaints:
(1) The complainant, the Board, and any employee of the Board shall produce such documentary and testimonial evidence as the investigator deems necessary.
(2) Investigators are authorized to administer oaths. Statements of witnesses shall be made under oath or affirmation or, alternatively, by written statement under penalty of perjury.
(3) When the complainant, or the Board or its employees fail without good cause shown to respond fully and in timely fashion to requests for documents, records, comparative data, statistics, affidavits or the attendance of witness(es), the investigator may note in the investigative record that the decisionmaker should, or the Commission on appeal may, in appropriate circumstances:
(i) Draw an adverse inference that the requested information, or the testimony of the requested witness, would have reflected unfavorably on the party refusing to provide the requested information;
(ii) Consider the matters to which the requested information or testimony pertains to be established in favor of the opposing party;
(iii) Exclude other evidence offered by the party failing to produce the requested information or witness;
(iv) Issue a decision fully or partially in favor of the opposing party; or
(v) Take such other actions as it deems appropriate.
(d) Any investigation will be conducted by investigators with appropriate security clearances.
(e)(1) The Board shall complete its investigation within 180 days of the date of filing of an individual complaint or within the time period contained in an order from the Office of Federal Operations on an appeal from a dismissal pursuant to § 268.106. By written agreement within those time periods, the complainant and the Board may voluntarily extend the time period for not more than an additional 90 days. The Board may unilaterally extend the time period or any period of extension for not more than 30 days where it must sanitize a complaint file that may contain information classified pursuant to Executive Order No. 12356, or successor orders, as secret in the interest of national defense or foreign policy, provided the Board notifies the complainant of the extension.
(2) Confidential supervisory information, as defined in 12 CFR 261.2(c), and other confidential information of the Board may be included in the investigative file by the investigator, the EEO Programs Director, or another appropriate officer of the Board, where such information is relevant to the complaint. Neither the complainant nor the complainant’s personal representative may make further disclosure of such information, however, except in compliance with the Board’s Rules Regarding Availability of Information, 12 CFR part 261, and where applicable, the Board’s Rules Regarding Access to Personal Information under the Privacy Act of 1974, 12 CFR part 261a. Any party or individual, including an investigator, who requires access to FOMC information must agree to abide by the Program for Security of FOMC Information before being granted access to such information.
(f) Within 180 days from the filing of the complaint, or where a complaint was amended, within the earlier of 180 days after the last amendment to the complaint or 360 days after the filing of the original complaint, within the time period contained in an order from the Office of Federal Operations on an appeal from a dismissal, or within any period of extension provided for in paragraph (e) of this section, the Board shall provide the complainant with a copy of the investigative file, and shall notify the complainant that, within 30 days of receipt of the investigative file, the complainant has the right to request a hearing and decision from an administrative judge or may request an immediate final decision pursuant to § 268.109(b) from the Board.
(g) If the Board does not send the notice required in paragraph (f) of this section within the applicable time limits, it shall, within those same time limits, issue a written notice to the complainant informing the complainant that it has been unable to complete its investigation within the time limits required by paragraph (f) and estimating a date by which the investigation will be completed. Further, the notice must explain that if the complainant does not want to wait until the agency completes the investigation, he or she may request a hearing in accordance with paragraph (h) of this section, or file a civil action in an appropriate United States District Court in accordance with § 268.406(b). Such notice shall contain information about the hearing procedures.
(h) Where the complainant has received the notice required in paragraph (f) of this section or at any time after 180 days have elapsed from the filing of the complaint, the complainant may request a hearing by submitting a written request for a hearing directly to the EEOC office indicated in the Board’s acknowledgment letter. The complainant shall send a copy of the request for a hearing to the Board’s EEO Programs Office. Within 15 days of receipt of the request for a hearing, the Board’s EEO Programs Office shall provide a copy of the complaint file to EEOC and, if not previously provided, to the complainant.
§ 268.108 Hearings.
(a) When a complainant requests a hearing, the Commission shall appoint an administrative judge to conduct a hearing in accordance with this section. Upon appointment, the administrative judge shall assume full responsibility for the adjudication of the complaint, including overseeing the development of the record. Any hearing will be conducted by an administrative judge or hearing examiner with appropriate security clearances.
(b) Dismissals. Administrative judges may dismiss complaints pursuant to § 268.106, on their own initiative, after notice to the parties, or upon the Board’s motion to dismiss a complaint.
(c) Offer of resolution. (1) Any time after the filing of the written complaint but not later than the date an administrative judge is appointed to conduct a hearing, the Board may make an offer of resolution to a complainant who is represented by an attorney.
(2) Any time after the parties have received notice that an administrative judge has been appointed to conduct a hearing, but not later than 30 days prior to the hearing, the Board may make an offer of resolution to the complainant, whether represented by an attorney or not.
(3) The offer of resolution shall be in writing and shall include a notice explaining the possible consequences of failing to accept the offer. The Board’s offer, to be effective, must include attorney’s fees and costs and must specify any non-monetary relief. With regard to monetary relief, the Board may make a lump sum offer covering all forms of monetary liability, or it may itemize the amounts and types of monetary relief being offered. The complainant shall have 30 days from receipt of the offer of resolution to accept it. If the complainant fails to accept an offer of resolution and the relief awarded in the administrative judge’s decision, the Board’s final decision, or the Commission’s decision on appeal is not more favorable than the offer, then, except where the interest of justice would not be served, the complainant shall not receive payment from the Board of attorney’s fees or costs incurred after the expiration of the 30-day acceptance period. An acceptance of an offer must be in writing and will be timely if postmarked or received within the 30-day period. Where a complainant fails to accept an offer of resolution, the Board may make other offers of resolution and either party may seek to negotiate a settlement of the complaint at any time.
(d) Discovery. The administrative judge shall notify the parties of the right to seek discovery prior to the hearing and may issue such discovery orders as are appropriate. Unless the parties agree in writing concerning the methods and scope of discovery, the party seeking discovery shall request authorization from the administrative judge prior to commencing discovery. Both parties are entitled to reasonable development of evidence on matters relevant to the issues raised in the complaint, but the administrative judge may limit the quantity and timing of discovery. Evidence may be developed through interrogatories, depositions, and requests for admissions, stipulations or production of documents. It shall be grounds for objection to producing evidence that the information sought by either party is irrelevant, overburdensome, repetitious, or privileged.
(e) Conduct of hearing. The Board shall provide for the attendance at a hearing of all employees approved as witnesses by an administrative judge. Attendance at hearings will be limited to persons determined by the administrative judge to have direct knowledge relating to the complaint. Hearings are part of the investigative process and are thus closed to the public. The administrative judge shall have the power to regulate the conduct of a hearing, limit the number of witnesses where testimony would be repetitious, and exclude any person from the hearing for contumacious conduct or misbehavior that obstructs the hearing. The administrative judge shall receive into evidence information or documents relevant to the complaint. Rules of evidence shall not be applied strictly, but the administrative judge shall exclude irrelevant or repetitious evidence. The administrative judge or the Commission may refer to the Disciplinary Committee of the appropriate Bar Association any attorney or, upon reasonable notice and an opportunity to be heard, suspend or disqualify from representing complainants or agencies in EEOC hearings any representative who refuses to follow the orders of an administrative judge, or who otherwise engages in improper conduct.
(f) Procedures. (1) The complainant, the Board and any employee of the Board shall produce such documentary and testimonial evidence as the administrative judge deems necessary. The administrative judge shall serve all orders to produce evidence on both parties.
(2) Administrative judges are authorized to administer oaths. Statements of witnesses shall be made under oath or affirmation or, alternatively, by written statement under penalty of perjury.
(3) When the complainant, or the Board, or its employees fail without good cause shown to respond fully and in timely fashion to an order of an administrative judge, or requests for the investigative file, for documents, records, comparative data, statistics, affidavits, or the attendance of witness(es), the administrative judge shall, in appropriate circumstances:
(i) Draw an adverse inference that the requested information, or the testimony of the requested witness, would have reflected unfavorably on the party refusing to provide the requested information;
(ii) Consider the matters to which the requested information or testimony pertains to be established in favor of the opposing party;
(iii) Exclude other evidence offered by the party failing to produce the requested information or witness;
(iv) Issue a decision fully or partially in favor of the opposing party; or
(v) Take such other actions as appropriate.
(g) Summary judgement. (1) If a party believes that some or all material facts are not in genuine dispute and there is no genuine issue as to credibility, the party may, at least 15 days prior to the date of the hearing or at such earlier time as required by the administrative judge, file a statement with the administrative judge prior to the hearing setting forth the fact or facts and referring to the parts of the record relied on to support the statement. The statement must demonstrate that there is no genuine issue as to any such material fact. The party shall serve the statement on the opposing party.
(2) The opposing party may file an opposition within 15 days of receipt of the statement in paragraph (g)(1) of this section. The opposition may refer to the record in the case to rebut the statement that a fact is not in dispute or may file an affidavit stating that the party cannot, for reasons stated, present facts to oppose the request. After considering the submissions, the administrative judge may order that discovery be permitted on the fact or facts involved, limit the hearing to the issues remaining in dispute, issue a decision without a hearing or make such other ruling as is appropriate.
(3) If the administrative judge determines upon his or her own initiative that some or all facts are not in genuine dispute, he or she may, after giving notice to the parties and providing them an opportunity to respond in writing within 15 calendar days, issue an order limiting the scope of the hearing or issue a decision without holding a hearing.
(h) Record of hearing. The hearing shall be recorded and the Board shall arrange and pay for verbatim transcripts. All documents submitted to, and accepted by, the administrative judge at the hearing shall be made part of the record of the hearing. If the Board submits a document that is accepted, it shall furnish a copy of the document to the complainant. If the complainant submits a document that is accepted, the administrative judge shall make the document available to the Board’s representative for reproduction.
(i) Decisions by administrative judges. Unless the administrative judge makes a written determination that good cause exists for extending the time for issuing a decision, an administrative judge shall issue a decision on the complaint, and shall order appropriate remedies and relief where discrimination is found, within 180 days of receipt by the administrative judge of the complaint file from the Board. The administrative judge shall send copies of the hearing record, including the transcript, and the decision to the parties. If the Board does not issue a final order within 40 days of receipt of the administrative judge’s decision in accordance with § 268.109(a), then the decision of the administrative judge shall become the final action of the Board.
§ 268.109 Final action by the Board.
(a) Final action by the Board following a decision by an administrative judge. When an EEOC administrative judge has issued a decision under §§ 268.108(b), (g), or (i), the Board shall take final action on the complaint by issuing a final order within 40 days of receipt of the hearing file and the administrative judge’s decision. The final order shall notify the complainant whether or not the Board will fully implement the decision of the administrative judge and shall contain notice of the complainant’s right to appeal to the Equal Employment Opportunity Commission, the right to file a civil action in federal district court, the name of the proper defendant in any such lawsuit and the applicable time limits for appeals and lawsuits. If the final order does not fully implement the decision of the administrative judge, then the Board shall simultaneously file an appeal in accordance with § 268.403 and append a copy of its appeal to the final order. A copy of EEOC Form 573 shall be attached to the final order.
(b) Final action by the Board in all other circumstances. When the Board dismisses an entire complaint under § 268.106, receives a request for an immediate final decision or does not receive a reply to the notice issued under § 268.107(f), the Board shall take final action by issuing a final decision. The final decision shall consist of findings by the Board on the merits of each issue in the complaint, or, as appropriate, the rationale for dismissing any claims in the complaint and, when discrimination is found, appropriate remedies and relief in accordance with subpart F of this part. The Board shall issue the final decision within 60 days of receiving notification that a complainant has requested an immediate decision from the Board, or within 60 days of the end of the 30-day period for the complainant to request a hearing or an immediate final decision where the complainant has not requested either a hearing or a decision. The final action shall contain notice of the right to appeal the final action to the Equal Employment Opportunity Commission, the right to file a civil action in federal district court, the name of the proper defendant in any such lawsuit and the applicable time limits for appeals and lawsuits. A copy of EEOC Form 573 shall be attached to the final action. The Board may issue a final decision within 30 days after receiving a decision of the Commission pursuant to § 268.405(c) of this part.
Subpart C – Provisions Applicable to Particular Complaints
§ 268.201 Age Discrimination in Employment Act.
(a) As an alternative to filing a complaint under this part, an aggrieved individual may file a civil action in a United States district court under the ADEA against the agency after giving the Commission not less than 30 days’ notice of the intent to file such an action. Such notice must be filed in writing with EEOC, at P.O. Box 77960, Washington, DC 20013, or by personal delivery or facsimile within 180 days of the occurrence of the alleged unlawful practice.
(b) The Commission may exempt a position from the provisions of the ADEA if the Commission establishes a maximum age requirement for the position on the basis of a determination that age is a bona fide occupational qualification necessary to the performance of the duties of the position.
(c) When an individual has filed an administrative complaint alleging age discrimination, administrative remedies will be considered to be exhausted for purposes of filing a civil action:
(1) 180 days after the filing of an individual complaint if the Board has not taken final action and the individual has not filed an appeal or 180 days after the filing of a class complaint if the Board has not issued a final decision;
(2) After final action on an individual or class complaint if the individual has not filed an appeal; or
(3) After the issuance of a final decision by the Commission on an appeal or 180 days after the filing of an appeal, if the Commission has not issued a final decision.
§ 268.202 Equal Pay Act.
Complaints alleging violations of the Equal Pay Act shall be processed under this part.
§ 268.203 Rehabilitation Act.
(a) Definitions. The following definitions apply for purposes of this section:
(1) The term ADA means title I of the Americans with Disabilities Act of 1990, as amended (42 U.S.C. 12101 through 12117), title V of the Americans with Disabilities Act, as amended (42 U.S.C. 12201 through 12213), as it applies to employment, and the regulations of the Equal Employment Opportunity Commission implementing titles I and V of the ADA at 29 CFR part 1630.
(2) The term disability means disability as defined under 29 CFR 1630.2(g) through (l).
(3) The term hiring authority that takes disability into account means a hiring authority established under written Board policy that permits the Board to consider disability status during the hiring process.
(4) The term personal assistance service provider means an employee or independent contractor whose primary job functions include provision of personal assistance services.
(5) The term personal assistance services means assistance with performing activities of daily living that an individual would typically perform if he or she did not have a disability, and that is not otherwise required as a reasonable accommodation, including, for example, assistance with removing and putting on clothing, eating, and using the restroom.
(6) The term Plan means an affirmative action plan for the hiring, placement, and advancement of individuals with disabilities.
(7) [Reserved]
(8) The term Section 501 means section 501 of the Rehabilitation Act of 1973, as amended (29 U.S.C. 791).
(9) The term targeted disability means a developmental disability, such as cerebral palsy or autism spectrum disorder; a traumatic brain injury; deafness or serious difficulty hearing, benefiting from, for example, American Sign Language, communication access real-time translation (CART), hearing aids, a cochlear implant and/or other supports; blindness or serious difficulty seeing even when wearing glasses; missing extremities (such as an arm, leg, hand and/or foot); a significant mobility impairment benefiting from, for example, the utilization of a wheelchair; partial or complete paralysis; epilepsy or other seizure disorders; an intellectual disability (formerly described as mental retardation); a significant psychiatric disorder such as bipolar disorder, schizophrenia, post-traumatic stress disorder (PTSD), or major depression; dwarfism; or a significant disfigurement such as significant disfigurements caused by burns, wounds, accidents, or congenital disorders.
(10) The term undue hardship has the meaning set forth in 29 CFR part 1630.
(b) Nondiscrimination. The Board shall not discriminate on the basis of disability in regard to the hiring, advancement or discharge of employees, employee compensation, job training, or other terms, conditions, and privileges of employment. The standards used to determine whether Section 501 has been violated in a complaint alleging employment discrimination under this part shall be the standards applied under the ADA.
(c) Model employer. The Board shall be a model employer of individuals with disabilities. The Board shall give full consideration to the hiring, advancement, and retention of qualified individuals with disabilities in its workforce. The Board shall also take affirmative action to promote the recruitment, hiring, and advancement of qualified individuals with disabilities, with the goal of eliminating under-representation of individuals with disabilities in the Board’s workforce.
(d) Affirmative action plan. The Board shall adopt and implement a Plan that provides sufficient assurances, procedures, and commitments to provide adequate hiring, placement, and advancement opportunities for individuals with disabilities at all levels of Board employment. The Board’s Plan must meet the following criteria:
(1) Disability hiring and advancement program – (i) Recruitment. The Plan shall require the Board to take specific steps to ensure that a broad range of individuals with disabilities, including individuals with targeted disabilities, will be aware of and be encouraged to apply for job vacancies when eligible. Such steps shall include, at a minimum –
(A) Use of programs and resources that identify job applicants with disabilities, including individuals with targeted disabilities, who are eligible to be appointed under a hiring authority that takes disability into account, examples of which could include programs that provide the qualifications necessary for particular positions within the Board to individuals with disabilities, databases of individuals with disabilities who previously applied to the Board but were not hired for the positions they applied for, and training and internship programs that lead directly to employment for individuals with disabilities; and
(B) Establishment and maintenance of contacts (which may include formal agreements) with organizations that specialize in providing assistance to individuals with disabilities, including individuals with targeted disabilities, in securing and maintaining employment, such as American Job Centers, State Vocational Rehabilitation Agencies, the Veterans’ Vocational Rehabilitation and Employment Program, Centers for Independent Living, and Employment Network service providers.
(ii) Application process. The Plan shall ensure that the Board has designated sufficient staff to handle any disability-related issues that arise during the application and selection processes, and shall require the Board to provide such individuals with sufficient training, support, and other resources to carry out their responsibilities under this section. Such responsibilities shall include, at a minimum –
(A) Ensuring that disability-related questions from members of the public regarding the agency’s application and selection processes are answered promptly and correctly, including questions about reasonable accommodations needed by job applicants during the application and selection processes and questions about how individuals may apply for appointment under hiring authorities that take disability into account;
(B) Processing requests for reasonable accommodations needed by job applicants during the application and placement processes, and ensuring that the Board provides such accommodations when required to do so under the standards set forth in 29 CFR part 1630;
(C) Accepting applications for appointment under hiring authorities that take disability into account, if permitted under written Board policy;
(D) If an individual has applied for appointment to a particular position under a hiring authority that takes disability into account, determining whether the individual is eligible for appointment under such authority, and, if so, forwarding the individual’s application to the relevant hiring officials with an explanation of how and when the individual may be appointed, consistent with all applicable laws; and
(E) Overseeing any other Board programs designed to increase hiring of individuals with disabilities.
(iii) Advancement program. The Plan shall require the Board to take specific steps to ensure that current employees with disabilities have sufficient opportunities for advancement. Such steps may include, for example –
(A) Efforts to ensure that employees with disabilities are informed of and have opportunities to enroll in relevant training, including management training when eligible;
(B) Development or maintenance of a mentoring program for employees with disabilities; and
(C) Administration of exit interviews that include questions on how the Board could improve the recruitment, hiring, inclusion, and advancement of individuals with disabilities.
(2) Disability anti-harassment policy. The Plan shall require the Board to state specifically in its anti-harassment policy that harassment based on disability is prohibited, and to include in its training materials examples of the types of conduct that would constitute disability-based harassment.
(3) Reasonable accommodation – (i) Procedures. The Plan shall require the Board to adopt, post on its public website, and make available to all job applicants and employees in written and accessible formats, reasonable accommodation procedures that are easy to understand and that, at a minimum –
(A) Explain relevant terms such as “reasonable accommodation,” “disability,” “interactive process,” “qualified,” and “undue hardship,” consistent with applicable statutory and regulatory definitions, using examples where appropriate;
(B) Explain that reassignment to a vacant position for which an employee is qualified, and not just permission to compete for such position, is a reasonable accommodation, and that the Board must consider providing reassignment to a vacant position as a reasonable accommodation when it determines that no other reasonable accommodation will permit an employee with a disability to perform the essential functions of his or her current position;
(C) Notify supervisors and other relevant Board employees how and where they are to conduct searches for available vacancies when considering reassignment as a reasonable accommodation;
(D) Explain that an individual may request a reasonable accommodation orally or in writing at any time, need not fill out any specific form in order for the interactive process to begin, and need not have a particular accommodation in mind before making a request, and that the request may be made to a supervisor or manager in the individual’s chain of command, the office designated by the Board to oversee the reasonable accommodation process, any Board employee connected with the application process, or any other individual designated by the Board to accept such requests;
(E) Include any forms the Board uses in connection with a reasonable accommodation request as attachments, and indicate that such forms are available in alternative formats that are accessible to people with disabilities;
(F) Describe the Board’s process for determining whether to provide a reasonable accommodation, including the interactive process, and provide contact information for the individual or program office from whom requesters will receive a final decision;
(G) Provide guidance to supervisors on how to recognize requests for reasonable accommodation;
(H) Require that decision makers communicate, early in the interactive process and periodically throughout the process, with individuals who have requested a reasonable accommodation;
(I) Explain when the Board may require an individual who requests a reasonable accommodation to provide medical information that is sufficient to explain the nature of the individual’s disability, his or her need for reasonable accommodation, and how the requested accommodation, if any, will assist the individual to apply for a job, perform the essential functions of a job, or enjoy the benefits and privileges of the workplace;
(J) Explain the Board’s right to request relevant supplemental medical information if the information submitted by the requester is insufficient for the purposes specified in paragraph (d)(3)(i)(I) of this section;
(K) Explain the Board’s right to have medical information reviewed by a medical expert of the Board’s choosing at the Board’s expense;
(L) Explain the Board’s obligation to keep medical information confidential, in accordance with applicable laws and regulations, and the limited circumstances under which such information may be disclosed;
(M) Designate the maximum amount of time the Board has, absent extenuating circumstances, to either provide a requested accommodation or deny the request, and explain that the time limit begins to run when the accommodation is first requested;
(N) Explain that the Board will not be expected to adhere to its usual timelines if an individual’s health professional fails to provide needed documentation in a timely manner;
(O) Explain that, where a particular reasonable accommodation can be provided in less than the maximum amount of time permitted under paragraph (d)(3)(i)(M) of this section, failure to provide the accommodation in a prompt manner may result in a violation of the Rehabilitation Act;
(P) Provide for expedited processing of requests for reasonable accommodations that are needed sooner than the maximum allowable time frame permitted under paragraph (d)(3)(i)(M) of this section;
(Q) Explain that, when all the facts and circumstances known to the Board make it reasonably likely that an individual will be entitled to a reasonable accommodation, but the accommodation cannot be provided immediately, the Board shall provide an interim accommodation that allows the individual to perform some or all of the essential functions of his or her job, if it is possible to do so without imposing undue hardship on the Board;
(R) Inform applicants and employees how they may track the processing of requests for reasonable accommodation;
(S) Explain that, where there is a delay in either processing a request for or providing a reasonable accommodation, the Board must notify the individual of the reason for the delay, including any extenuating circumstances that justify the delay;
(T) Explain that individuals who have been denied reasonable accommodations have the right to file complaints pursuant to 12 CFR 268.105;
(U) Encourage the use of voluntary informal dispute resolution processes that individuals may use to obtain prompt reconsideration of denied requests for reasonable accommodation;
(V) Provide that the Board shall give the requester a notice consistent with the requirements of paragraph (d)(3)(iii) of this section at the time a request for reasonable accommodation is denied; and
(W) Provide information on how to access additional information regarding reasonable accommodation, including, at a minimum, Commission guidance and technical assistance documents.
(ii) Cost of accommodations. The Plan shall require the Board to take specific steps to ensure that requests for reasonable accommodation are not denied for reasons of cost, and that individuals with disabilities are not excluded from employment due to the anticipated cost of a reasonable accommodation, if the resources available to the Board as a whole, excluding those designated by statute for a specific purpose that does not include reasonable accommodation, would enable it to provide an effective reasonable accommodation without undue hardship. Such steps shall be reasonably designed to, at a minimum –
(A) Ensure that anyone who is authorized to grant or deny requests for reasonable accommodation or to make hiring decisions is aware that, pursuant to the regulations implementing the undue hardship defense at 29 CFR part 1630, all resources available to the agency as a whole, excluding those designated by statute for a specific purpose that does not include reasonable accommodation, are considered when determining whether a denial of reasonable accommodation based on cost is lawful; and
(B) Ensure that anyone authorized to grant or deny requests for reasonable accommodation or to make hiring decisions is aware of, and knows how to arrange for the use of, Board resources available to provide the accommodation, including any centralized fund the Board may have for that purpose.
(iii) Notification of basis for denial. The Plan shall require the Board to provide a job applicant or employee who is denied a reasonable accommodation with a written notice at the time of the denial, in an accessible format when requested, that –
(A) Explains the reasons for the denial and notifies the job applicant or employee of any available internal appeal or informal dispute resolution processes;
(B) Informs the job applicant or employee of the right to challenge the denial by filing a complaint of discrimination under this part;
(C) Provides instructions on how to file such a complaint; and
(D) Explains that, pursuant to 12 CFR 268.105, the right to file a complaint will be lost unless the job applicant or employee initiates contact with an EEO Counselor within 45 days of the denial, regardless of whether the applicant or employee participates in an informal dispute resolution process.
(4) Accessibility of facilities and technology – (i) Notice of rights. The Plan shall require the Board to adopt, post on its public website, and make available to all employees in written and accessible formats, a notice that –
(A) Explains their rights under Section 508 of the Rehabilitation Act of 1973, 29 U.S.C. 794d, concerning the accessibility of agency technology, and the Architectural Barriers Act, 42 U.S.C. 4151 through 4157, concerning the accessibility of agency building and facilities;
(B) Provides contact information for a Board employee who is responsible for ensuring the physical accessibility of the Board’s facilities under the Architectural Barriers Act of 1968, and a Board employee who is responsible for ensuring that the electronic and information technology purchased, maintained, or used by the agency is readily accessible to, and usable by, individuals with disabilities, as required by Section 508 of the Rehabilitation Act of 1973; and
(C) Provides instructions on how to file complaints alleging violations of the accessibility requirements of the Architectural Barriers Act of 1968 and Section 508 of the Rehabilitation Act of 1973.
(ii) Assistance with filing complaints at other agencies. If the Board’s investigation of a complaint filed under Section 508 of the Rehabilitation Act of 1973 or the Architectural Barriers Act of 1968 shows that a different entity is responsible for the alleged violation, the Plan shall require the Board to inform the individual who filed the complaint where he or she may file a complaint against the other entity, if possible.
(5) Personal assistance services allowing employees to participate in the workplace – (i) Obligation to provide personal assistance services. The Plan shall require the Board to provide an employee with, in addition to professional services required as a reasonable accommodation under the standards set forth in 29 CFR part 1630, personal assistance services during work hours and job-related travel if –
(A) The employee requires such services because of a targeted disability;
(B) Provision of such services would, together with any reasonable accommodations required under the standards set forth in 29 CFR part 1630, enable the employee to perform the essential functions of his or her position; and
(C) Provision of such services would not impose undue hardship on the Board.
(ii) Service providers. The Plan shall state that personal assistance services required under paragraph (d)(5)(i) of this section must be performed by a personal assistance service provider. The Plan may permit the Board to require personal assistance service providers to provide personal assistance services to more than one individual. The Plan may also permit the Board to require personal assistance service providers to perform tasks unrelated to personal assistance services, but only to the extent that doing so does not result in failure to provide personal assistance services required under paragraph (d)(5)(i) of this section in a timely manner.
(iii) No adverse action. The Plan shall prohibit the Board from taking adverse actions against job applicants or employees based on their need for, or perceived need for, personal assistance services.
(iv) Selection of personal assistance service providers. The Plan shall require the Board, when selecting someone who will provide personal assistance services to a single individual, to give primary consideration to the individual’s preferences to the extent permitted by law.
(v) Written procedures. The Plan shall require the Board to adopt, post on its public website, and make available to all job applicants and employees in written and accessible formats, procedures for processing requests for personal assistance services. The Board may satisfy the requirement in this paragraph (d)(5)(v) by stating, in the procedures required under paragraph (d)(3)(i) of this section, that the process for requesting personal assistance services, the process for determining whether such services are required, and the Board’s right to deny such requests when provision of the services would pose an undue hardship, are the same as for reasonable accommodations.
(6) Utilization analysis – (i) Current utilization. The Plan shall require the Board to perform a workforce analysis annually to determine the percentage of its employees at each grade and salary level who have disabilities, and the percentage of its employees at each grade and salary level who have targeted disabilities.
(ii) Source of data. For purposes of the analysis required under paragraph (d)(6)(i) of this section an employee may be classified as an individual with a disability or an individual with a targeted disability on the basis of –
(A) The individual’s self-identification as an individual with a disability or an individual with a targeted disability on a form, including but not limited to the Office of Personnel Management’s Standard Form 256, which states that the information collected will be kept confidential and used only for statistical purposes, and that completion of the form is voluntary;
(B) Records relating to the individual’s appointment under a hiring authority that takes disability into account, if applicable; and
(C) Records relating to the individual’s requests for reasonable accommodation, if any.
(iii) Data accuracy. The Plan shall require the Board to take steps to ensure that data collected pursuant to paragraph (d)(6)(i) of this section are accurate.
(7) Goals – (i) Adoption. The Plan shall commit the Board to the goal of ensuring that –
(A) No less than 12% of employees who have salaries equal to or greater than employees at the GS-11, step 1 level in the Washington, DC locality, are individuals with disabilities;
(B) No less than 12% of employees who have salaries less than employees at the GS-11, step 1 level in the Washington, DC locality, are individuals with disabilities;
(C) No less than 2% of employees who have salaries equal to or greater than employees at the GS-11, step 1 level in the Washington, DC locality, are individuals with targeted disabilities; and
(D) No less than 2% of employees who have salaries less than employees at the GS-11, step 1 level in the Washington, DC locality, are individuals with targeted disabilities.
(ii) Progression toward goals. The Plan shall require the Board to take specific steps that are reasonably designed to gradually increase the number of persons with disabilities or targeted disabilities employed at the Board until it meets the goals established pursuant to paragraph (d)(7)(i) of this section. Examples of such steps include, but are not limited to –
(A) Increased use of hiring authorities that take disability into account to hire or promote individuals with disabilities or targeted disabilities, as applicable;
(B) To the extent permitted by applicable laws, consideration of disability or targeted disability status as a positive factor in hiring, promotion, or assignment decisions;
(C) Disability-related training and education campaigns for all employees in the Board;
(D) Additional outreach or recruitment efforts;
(E) Increased efforts to hire and retain individuals who require supported employment because of a disability, who have retained the services of a job coach at their own expense or at the expense of a third party, and who may be given permission to use the job coach during work hours as a reasonable accommodation without imposing undue hardship on the Board; and
(F) Adoption of training, mentoring, or internship programs for individuals with disabilities.
(8) Recordkeeping. The Plan shall require the Board to keep records that it may use to determine whether it is complying with the nondiscrimination and affirmative action requirements imposed under Section 501, and to make such records available to the Commission upon the Commission’s request, including, at a minimum, records of –
(i) The number of job applications received from individuals with disabilities, and the number of individuals with disabilities who were hired by the Board;
(ii) The number of job applications received from individuals with targeted disabilities, and the number of individuals with targeted disabilities who were hired by the Board;
(iii) All rescissions of conditional job offers, demotions, and terminations taken against applicants or employees as a result of medical examinations or inquiries;
(iv) All Board employees hired under special hiring authority for person with certain disabilities, and each such employee’s date of hire, entering grade level, probationary status, and current grade level;
(v) The number of employees appointed under special hiring authority for persons with certain disabilities who successfully completed the Board’s Provisional Employment period and the number of such employees who were terminate prior to the end of their Provisional Employment period; and
(vi) Details about each request for reasonable accommodation including, at a minimum –
(A) The specific reasonable accommodation requested, if any;
(B) The job sought by the requesting applicant or held by the requesting employee;
(C) Whether the accommodation was needed to apply for a job, perform the essential functions of a job, or enjoy the benefits and privileges of employment;
(D) Whether the request was granted (which may include an accommodation different from the one requested) or denied;
(E) The identity of the deciding official;
(F) If denied, the basis for such denial; and
(G) The number of days taken to process the request.
(e) Reporting – (1) Submission to the Commission. On an annual basis the Board shall submit to the Commission at such time and in such manner as the Commission deems appropriate –
(i) A copy of its current Plan;
(ii) The results of the two most recent workforce analyses performed pursuant to paragraph (d)(6) of this section showing the percentage of employees with disabilities and employees with targeted disabilities in each of the designated pay groups;
(iii) The number of individuals appointed to positions within the Board under special hiring authority for persons with certain disabilities during the previous year, and the total number of employees whose employment at the Board began by appointment under special hiring authority for persons with certain disabilities; and
(iv) A list of changes made to the Plan since the prior submission, if any, and an explanation of why those changes were made.
(2) Availability to the public. The Board shall make the information submitted to the Commission pursuant to paragraph (e)(1) of this section available to the public by, at a minimum, posting a copy of the submission on its public website and providing a means by which members of the public may request copies of the submission in accessible formats.
§ 268.204 Class complaints.
(a) Definitions – (1) Class is a group of Board employees, former employees or applicants for employment who, it is alleged, have been or are being adversely affected by a Board personnel management policy or practice that discriminates against the group on the basis of their race, color, religion, sex, national origin, age or disability.
(2) Class complaint is a written complaint of discrimination filed on behalf of a class by the agent of the class alleging that:
(i) The class is so numerous that a consolidated complaint of the members of the class is impractical;
(ii) There are questions of fact common to the class;
(iii) The claims of the agent of the class are typical of the claims of the class;
(iv) The agent of the class, or, if represented, the representative, will fairly and adequately protect the interests of the class.
(3) An agent of the class is a class member who acts for the class during the processing of the class complaint.
(b) Pre-complaint processing. An employee or applicant who wishes to file a class complaint must seek counseling and be counseled in accordance with § 268.104. A complainant may move for class certification at any reasonable point in the process when it becomes apparent that there are class implications to the claim raised in an individual complaint. If a complainant moves for class certification after completing the counseling process contained in § 268.104, no additional counseling is required. The administrative judge shall deny class certification when the complainant has unduly delayed in moving for certification.
(c) Filing and presentation of a class complaint. (1) A class complaint must be signed by the agent or representative and must identify the policy or practice adversely affecting the class as well as the specific action or matter affecting the class agent.
(2) The complaint must be filed with the Board not later than 15 days after the agent’s receipt of the notice of right to file a class complaint.
(3) The complaint shall be processed promptly; the parties shall cooperate and shall proceed at all times without undue delay.
(d) Acceptance or dismissal. (1) Within 30 days of the Board’s receipt of a complaint, the Board shall: Designate an agency representative who shall not be one of the individuals referenced in § 268.102(b)(4), and forward the complaint, along with a copy of the Counselor’s report and any other information pertaining to timeliness or other relevant circumstances related to the complaint, to the Commission. The Commission shall assign the complaint to an administrative judge or complaints examiner with a proper security clearance when necessary. The administrative judge may require the complainant or the Board to submit additional information relevant to the complaint.
(2) The administrative judge may dismiss the complaint, or any portion, for any of the reasons listed in § 268.106 or because it does not meet the prerequisites of a class complaint under § 268.204(a)(2).
(3) If an allegation is not included in the Counselor’s report, the administrative judge shall afford the agent 15 days to state whether the matter was discussed with the Counselor and, if not, explain why it was not discussed. If the explanation is not satisfactory, the administrative judge shall dismiss the allegation. If the explanation is satisfactory, the administrative judge shall refer the allegation to the Board for further counseling of the agent. After counseling, the allegation shall be consolidated with the class complaint.
(4) If an allegation lacks specificity and detail, the administrative judge shall afford the agent 15 days to provide specific and detailed information. The administrative judge shall dismiss the complaint if the agent fails to provide such information within the specified time period. If the information provided contains new allegations outside the scope of the complaint, the administrative judge shall advise the agent how to proceed on an individual or class basis concerning these allegations.
(5) The administrative judge shall extend the time limits for filing a complaint and for consulting with a Counselor in accordance with the time limit extension provisions contained in §§ 268.104(a)(2) and 268.604.
(6) When appropriate, the administrative judge may decide that a class be divided into subclasses and that each subclass be treated as a class, and the provisions of this section then shall be construed and applied accordingly.
(7) The administrative judge shall transmit his or her decision to accept or dismiss a complaint to the Board and the agent. The Board shall take final action by issuing a final order within 40 days of receipt of the hearing record and administrative judge’s decision. The final order shall notify the agent whether or not the Board will implement the decision of the administrative judge. If the final order does not implement the decision of the administrative judge, the Board shall simultaneously appeal the administrative judge’s decision in accordance with § 268.403 and append a copy of the appeal to the final order. A dismissal of a class complaint shall inform the agent either that the complaint is being filed on that date as an individual complaint of discrimination and will be processed under subpart B or that the complaint is also dismissed as an individual complaint in accordance with § 268.106. In addition, it shall inform the agent of the right to appeal the dismissal of the class complaint to the Equal Employment Opportunity Commission or to file a civil action and shall include EEOC Form 573, Notice of Appeal/Petition.
(e) Notification. (1) Within 15 days of receiving notice that the administrative judge has accepted a class complaint or a reasonable time frame specified by the administrative judge, the Board shall use reasonable means, such as delivery, mailing to last known address or distribution, to notify all class members of the acceptance of the class complaint.
(2) Such notice shall contain:
(i) An identification of the Board as the named agency, its location, and the date of acceptance of the complaint;
(ii) A description of the issues accepted as part of the class complaint;
(iii) An explanation of the binding nature of the final decision or resolution of the class complaint on class members; and
(iv) The name, address and telephone number of the class representative.
(f) Obtaining evidence concerning the complaint. (1) The administrative judge shall notify the agent and the Board’s representative of the time period that will be allowed both parties to prepare their cases. This time period will include at least 60 days and may be extended by the administrative judge upon the request of either party. Both parties are entitled to reasonable development of evidence on matters relevant to the issues raised in the complaint. Evidence may be developed through interrogatories, depositions, and requests for admissions, stipulations or production of documents. It shall be grounds for objection to producing evidence that the information sought by either party is irrelevant, overburdensome, repetitious, or privileged.
(2) If mutual cooperation fails, either party may request the administrative judge to rule on a request to develop evidence. If a party fails without good cause shown to respond fully and in timely fashion to a request made or approved by the administrative judge for documents, records, comparative data, statistics or affidavits, and the information is solely in the control of one party, such failure may, in appropriate circumstances, cause the administrative judge:
(i) To draw an adverse inference that the requested information would have reflected unfavorably on the party refusing to provide the requested information;
(ii) To consider the matters to which the requested information pertains to be established in favor of the opposing party;
(iii) To exclude other evidence offered by the party failing to produce the requested information;
(iv) To recommend that a decision be entered in favor of the opposing party; or
(v) To take such other actions as the administrative judge deems appropriate.
(3) During the period for development of evidence, the administrative judge may, in his or her discretion, direct that an investigation of facts relevant to the class complaint or any portion be conducted by an agency certified by the Commission.
(4) Both parties shall furnish to the administrative judge copies of all materials that they wish to be examined and such other material as may be requested.
(g) Opportunity for resolution of the complaint. (1) The administrative judge shall furnish the agent and the Board’s representative a copy of all materials obtained concerning the complaint and provide opportunity for the agent to discuss the materials with the Board’s representative and attempt resolution of the complaint.
(2) The complaint may be resolved by agreement of the Board and the agent at any time pursuant to the notice and approval procedure contained in paragraph (g)(4) of this section.
(3) If the complaint is resolved, the terms of the resolution shall be reduced to writing and signed by the agent and the Board.
(4) Notice of the resolution shall be given to all class members in the same manner as notification of the acceptance of the class complaint and to the administrative judge. It shall state the relief, if any, to be granted by the Board and the name and address of the EEOC administrative judge assigned to the case. It shall state that within 30 days of the date of the notice of resolution, any member of the class may petition the administrative judge to vacate the resolution because it benefits only the class agent, or is otherwise not fair, adequate and reasonable to the class as a whole. The administrative judge shall review the notice of resolution and consider any petitions to vacate filed. If the administrative judge finds that the proposed resolution is not fair, adequate and reasonable to the class as a whole, the administrative judge shall issue a decision vacating the agreement and may replace the original class agent with a petitioner or some other class member who is eligible to be the class agent during further processing of the class complaint. The decision shall inform the former class agent or the petitioner of the right to appeal the decision to the Equal Employment Opportunity Commission and include EEOC Form 573, Notice of Appeal/Petition. If the administrative judge finds that the resolution is fair, adequate and reasonable to the class as a whole, the resolution shall bind all members of the class.
(h) Hearing. On expiration of the period allowed for preparation of the case, the administrative judge shall set a date for hearing. The hearing shall be conducted in accordance with 12 CFR 268.108(a) through (f).
(i) Decisions. The administrative judge shall transmit to the agency and class agent a decision on the complaint, including findings, systemic relief for the class and any individual relief, where appropriate, with regard to the personnel action or matter that gave rise to the complaint. If the administrative judge finds no class relief appropriate, he or she shall determine if a finding of individual discrimination is warranted and if so, shall order appropriate relief.
(j) Board final action. (1) Within 60 days of receipt of the administrative judge’s decision on the complaint, the Board shall take final action by issuing a final order. The final order shall notify the class agent whether or not the Board will fully implement the decision of the administrative judge and shall contain notice of the class agent’s right to appeal to the Commission, the right to file a civil action in Federal district court, the name of the proper defendant in any such lawsuit, and the applicable time limits for appeals and lawsuits. If the final order does not fully implement the decision of the administrative judge, then the Board shall simultaneously file an appeal in accordance with § 268.403 and append a copy of the appeal to the final order. A copy of EEOC Form 573 shall be attached to the final order.
(2) If the Board does not issue a final order within 60 days of receipt of the administrative judge’s decision, then the decision of the administrative judge shall become the final action of the Board.
(3) A final order on a class complaint shall, subject to subpart E of this part, be binding on all members of the class and the Board.
(k) Notification of final action. The Board shall notify class members of the final action and the relief awarded, if any, through the same media employed to give notice of the existence of the class complaint. The notice, where appropriate, shall include information concerning the rights of class members to seek individual relief, and of the procedures to be followed. Notice shall be given by the Board within 10 days of the transmittal of the final action to the agent.
(l) Relief for individual class members. (1) When discrimination is found, the Board must eliminate or modify the employment policy or practice out of which the complaint arose and provide individual relief, including an award of attorney’s fees and costs, to the agent in accordance with § 268.501.
(2) When class-wide discrimination is not found, but it is found that the class agent is a victim of discrimination, § 268.501 shall apply. The Board shall also, within 60 days of the issuance of the final decision finding no class-wide discrimination, issue the acknowledgment of receipt of an individual complaint as required by § 268.105(d) and process in accordance with the provisions of subpart B of this part, each individual complaint that was subsumed into the class complaint.
(3) When discrimination is found in the final decision and a class member believes that he or she is entitled to individual relief, the class member may file a written claim with the Board or the Board’s EEO Programs Director within 30 days of receipt of notification by the Board of its final decision. Administrative judges shall retain jurisdiction over the complaint in order to resolve any disputed claims by class members. The claim must include a specific detailed showing that the claimant is a class member who was affected by the discriminatory policy or practice, and that this discriminatory action took place within the period of time for which class-wide discrimination was found in the final order. Where a finding of discrimination against a class has been made, there shall be a presumption of discrimination as to each member of the class. The Board must show by clear and convincing evidence that any class member is not entitled to relief. The administrative judge may hold a hearing or otherwise supplement the record on a claim filed by a class member. The Board or the Commission may find class-wide discrimination and order remedial action for any policy or practice in existence within 45 days of the agent’s initial contact with the Counselor. Relief otherwise consistent with this Part may be ordered for the time the policy or practice was in effect. The Board shall issue a final decision on each such claim within 90 days of filing. Such decision must include a notice of the right to file an appeal or a civil action in accordance with subpart E of this part and the applicable time limits.
§ 268.205 [Reserved]
Subpart D – Related Processes
§ 268.301 Negotiated grievance procedure.
When an employee of the Board, which is not an agency subject to 5 U.S.C. 7121(d), is covered by a negotiated grievance procedure, allegations of discrimination shall be processed as complaints under this part, except that the time limits for processing the complaint contained in § 268.105 and for appeal to the Commission contained in § 268.402 may be held in abeyance during processing of a grievance covering the same matter as the complaint if the Board notifies the complainant in writing that the complaint will be held in abeyance pursuant to this section.
§ 268.302 [Reserved]
Subpart E – Appeals to the Equal Employment Opportunity Commission
§ 268.401 Appeals to the Equal Employment Opportunity Commission.
(a) A complainant may appeal the Board’s final action or dismissal of a complaint.
(b) The Board may appeal as provided in § 268.109(a).
(c) A class agent or the Board may appeal an administrative judge’s decision accepting or dismissing all or part of a class complaint; a class agent may appeal the Board’s final action or the Board may appeal an administrative judge’s decision on a class complaint; a class member may appeal a final decision on a claim for individual relief under a class complaint; and a class member, a class agent or the Board may appeal a final decision on a petition pursuant to § 268.204(g)(4).
(d) A complainant, agent of the class or individual class claimant may appeal to the Commission the Board’s alleged noncompliance with a settlement agreement or final decision in accordance with § 268.504.
§ 268.402 Time for appeals to the Equal Employment Opportunity Commission.
(a) Appeals described in § 268.401(a) and (c) must be filed within 30 days of receipt of the dismissal, final action or decision. Appeals described in § 268.401(b) must be filed within 40 days of receipt of the hearing file and decision. Where a complainant has notified the Board’s EEO Programs Director of alleged noncompliance with a settlement agreement in accordance with § 268.504, the complainant may file an appeal 35 days after service of the allegations of noncompliance, but no later than 30 days after receipt of the Board’s determination.
(b) If the complainant is represented by an attorney of record, then the 30-day time period provided in paragraph (a) of this section within which to appeal shall be calculated from the receipt of the required document by the attorney. In all other instances, the time within which to appeal shall be calculated from the receipt of the required document by the complainant.
§ 268.403 How to appeal.
(a) The complainant, the Board, agent or individual class claimant (hereinafter appellant) must file an appeal with the Director, Office of Federal Operations, Equal Employment Opportunity Commission, at P.O. Box 77960, Washington, DC 20013, or electronically, or by personal delivery or facsimile. The appellant should use EEOC Form 573, Notice of Appeal/Petition, and should indicate what is being appealed.
(b) The appellant shall furnish a copy of the appeal to the opposing party at the same time it is filed with the Commission. In or attached to the appeal to the Commission, the appellant must certify the date and method by which service was made on the opposing party.
(c) If an appellant does not file an appeal within the time limits of this subpart, the appeal shall be dismissed by the Commission as untimely.
(d) Any statement or brief on behalf of a complainant in support of the appeal must be submitted to the Office of Federal Operations within 30 days of filing the notice of appeal. Any statement or brief on behalf of the Board in support of its appeal must be submitted to the Office of Federal Operations within 20 days filing the notice of appeal. The Office of Federal Operations will accept statements or briefs in support of an appeal by facsimile transmittal, provided they are no more than 10 pages long.
(e) The Board must submit the complaint file to the Office of Federal Operations within 30 days of initial notification that the complainant has filed an appeal or within 30 days of submission of an appeal by the Board.
(f) Any statement or brief in opposition to an appeal must be submitted to the Commission and served on the opposing party within 30 days of receipt of the statement or brief supporting the appeal, or, if no statement or brief supporting the appeal is filed, within 60 days of receipt of the appeal. The Office of Federal Operations will accept statements or briefs in opposition to an appeal by facsimile provided they are no more than 10 pages long.
(g) The Board will submit appeals, complaint files, and other filings to the Commission’s Office of Federal Operations in a digital format acceptable to the Commission, absent a showing of good cause why the Board cannot submit digital records. Appellants are encouraged, but not required, to submit digital appeals and supporting documentation to the Commission’s Office of Federal Operations in a format acceptable to the Commission.
§ 268.404 Appellate Procedure.
(a) On behalf of the Commission, the Office of Federal Operations shall review the complaint file and all written statements and briefs from either party. The Commission may supplement the record by an exchange of letters or memoranda, investigation, remand to the Board or other procedures.
(b) If the Office of Federal Operations requests information from one or both of the parties to supplement the record, each party providing information shall send a copy of the information to the other party.
(c) When either party to an appeal fails without good cause shown to comply with the requirements of this section or to respond fully and in timely fashion to requests for information, the Office of Federal Operations shall, in appropriate circumstances:
(1) Draw an adverse inference that the requested information would have reflected unfavorably on the party refusing to provide the requested information;
(2) Consider the matters to which the requested information or testimony pertains to be established in favor of the opposing party;
(3) Issue a decision fully or partially in favor of the opposing party; or
(4) Take such other actions as appropriate.
§ 268.405 Decisions on appeals.
(a) The Office of Federal Operations, on behalf of the Commission, shall issue a written decision setting forth its reasons for the decision. The Commission shall dismiss appeals in accordance with §§ 268.106, 268.403(c) and 268.408. The decision shall be based on the preponderance of the evidence. The decision on an appeal from the Board’s final action shall be based on a de novo review, except that the review of the factual findings in a decision by an administrative judge issued pursuant to § 268.108(i) shall be based on a substantial evidence standard of review. If the decision contains a finding of discrimination, appropriate remedy(ies) shall be included and, where appropriate, the entitlement to interest, attorney’s fees or costs shall be indicated. The decision shall reflect the date of its issuance, inform the complainant of his or her civil action rights, and be transmitted to the complainant and the Board by first class mail.
(b) The Office of Federal Operations, on behalf of the Commission, shall issue decisions on appeals of decisions to accept or dismiss a class complaint issued pursuant to § 268.204(d)(7) within 90 days of receipt of the appeal.
(c) A decision issued under paragraph (a) of this section is final within the meaning of § 268.406 unless the Board issues a final decision under paragraph (d) of this section or unless a timely request for reconsideration is filed by a party to the case. A party may request reconsideration within 30 days of receipt of a decision of the Commission, which the Commission in its discretion may grant, if the party demonstrates that:
(1) The appellate decision involved a clearly erroneous interpretation of material fact or law; or
(2) The decision will have a substantial impact on the policies, practices, or operations of the Board.
(d) The Board, within 30 days of receiving a decision of the Commission, may issue a final decision based upon that decision, which shall be final within the meaning of § 268.406.
§ 268.406 Civil action: title VII, Age Discrimination in Employment Act and Rehabilitation Act.
A complainant who has filed an individual complaint, an agent who has filed a class complaint or a claimant who has filed a claim for individual relief pursuant to a class complaint is authorized under title VII, the ADEA and the Rehabilitation Act to file a civil action in an appropriate United States District Court:
(a) Within 90 days of receipt of the final action on an individual or class complaint if no appeal has been filed;
(b) After 180 days from the date of filing an individual or class complaint if an appeal has not been filed and final action has not been taken;
(c) Within 90 days of receipt of the Commission’s final decision on an appeal; or
(d) After 180 days from the date of filing an appeal with the Commission if there has been no final decision by the Commission.
§ 268.407 Civil action: Equal Pay Act.
A complainant is authorized under section 16(b) of the Fair Labor Standards Act (29 U.S.C. 216(b)) to file a civil action in a court of competent jurisdiction within two years or, if the violation is willful, three years of the date of the alleged violation of the Equal Pay Act regardless of whether he or she pursued any administrative complaint processing. Recovery of back wages is limited to two years prior to the date of filing suit, or to three years if the violation is deemed willful; liquidated damages in an equal amount may also be awarded. The filing of a complaint or appeal under this part shall not toll the time for filing a civil action.
§ 268.408 Effect of filing a civil action.
Filing a civil action under §§ 268.406 or 268.407 shall terminate Commission processing of the appeal. If private suit is filed subsequent to the filing of an appeal, the parties are requested to notify the Commission in writing.
Subpart F – Remedies and Enforcement
§ 268.501 Remedies and relief.
(a) When the Board, or the Commission, in an individual case of discrimination, finds that an applicant or an employee has been discriminated against, the Board shall provide full relief which shall include the following elements in appropriate circumstances:
(1) Notification to all employees of the Board in the affected facility of their right to be free of unlawful discrimination and assurance that the particular types of discrimination found will not recur;
(2) Commitment that corrective, curative or preventive action will be taken, or measures adopted, to ensure that violations of the law similar to those found unlawful will not recur;
(3) An unconditional offer to each identified victim of discrimination of placement in the position the person would have occupied but for the discrimination suffered by that person, or a substantially equivalent position;
(4) Payment to each identified victim of discrimination on a make whole basis for any loss of earnings the person may have suffered as a result of the discrimination; and
(5) Commitment that the Board shall cease from engaging in the specific unlawful employment practice found in the case.
(b) Relief for an applicant. (1)(i) When the Board, or the Commission, finds that an applicant for employment has been discriminated against, the Board shall offer the applicant the position that the applicant would have occupied absent discrimination or, if justified by the circumstances, a substantially equivalent position unless clear and convincing evidence indicates that the applicant would not have been selected even absent the discrimination. The offer shall be made in writing. The individual shall have 15 days from receipt of the offer within which to accept or decline the offer. Failure to accept the offer within the 15-day period will be considered a declination of the offer, unless the individual can show that circumstances beyond his or her control prevented a response within the time limit.
(ii) If the offer is accepted, appointment shall be retroactive to the date the applicant would have been hired. Back pay, computed in the manner prescribed in 5 CFR 550.805, shall be awarded from the date the individual would have entered on duty until the date the individual actually enters on duty unless clear and convincing evidence indicates that the applicant would not have been selected even absent discrimination. Interest on back pay shall be included in the back pay computation where sovereign immunity has been waived. The individual shall be deemed to have performed service for the Board during this period for all purposes except for meeting service requirements for completion of a required probationary or trial period.
(iii) If the offer of employment is declined, the Board shall award the individual a sum equal to the back pay he or she would have received, computed in the manner prescribed in 5 CFR 550.805, from the date he or she would have been appointed until the date the offer was declined, subject to the limitation of paragraph (b)(3) of this section. Interest on back pay shall be included in the back pay computation. The Board shall inform the applicant, in its offer of employment, of the right to this award in the event the offer is declined.
(2) When the Board, or the Commission, finds that discrimination existed at the time the applicant was considered for employment but also finds by clear and convincing evidence that the applicant would not have been hired even absent discrimination, the Board shall nevertheless take all steps necessary to eliminate the discriminatory practice and ensure it does not recur.
(3) Back pay under this paragraph (b) for complaints under title VII or the Rehabilitation Act may not extend from a date earlier than two years prior to the date on which the complaint was initially filed by the applicant.
(c) Relief for an employee. When the Board, or the Commission, finds that an employee of the Board was discriminated against, the Board shall provide relief, which shall include, but need not be limited to, one or more of the following actions:
(1) Nondiscriminatory placement, with back pay computed in the manner prescribed in 5 CFR 550.805, unless clear and convincing evidence contained in the record demonstrates that the personnel action would have been taken even absent the discrimination. Interest on back pay shall be included in the back pay computation where sovereign immunity has been waived. The back pay liability under title VII or the Rehabilitation Act is limited to two years prior to the date the discrimination complaint was filed.
(2) If clear and convincing evidence indicates that, although discrimination existed at the time the personnel action was taken, the personnel action would have been taken even absent discrimination, the Board shall nevertheless eliminate any discriminatory practice and ensure it does not recur.
(3) Cancellation of an unwarranted personnel action and restoration of the employee.
(4) Expunction from the Board’s records of any adverse materials relating to the discriminatory employment practice.
(5) Full opportunity to participate in the employee benefit denied (e.g., training, preferential work assignments, overtime scheduling).
(d) The Board has the burden of proving by a preponderance of the evidence that the complainant has failed to mitigate his or her damages.
(e) Attorney’s fees or costs – (1) Awards of attorney’s fees or costs. The provisions of this paragraph relating to the award of attorney’s fees or costs shall apply to allegations of discrimination prohibited by title VII and the Rehabilitation Act. In a decision or final action, the Board, administrative judge, or Commission may award the applicant or employee or reasonable attorney’s fees (including expert witness fees) and other costs incurred in the processing of the complaint.
(i) A finding of discrimination raises a presumption of entitlement to an award of attorney’s fees.
(ii) Any award of attorney’s fees or costs shall be paid by the Board.
(iii) Attorney’s fees are allowable only for the services of members of the Bar and law clerks, paralegals or law students under the supervision of members of the Bar, except that no award is allowable for the services of any employee of the Federal Government.
(iv) Attorney’s fees shall be paid for services performed by an attorney after the filing of a written complaint, provided that the attorney provides reasonable notice of representation to the Board, administrative judge or Commission, except that fees are allowable for a reasonable period of time prior to the notification of representation for any services performed in reaching a determination to represent the complainant. The Board is not required to pay attorney’s fees for services performed during the pre-complaint process, except that fees are allowable when the Commission affirms on appeal an administrative judge’s decision finding discrimination after the Board takes final action by not implementing an administrative judge’s decision. Written submissions to the Board that are signed by the representative shall be deemed to constitute notice of representation.
(2) Amount of awards. (i) When the Board, administrative judge or the Commission determines an entitlement to attorney’s fees or costs, the complainant’s attorney shall submit a verified statement of attorney’s fees (including expert witness fees) and other costs, as appropriate, to the Board or administrative judge within 30 days of receipt of the decision and shall submit a copy of the statement to the Board. A statement of attorney’s fees and costs shall be accompanied by an affidavit executed by the attorney of record itemizing the attorney’s charges for legal services. The Board may respond to a statement of attorney’s fees and costs within 30 days of its receipt. The verified statement, accompanying affidavit and any Board response shall be made a part of the complaint file.
(ii)(A) The Board or administrative judge shall issue a decision determining the amount of attorney’s fees or costs due within 60 days of receipt of the statement and affidavit. The decision shall include a notice of right to appeal to the EEOC along with EEOC Form 573, Notice of Appeal/Petition and shall include the specific reasons for determining the amount of the award.
(B) The amount of attorney’s fees shall be calculated using the following standards: The starting point shall be the number of hours reasonably expended multiplied by a reasonable hourly rate. There is a strong presumption that this amount represents the reasonable fee. In limited circumstances, this amount may be reduced or increased in consideration of the degree of success, quality of representation, and long delay caused by the Board.
(C) The costs that may be awarded are those authorized by 28 U.S.C. 1920 to include: Fees of the reporter for all or any of the stenographic transcript necessarily obtained for use in the case; fees and disbursements for printing and witnesses; and fees for exemplification and copies necessarily obtained for use in the case.
(iii) Witness fees shall be awarded in accordance with the provisions of 28 U.S.C. 1821, except that no award shall be made for a Federal employee who is in a duty status when made available as a witness.
§ 268.502 Compliance with final Commission decisions.
(a) Relief ordered in a final Commission decision, if accepted pursuant to § 268.405(c) as a final decision, or not acted upon the Board within the time periods of § 268.405(c), is mandatory and binding on the Board except as provided in this section. Failure to implement ordered relief shall be subject to judicial enforcement as specified in § 268.503(f).
(b) Notwithstanding paragraph (a) of this section, when the Board requests reconsideration and the case involves removal, separation, or a suspension continuing beyond the date of the request for reconsideration, and when the decision orders retroactive restoration, the Board shall comply with the decision to the extent of the temporary or conditional restoration of the employee to duty status in the position specified by the Commission, pending the outcome of the Board’s request for reconsideration.
(1) Service under the temporary or conditional restoration provisions of this paragraph (b) shall be credited toward the completion of a probationary or trial period or the completion of the service requirement for career tenure, if the Commission upholds its decision after reconsideration.
(2) When the Board requests reconsideration, it may delay the payment of any amounts ordered to be paid to the complainant until after the request for reconsideration is resolved. If the Board delays payment of any amount pending the outcome of the request to reconsider and the resolution of the request (including under § 268.405(d)) requires the Board to make the payment, then the Board shall pay interest from the date of the original appellate decision until payment is made.
(3) The Board shall notify the Commission and the employee in writing at the same time it requests reconsideration that the relief it provides is temporary or conditional and, if applicable, that it will delay the payment of any amounts owed but will pay interest as specified in paragraph (b)(2) of this section. Failure of the Board to provide notification will result in the dismissal of the Board’s request.
(c) When no request for reconsideration or final decision under § 268.405(d) is filed or when a request for reconsideration is denied, the Board shall provide the relief ordered and there is no further right to delay implementation of the ordered relief. The relief shall be provided in full not later than 120 days after receipt of the final decision unless otherwise ordered in the decision.
§ 268.503 Enforcement of final EEOC decisions.
(a) Petition for enforcement. A complainant may petition the Commission for enforcement of a decision issued under the Commission’s appellate jurisdiction. The petition shall be submitted to the Office of Federal Operations. The petition shall specifically set forth the reasons that lead the complainant to believe that the Board is not complying with the decision.
(b) Compliance. On behalf of the Commission, the Office of Federal Operations shall take all necessary action to ascertain whether the Board is implementing the decision of the Commission. If the Board is found not to be in compliance with the decision, efforts shall be undertaken to obtain compliance.
(c) Clarification. On behalf of the Commission, the Office of Federal Operations may, on its own motion or in response to a petition for enforcement or in connection with a timely request for reconsideration, issue a clarification of a prior decision. A clarification cannot change the result of a prior decision or enlarge or diminish the relief ordered but may further explain the meaning or intent of the prior decision.
(d) Referral to the Commission. Where the Director, Office of Federal Operations, is unable to obtain satisfactory compliance with the final decision, the Director shall submit appropriate findings and recommendations for enforcement to the Commission, or, as directed by the Commission, refer the matter to another appropriate agency.
(e) Commission notice to show cause. The Commission may issue a notice to the Chairman of the Board to show cause why there is noncompliance. Such notice may request the Chairman of the Board or a representative to appear before the Commission or to respond to the notice in writing with adequate evidence of compliance or with compelling reasons for noncompliance.
(f) Notification to complainant of completion of administrative efforts. Where the Commission has determined that the Board is not complying with a prior decision, or where the Board has failed or refused to submit any required report of compliance, the Commission shall notify the complainant the right to file a civil action for enforcement of the decision pursuant to title VII, the ADEA, the Equal Pay Act or the Rehabilitation Act and to seek judicial review of the Board’s refusal to implement the ordered relief pursuant to the Administrative Procedures Act, 5 U.S.C. 701 et seq., and the mandamus statute, 28 U.S.C. 1361, or to commence de novo proceedings pursuant to the appropriate statutes.
§ 268.504 Compliance with settlement agreements and final actions.
(a) Any settlement agreement knowingly and voluntarily agreed to by the parties, reached at any stage of the complaint process, shall be binding on both parties. Final action that has not been the subject of an appeal or a civil action shall be binding on the Board. If the complainant believes that the Board has failed to comply with the terms of a settlement agreement or decision, the complainant shall notify the Board’s EEO Programs Director, in writing, of the alleged noncompliance within 30 days of when the complainant knew or should have known of the alleged noncompliance. The complainant may request that the terms of the settlement agreement be specifically implemented or, alternatively, that the complaint be reinstated for further processing from the point processing ceased.
(b) The Board shall resolve the matter and respond to the complainant, in writing. If the Board has not responded to the complainant, in writing, or if the complainant is not satisfied with the Board’s attempt to resolve the matter, the complainant may appeal to the Commission for a determination as to whether the Board has complied with the terms of the settlement agreement or decision. The complainant may file such an appeal 35 days after he or she has served the Board with the allegations of noncompliance, but must file an appeal within 30 days of his or her receipt of the Board’s determination. The complainant must serve a copy of the appeal on the Board and the Board may submit a response to the Commission within 30 days of receiving notice of the appeal.
(c) Prior to rendering its determination, the Commission may request that the parties submit whatever additional information or documentation it deems necessary or may direct that an investigation or hearing on the matter be conducted. If the Commission determines that the Board is not in compliance with a decision or a settlement agreement, and the noncompliance is not attributable to acts or conduct of the complainant, it may order such compliance with the decision or settlement agreement, or, alternatively, for a settlement agreement, it may order that the complaint be reinstated for further processing from the point processing ceased. Allegations that subsequent acts of discrimination violate a settlement agreement shall be processed as separate complaints under § 268.105 or § 268.204, as appropriate, rather than under this section.
§ 268.505 Interim relief.
(a)(1) When the Board appeals and the case involves removal, separation, or suspension continuing beyond the date of the appeal, and when the administrative judge orders retroactive restoration, the Board shall comply with the decision to the extent of the temporary or conditional restoration of the employee to duty status in the position specified in the decision, pending the outcome of the Board appeal. The employee may decline the offer of interim relief.
(2) Service under the temporary or conditional restoration provisions of paragraph (a)(1) of this section shall be credited toward the completion of a probationary or trial period, eligibility for a within-grade increase, or the completion of the service requirement for career tenure, if the Commission upholds the decision on appeal. Such service shall not be credited toward the completion of any applicable probationary or trial period or the completion of the service requirement for career tenure if the Commission reverses the decision on appeal.
(3) When the Board appeals, it may delay the payment of any amount, other than prospective pay and benefits, ordered to be paid to the complainant until after the appeal is resolved. If the Board delays payment of any amount pending the outcome of the appeal and the resolution of the appeal requires the Board to make the payment, then the Board shall pay interest from the date of the original decision until payment is made.
(4) The Board shall notify the Commission and the employee in writing at the same time it appeals that the relief it provides is temporary or conditional and, if applicable, that it will delay the payment of any amounts owed but will pay interest as specified in paragraph (b)(2) of this section. Failure of the Board to provide notification will result in the dismissal of the Board’s appeal.
(5) The Board may, by notice to the complainant, decline to return the complainant to his or her place of employment if it determines that the return or presence of the complainant will be unduly disruptive to the work environment. However, prospective pay and benefits must be provided. The determination not to return the complainant to his or her place of employment is not reviewable. A grant of interim relief does not insulate a complainant from subsequent disciplinary or adverse action.
(b) If the Board files an appeal and has not provided required interim relief, the complainant may request dismissal of the Board’s appeal. Any such request must be filed with the Office of Federal Operations within 25 days of the date of service of the Board’s appeal. A copy of the request must be served on the Board at the same time it is filed with EEOC. The Board may respond with evidence and argument to the complainant’s request to dismiss within 15 days of the date of service of the request.
Subpart G – Matters of General Applicability
§ 268.601 EEO group statistics.
(a) The Board shall establish a system to collect and maintain accurate employment information on the race, national origin, sex and disability(ies) of its employees.
(b) Data on race, national origin and sex shall be collected by voluntary self-identification. If an employee does not voluntarily provide the requested information, the Board shall advise the employee of the importance of the data and of the Board’s obligation to report it. If the employee still refuses to provide the information, the Board must make a visual identification and inform the employee of the data it will be reporting. If the Board believes that information provided by an employee is inaccurate, the Board shall advise the employee about the solely statistical purpose for which the data is being collected, the need for accuracy, the Board’s recognition of the sensitivity of the information and the existence of procedures to prevent its unauthorized disclosure. If, thereafter, the employee declines to change the apparently inaccurate self identification, the Board must accept it.
(c) Subject to applicable law, the information collected under paragraph (b) of this section shall be disclosed only in the form of gross statistics. The Board shall not collect or maintain any information on the race, national origin or sex of individual employees except in accordance with applicable law and when an automated data processing system is used in accordance with standards and requirements prescribed by the Commission to insure individual privacy and the separation of that information from personnel records.
(d) The Board’s system is subject to the following controls:
(1) Only those categories of race and national origin prescribed by the Commission may be used;
(2) Only the specific procedures for the collection and maintenance of data that are prescribed or approved by the Commission may be used.
(e) The Board may use the data only in studies and analyses which contribute affirmatively to achieving the objectives of the Board’s equal employment opportunity program. The Board shall not establish a quota for the employment of persons on the basis of race, color, religion, sex, or national origin.
(f) Data on disabilities shall also be collected by voluntary self-identification. If an employee does not voluntarily provide the requested information, the Board shall advise the employee of the importance of the data and of the Board’s obligation to report it. If an employee who has been appointed pursuant to a special Board program for hiring individuals with a disability still refuses to provide the requested information, the Board must identify the employee’s disability based upon the records supporting the appointment. If any other employee still refuses to provide the requested information or provides information that the Board believes to be inaccurate, the Board should report the employee’s disability status as unknown.
(g) The Board shall report to the Commission on employment by race, national origin, sex and disability in the form and at such times as the Board and Commission shall agree.
§ 268.602 Reports to the Commission.
(a) The Board shall report to the Commission information concerning pre-complaint counseling and the status, processing, and disposition of complaints under this part at such times and in such manner as the Board and Commission shall agree.
(b) The Board shall advise the Commission whenever it is served with a Federal court complaint based upon a complaint that is pending on appeal at the Commission.
(c) The Board shall submit annually for the review and approval of the Commission written equal employment opportunity plans of action. Plans shall be submitted in the format prescribed by the Commission and shall include, but not be limited to:
(1) Provision for the establishment of training and education programs designed to provide maximum opportunity for employees to advance so as to perform at their highest potential;
(2) Description of the qualifications, in terms of training and experience relating to equal employment opportunity, of the principal and operating officials concerned with administration of the Board’s equal employment opportunity program; and
(3) Description of the allocation of personnel and resources proposed by the Board to carry out its equal employment opportunity program.
§ 268.603 Voluntary settlement attempts.
The Board shall make reasonable efforts to voluntarily settle complaints of discrimination as early as possible in, and throughout, the administrative processing of complaints, including the pre-complaint counseling stage. Any settlement reached shall be in writing and signed by both parties and shall identify the claims resolved.
§ 268.604 Filing and computation of time.
(a) All time periods in this part that are stated in terms of days are calendar days unless otherwise stated.
(b) A document shall be deemed timely if it is received or postmarked before the expiration of the applicable filing period, or, in the absence of a legible postmark, if it is received by mail within five days of the expiration of the applicable filing period.
(c) The time limits in this part are subject to waiver, estoppel and equitable tolling.
(d) The first day counted shall be the day after the event from which the time period begins to run and the last day of the period shall be included, unless it falls on a Saturday, Sunday or Federal holiday, in which case the period shall be extended to include the next business day.
§ 268.605 Representation and official time.
(a) At any stage in the processing of a complaint, including the counseling stage under § 268.104, the complainant shall have the right to be accompanied, represented, and advised by a representative of complainant’s choice.
(b) If the complainant is an employee of the Board, he or she shall have a reasonable amount of official time, if otherwise on duty, to prepare the complaint and to respond to Board and EEOC requests for information. If the complainant is an employee of the Board and he designates another employee of the Board as his or her representative, the representative shall have a reasonable amount of official time, if otherwise on duty, to prepare the complaint and respond to Board and EEOC requests for information. The Board is not obligated to change work schedules, incur overtime wages, or pay travel expenses to facilitate the choice of a specific representative or to allow the complainant and representative to confer. The complainant and the representative, if employed by the Board and otherwise in a pay status, shall be on official time, regardless of their tour of duty, when their presence is authorized or required by the Board or the Commission during the investigation, informal adjustment, or hearing on the complaint.
(c) In cases where the representation of a complainant or the Board would conflict with the official or collateral duties of the representative, the Commission or the Board may, after giving the representative an opportunity to respond, disqualify the representative.
(d) Unless the complainant states otherwise in writing, after the Board has received written notice of the name, address and telephone number of a representative for the complainant, all official correspondence shall be with the representative with copies to the complainant. When the complainant designates an attorney as representative, service of all official correspondence shall be made on the attorney and the complainant, but time frames for receipt of material shall be computed from the time of receipt by the attorney. The complainant must serve all official correspondence on the designated representative of the Board.
(e) The complainant shall at all times be responsible for proceeding with the complaint whether or not he or she has designated a representative.
(f) Witnesses who are Board employees shall be in a duty status when their presence is authorized or required by Commission or Board officials in connection with a complaint.
§ 268.606 Joint processing and consolidation of complaints.
Complaints of discrimination filed by two or more complainants consisting of substantially similar allegations of discrimination or relating to the same matter may be consolidated by the Board or the Commission for joint processing after appropriate notification to the parties. Two or more complaints of discrimination filed by the same complainant shall be consolidated by the Board for joint processing after appropriate notification to the complainant. When a complaint has been consolidated with one or more earlier filed complaints, the Board shall complete its investigation within the earlier of 180 days after the filing of the last complaint or 360 days after the filing of the original complaint, except that the complainant may request a hearing from an administrative judge on the consolidated complaints any time after 180 days from the date of the first filed complaint. Administrative judges or the Commission may, in their discretion, consolidate two or more complaints of discrimination filed by the same complainant.
The Board of Governors may delegate authority under this part, to one or more designees.
Subpart H – Prohibition Against Discrimination in Board Programs and Activities Because of Physical or Mental Disability
§ 268.701 Purpose and application.
(a) Purpose. The purpose of this subpart H is to prohibit discrimination on the basis of a disability in programs or activities conducted by the Board.
(b) Application. (1) This subpart H applies to all programs and activities conducted by the Board. Such programs and activities include:
(i) Holding open meetings of the Board or other meetings or public hearings at the Board’s office in Washington, DC;
(ii) Responding to inquiries, filing complaints, or applying for employment at the Board’s office;
(iii) Making available the Board’s library facilities; and
(iv) Any other lawful interaction with the Board or its staff in any official matter with people who are not employees of the Board.
(2) This subpart H does not apply to Federal Reserve Banks or to financial institutions or other companies supervised or regulated by the Board.
§ 268.702 Definitions.
For purposes of this subpart, the following definitions apply:
(a) Auxiliary aids means services or devices that enable persons with impaired sensory, manual, or speaking skills to have an equal opportunity to participate in, and enjoy the benefits of, programs or activities conducted by the Board. For example, auxiliary aids useful for persons with impaired vision include readers, Brailled materials, audio recordings, telecommunications devices and other similar services and devices. Auxiliary aids useful for persons with impaired hearing include telephone handset amplifiers, telephones compatible with hearing aids, telecommunication devices for deaf persons (TDD’s), interpreters, notetakers, written materials, and other similar services and devices.
(b) Complete complaint means a written statement that contains the complainant’s name and address and describes the Board’s alleged discriminatory action in sufficient detail to inform the Board of the nature and date of the alleged violation. It shall be signed by the complainant or by someone authorized to do so on his or her behalf. Complaints filed on behalf of classes or third parties shall describe or identify (by name, if possible) the alleged victims of discrimination.
(c) Facility means all or any portion of buildings, structures, equipment, roads, walks, parking lots, rolling stock or other conveyances, or other real or personal property.
(d) Person with a disability means any person who has a physical or mental impairment that substantially limits one or more major life activities, has a record of such an impairment, or is regarded as having such an impairment. As used in this definition, the phrase:
(1) Physical or mental impairment includes –
(i) Any physiological disorder or condition, cosmetic disfigurement, or anatomical loss affecting one of more of the following body systems: Neurological; musculoskeletal; special sense organs; respiratory, including speech organs; cardiovascular; reproductive; digestive; genitourinary; hemic and lymphatic; skin; and endocrine; or
(ii) Any mental or psychological disorder, such as mental retardation, organic brain syndrome, emotional or mental illness, and specific learning disabilities. The term physical or mental impairment includes, but is not limited to, such diseases and conditions as orthopedic, visual, speech, and hearing impairments, cerebral palsy, epilepsy, muscular dystrophy, multiple sclerosis, cancer, heart disease, diabetes, mental retardation, emotional illness, and drug addiction and alcoholism.
(2) Major life activities includes functions such as caring for one’s self, performing manual tasks, walking, seeing, hearing, speaking, breathing, learning, and working.
(3) Has a record of such an impairment means has a history of, or has been misclassified as having, a mental or physical impairment that substantially limits one or more major life activities.
(4) Is regarded as having an impairment means –
(i) Has a physical or mental impairment that does not substantially limit major life activities but is treated by the Board as constituting such a limitation;
(ii) Has a physical or mental impairment that substantially limits major life activities only as a result of the attitudes of others toward such impairment; or
(iii) Has none of the impairments defined in paragraph (d)(1) of this section but is treated by Board as having such an impairment.
(e) Qualified person with a disability means –
(1) With respect to any Board program or activity under which a person is required to perform services or to achieve a level of accomplishment, a person with a disability who meets the essential eligibility requirements and who can achieve the purpose of the program or activity without modifications in the program or activity that the Board can demonstrate would result in a fundamental alteration in its nature; or
(2) With respect to any other program or activity, a person with a disability who meets the essential eligibility requirements for participation in, or receipt of benefits from, that program or activity.
(3) Qualified individual with a disability is defined for purposes of employment in § 268.203 of this part, which is made applicable to this subpart by § 268.705.
§ 268.703 Notice.
The Board shall make available to employees, applicants for employment, participants, beneficiaries, and other interested persons information regarding the provisions of this subpart and its applicability to the programs and activities conducted by the Board, and make this information available to them in such manner as the Board finds necessary to apprise such persons of the protections against discrimination assured them by this subpart.
§ 268.704 General prohibitions against discrimination.
(a) No qualified individual with a disability shall, on the basis of a disability, be excluded from participation in, be denied the benefits of, or otherwise be subjected to discrimination in any program or activity conducted by the Board.
(b)(1) The Board, in providing any aid, benefit, or service, may not, directly or through contractual, licensing, or other arrangements, on the basis of a disability:
(i) Deny a qualified individual with a disability the opportunity to participate in or benefit from the aid, benefit, or service that is not equal to that provided to others;
(ii) Afford a qualified individual with a disability an opportunity to participate in or benefit from the aid, benefit, or service that is not equal to that afforded others;
(iii) Provide a qualified individual with a disability with an aid, benefit, or service that is not as effective in affording equal opportunity to obtain the same result, to gain the same benefit, or to reach the same level of achievement as that provided to others;
(iv) Provide different or separate aid, benefits, or services to individuals with a disability or to any class of individuals with a disability than is provided to others unless such action is necessary to provide qualified individuals with a disability with aid, benefits, or services that are as effective as those provided to others;
(v) Deny a qualified individual with a disability the opportunity to participate as a member of planning or advisory boards; or
(vi) Otherwise limit a qualified individual with a disability in the enjoyment of any right, privilege, advantage, or opportunity enjoyed by others receiving the aid, benefit, or service.
(2) The Board may not deny a qualified individual with a disability the opportunity to participate in programs or activities that are not separate or different, despite the existence of permissibly separate or different programs or activities.
(3) The Board may not, directly or through contractual or other arrangements, utilize criteria or methods of administration, the purpose or effect of which would:
(i) Subject qualified individuals with a disability to discrimination on the basis of a disability; or
(ii) Defeat or substantially impair accomplishment of the objectives of a program or activity with respect to individuals with a disability.
(4) The Board may not, in determining the site or location of a facility, make selections the purpose or effect of which would:
(i) Exclude individuals with a disability from, deny them the benefits of, or otherwise subject them to discrimination under any program or activity conducted by the Board; or
(ii) Defeat or substantially impair the accomplishment of the objectives or a program or activity with respect to individuals with a disability.
(5) The Board, in the selection of procurement contractors, may not use criteria that subject qualified individuals with a disability to discrimination on the basis of a disability.
(6) The Board may not administer a licensing or certification program in a manner that subjects qualified individuals with a disability to discrimination on the basis of a disability, nor may the Board establish requirements for the programs and activities of licensees or certified entities that subject qualified individuals with a disability to discrimination on the basis of a disability. However, the programs and activities of entities that are licensed or certified by the Board are not, themselves, covered by this subpart.
(c) The exclusion of individuals who do not have a disability from the benefits of a program limited by Federal statute or Board order to individuals with a disability or the exclusion of a specific class of individuals with a disability from a program limited by Federal statute or Board order to a different class of individuals with a disability is not prohibited by this subpart.
(d) The Board shall administer programs and activities in the most integrated setting appropriate to the needs of qualified individuals with a disability.
§ 268.705 Employment.
No qualified individual with a disability shall, on the basis of a disability, be subjected to discrimination in employment under any program or activity conducted by the Board. The definitions, requirements and procedures of § 268.203 of this part shall apply to discrimination in employment in federally conducted programs or activities.
§ 268.706 Program accessibility: Discrimination prohibited.
Except as otherwise provided in § 268.707 of this subpart, no qualified individual with a disability shall, because the Board’s facilities are inaccessible to or unusable by individuals with a disability, be denied the benefits of, be excluded from participation in, or otherwise be subjected to discrimination under any program or activity conducted by the Board.
§ 268.707 Program accessibility: Existing facilities.
(a) General. The Board shall operate each program or activity so that the program or activity, when viewed in its entirety, is readily accessible to and usable by individuals with a disability. This paragraph (a) does not:
(1) Necessarily require the Board to make each of its existing facilities accessible to and usable by individuals with a disability; or
(2) Require the Board to take any action that it can demonstrate would result in a fundamental alteration in the nature of a program or activity or in undue financial and administrative burdens. In those circumstances where the Board believes that the proposed action would fundamentally alter the program or activity or would result in undue financial and administrative burdens, the Board has the burden of proving that compliance with this paragraph (a) would result in such alterations or burdens. The decision that compliance would result in such alterations or burdens shall be made by the Board of Governors or their designee after considering all Board resources available for use in the funding and operation of the conducted program or activity, and must be accompanied by a written statement of the reasons for reaching that conclusion. If an action would result in such an alteration or such burdens, the Board shall take any other action that would not result in such an alteration or such burdens but would nevertheless ensure that individuals with a disability receive the benefits and services of the program or activity.
(b) Methods. The Board may comply with the requirements of this subpart H through such means as redesign of equipment, reassignment of services to accessible buildings, assignment of aides to individuals with a disability, home visits, delivery of service at alternate accessible sites, alteration of existing facilities and construction of new facilities, use of accessible rolling stock, or any other methods that result in making its programs or activities readily accessible to and usable by individuals with a disability. The Board is not required to make structural changes in existing facilities where other methods are effective in achieving compliance with this section. In choosing among available methods for meeting the requirements of this section, the Board shall give priority to those methods that offer programs and activities to qualified individuals with a disability in the most integrated setting appropriate.
(c) Time period for compliance. The Board shall comply with any obligations established under this section as expeditiously as possible.
§ 268.708 Program accessibility: New construction and alterations.
Each building or part of a building that is constructed or altered by, on behalf of, or for the use of the Board shall be designed, constructed, or altered so as to be readily accessible to and usable by individuals with a disability.
§ 268.709 Communications.
(a) The Board shall take appropriate steps to ensure effective communication with applicants, participants, personnel of other Federal entities, and members of the public.
(1) The Board shall furnish appropriate auxiliary aids where necessary to afford an individual with a disability an equal opportunity to participate in, and enjoy the benefits of, a program or activity conducted by the Board.
(i) In determining what type of auxiliary aid is necessary, the Board shall give primary consideration to the requests of the individual with a disability.
(ii) The Board need not provide individually prescribed devices, readers for personal use or study, or other devices of a personal nature.
(2) Where the Board communicates with employees and others by telephone, telecommunication devices for deaf persons (TDD’s) or equally effective telecommunication systems shall be used.
(b) The Board shall ensure that interested persons, including persons with impaired vision or hearing, can obtain information as to the existence and location of accessible services, activities, and facilities.
(c) The Board shall provide signage at a primary entrance to each of its inaccessible facilities, directing users to a location at which they can obtain information about accessible facilities. The international symbol for accessibility shall be used at each primary entrance of an accessible facility.
(d) This section does not require the Board to take any action that would result in a fundamental alteration in the nature of a program or activity or in undue financial and administrative burdens. In those circumstances where the Board believes that the proposed action would fundamentally alter the program or activity or would result in undue financial and administrative burdens, the Board has the burden of proving that compliance with section 268.709 would result in such alterations or burdens. The determination that compliance would result in such alteration or burdens must be made by the Board of Governors or their designee after considering all Board resources available for use in the funding and operation of the conducted program or activity, and must be accompanied by a written statement of the reasons for reaching that conclusion. If an action required to comply with this section would result in such an alteration or such burdens, the Board shall take any other action that would not result in such an alteration or such burdens but would nevertheless ensure that, to the maximum extent possible, individuals with a disability receive the benefits and services of the program or activity.
§ 268.710 Compliance procedures.
(a) Applicability. Except as provided in paragraph (b) of this section, this section, rather than subpart B and § 268.203 of this part, applies to all allegations of discrimination on the basis of a disability in programs or activities conducted by the Board.
(b) Employment complaints. The Board shall process complaints alleging discrimination in employment on the basis of a disability in accordance with subparts A through G of this part.
(c) Responsible official. The Office of Diversity and Inclusion Programs Director (“Programs Director”) shall be responsible for coordinating implementation of this section.
(d) Filing the complaint – (1) Who may file. Any person who believes that he or she has been subjected to discrimination prohibited by this subpart may, personally or by his or her authorized representative, file a complaint of discrimination with the Programs Director.
(2) Confidentiality. The Programs Director shall not reveal the identity of any person submitting a complaint, except when authorized to do so in writing by the complainant, and except to the extent necessary to carry out the purposes of this subpart , including the conduct of any investigation, hearing, or proceeding under this subpart.
(3) When to file. Complaints shall be filed within 180 days of the alleged act of discrimination. The Programs Director may extend this time limit for good cause shown. For the purpose of determining when a complaint is timely filed under this paragraph (d), a complaint mailed to the Board shall be deemed filed on the date it is postmarked. Any other complaint shall be deemed filed on the date it is received by the Board.
(4) How to file. Complaints may be delivered or mailed to the Administrative Governor, the Chief Operating Officer, the Programs Director, the Federal Women’s Program Manager, the Hispanic Employment Program Coordinator, or the People with Disabilities Program Coordinator. Complaints should be sent to the Programs Director, Office of Diversity and Inclusion, Board of Governors of the Federal Reserve System, 20th and C Street NW, Washington, DC 20551. If any Board official other than the Programs Director receives a complaint, he or she shall forward the complaint to the Programs Director.
(e) Acceptance of complaint. (1) The Programs Director shall accept a complete complaint that is filed in accordance with paragraph (d) of this section and over which the Board has jurisdiction. The Programs Director shall notify the complainant of receipt and acceptance of the complaint.
(2) If the Programs Director receives a complaint that is not complete, he or she shall notify the complainant, within 30 days of receipt of the incomplete complaint, that additional information is needed. If the complainant fails to complete the complaint within 30 days of receipt of this notice, the Programs Director shall dismiss the complaint without prejudice.
(3) If the Programs Director receives a complaint over which the Board does not have jurisdiction, the Programs Director shall notify the complainant and shall make reasonable efforts to refer the complaint to the appropriate government entity.
(f) Investigation/conciliation. (1) Within 180 days of the receipt of a complete complaint, the Programs Director shall complete the investigation of the complaint, attempt informal resolution of the complaint, and if no informal resolution is achieved, the Programs Director shall forward the investigative report to the Chief Operating Officer.
(2) The Programs Director may request Board employees to cooperate in the investigation and attempted resolution of complaints. Employees who are requested by the Programs Director to participate in any investigation under this section shall do so as part of their official duties and during the course of regular duty hours.
(3) The Programs Director shall furnish the complainant with a copy of the investigative report promptly after completion of the investigation and provide the complainant with an opportunity for informal resolution of the complaint.
(4) If a complaint is resolved informally, the terms of the agreement shall be reduced to writing and made a part of the complaint file, with a copy of the agreement provided to the complainant. The written agreement may include a finding on the issue of discrimination and shall describe any corrective action to which the complainant has agreed.
(g) Letter of findings. (1) If an informal resolution of the complaint is not reached, the Programs Director shall transmit the complaint file to the Chief Operating Officer. The Chief Operating Officer shall, within 180 days of the receipt of the complete complaint by the Programs Director, notify the complainant of the results of the investigation in a letter sent by certified mail, return receipt requested, containing:
(i) Findings of fact and conclusions of law;
(ii) A description of a remedy for each violation found;
(iii) A notice of right of the complainant to appeal the letter of findings under paragraph (k) of this section; and
(iv) A notice of right of the complainant to request a hearing.
(2) If the complainant does not file a notice of appeal or does not request a hearing within the times prescribed in paragraph (h)(1) and (j)(1) of this section, the Programs Director shall certify that the letter of findings under this paragraph (g) is the final decision of the Board at the expiration of those times.
(h) Filing an appeal. (1) Notice of appeal, with or without a request for hearing, shall be filed by the complainant with the Programs Director within 30 days of receipt from the Chief Operating Officer of the letter of findings required by paragraph (g) of this section.
(2) If the complainant does not request a hearing, the Programs Director shall notify the Board of Governors of the appeal by the complainant and that a decision must be made under paragraph (k) of this section.
(i) Acceptance of appeal. The Programs Director shall accept and process any timely appeal. A complainant may appeal to the Administrative Governor from a decision by the Programs Director that an appeal is untimely. This appeal shall be filed within 15 calendar days of receipt of the decision from the Programs Director.
(j) Hearing. (1) Notice of a request for a hearing, with or without a request for an appeal, shall be filed by the complainant with the Programs Director within 30 days of receipt from the Chief Operating Officer of the letter of findings required by paragraph (g) of this section. Upon a timely request for a hearing, the Programs Director shall request that the Board of Governors, or its designee, appoint an administrative law judge to conduct the hearing. The administrative law judge shall issue a notice to the complainant and the Board specifying the date, time, and place of the scheduled hearing. The hearing shall be commenced no earlier than 15 calendar days after the notice is issued and no later than 60 days after the request for a hearing is filed, unless all parties agree to a different date.
(2) The hearing, decision, and any administrative review thereof shall be conducted in conformity with 5 U.S.C. 554-557. The administrative law judge shall have the duty to conduct a fair hearing, to take all necessary actions to avoid delay, and to maintain order. He or she shall have all powers necessary to these ends, including (but not limited to) the power to:
(i) Arrange and change the dates, times, and places of hearings and prehearing conferences and to issue notice thereof;
(ii) Hold conferences to settle, simplify, or determine the issues in a hearing, or to consider other matters that may aid in the expeditious disposition of the hearing;
(iii) Require parties to state their positions in writing with respect to the various issues in the hearing and to exchange such statements with all other parties;
(iv) Examine witnesses and direct witnesses to testify;
(v) Receive, rule on, exclude, or limit evidence;
(vi) Rule on procedural items pending before him or her; and
(vii) Take any action permitted to the administrative law judge as authorized by this subpart G or by the provisions of the Administrative Procedures Act (5 U.S.C. 554-557).
(3) Technical rules of evidence shall not apply to hearings conducted pursuant to this paragraph (j), but rules or principles designed to assure production of credible evidence and to subject testimony to cross-examination shall be applied by the administrative law judge wherever reasonably necessary. The administrative law judge may exclude irrelevant, immaterial, or unduly repetitious evidence. All documents and other evidence offered or taken for the record shall be open to examination by the parties, and opportunity shall be given to refute facts and arguments advanced on either side of the issues. A transcript shall be made of the oral evidence except to the extent the substance thereof is stipulated for the record. All decisions shall be based upon the hearing record.
(4) The costs and expenses for the conduct of a hearing shall be allocated as follows:
(i) Employees of the Board shall, upon the request of the administrative law judge, be made available to participate in the hearing and shall be on official duty status for this purpose. They shall not receive witness fees.
(ii) Employees of other Federal agencies called to testify at a hearing, at the request of the administrative law judge and with the approval of the employing agency, shall be on official duty status during any absence from normal duties caused by their testimony, and shall not receive witness fees.
(iii) The fees and expenses of other persons called to testify at a hearing shall be paid by the party requesting their appearance.
(iv) The administrative law judge may require the Board to pay travel expenses necessary for the complainant to attend the hearing.
(v) The Board shall pay the required expenses and charges for the administrative law judge and court reporter.
(vi) All other expenses shall be paid by the parties incurring them.
(5) The administrative law judge shall submit in writing recommended findings of fact, conclusions of law, and remedies to the complainant and the Programs Director within 30 days, after the receipt of the hearing transcripts, or within 30 days after the conclusion of the hearing if no transcripts are made. This time limit may be extended with the permission of the Programs Director.
(6) Within 15 calendar days after receipt of the recommended decision of the administrative law judge, the complainant may file exceptions to the recommended decision with the Programs Director. On behalf of the Board, the Programs Director may, within 15 calendar days after receipt of the recommended decision of the administrative law judge, take exception to the recommended decision of the administrative law judge and shall notify the complainant in writing of the Board’s exception. Thereafter, the complainant shall have 10 calendar days to file reply exceptions with the Programs Director. The Programs Director shall retain copies of the exceptions and replies to the Board’s exception for consideration by the Board. After the expiration of the time to reply, the recommended decision shall be ripe for a decision under paragraph (k) of this section.
(k) Decision. (1) The Programs Director shall notify the Board of Governors when a complaint is ripe for decision under this paragraph (k). At the request of any member of the Board of Governors made within 3 business days of such notice, the Board of Governors shall make the decision on the complaint. If no such request is made, the Administrative Governor, or the Chief Operating Officer if he or she is delegated the authority to do so, shall make the decision on the complaint. The decision shall be made based on information in the investigative record and, if a hearing is held, on the hearing record. The decision shall be made within 60 days of the receipt by the Programs Director of the notice of appeal and investigative record pursuant to paragraph (h)(1) of this section or 60 days following the end of the period for filing reply exceptions set forth in paragraph (j)(6) of this section, whichever is applicable. If the decision-maker under this paragraph (k) determines that additional information is needed from any party, the decision-maker shall request the information and provide the other party or parties an opportunity to respond to that information. The decision-maker shall have 60 days from receipt of the additional information to render the decision on the appeal. The decision-maker shall transmit the decision by letter to all parties. The decision shall set forth the findings, any remedial actions required, and the reasons for the decision. If the decision is based on a hearing record, the decision-maker shall consider the recommended decision of the administrative law judge and render a final decision based on the entire record. The decision-maker may also remand the hearing record to the administrative law judge for a fuller development of the record.
(2) The Board shall take any action required under the terms of the decision promptly. The decision-maker may require periodic compliance reports specifying:
(i) The manner in which compliance with the provisions of the decision has been achieved;
(ii) The reasons any action required by the final Board decision has not been taken; and
(iii) The steps being taken to ensure full compliance.
(3) The decision-maker may retain responsibility for resolving disputes that arise between parties over interpretation of the final Board decision, or for specific adjudicatory decisions arising out of implementation.
PART 269 – POLICY ON LABOR RELATIONS FOR THE FEDERAL RESERVE BANKS
§ 269.1 Definition of a labor organization.
When used in this part, the term labor organization means any lawful organization of any kind, or any employee representation group, which exists for the purpose, in whole or in part, of dealing with any Federal Reserve Bank concerning grievances, personnel policies and practices, or other matters affecting the working conditions of its employees, but the term shall not include any organization:
(a) Which asserts the right to strike against the government of the United States, the Board of Governors of the Federal Reserve System, or any Federal Reserve Bank, or to assist or participate in any such strike, or which imposes a duty or obligation to conduct, assist or participate in any such strike; or
(b) Which fails to agree to refrain from seeking or accepting support from any organization which employs coercive tactics affecting any Federal Reserve Bank’s operations; or
(c) Which advocates the overthrow of the constitutional form of the government of the United States; or
(d) Which discriminates with regard to the terms or conditions of membership because of race, color, sex, creed, age or national origin.
§ 269.2 Membership in a labor organization.
(a) Any employee of a Federal Reserve Bank (hereinafter referred to as “Bank”) is free to join and assist any existing labor organization or to participate in the formation of a new labor organization, or to refrain from any such activities except that officers and their administrative or confidential assistants, managers and other supervisory personnel, secretaries to all such persons and all employees engaged in Bank personnel work shall not be represented by any labor organization.
(b) The rights described in paragraph (a) of this section for employees do not extend to participation in the management of a labor organization, or acting as a representative of any such organization, where such participation or activity would conflict with law or the duties of an employee.
(c) Notwithstanding anything stated in paragraph (a) of this section, professional employees of a Bank shall not be represented by a labor organization which represents other employees of the Bank unless a majority of the professional employees eligible to vote specifically elect to be represented by such labor organization. However, the professional employees of a Bank may, if they so choose, be represented by a separate labor organization of their own, or by no labor organization at all.
(d) Notwithstanding anything stated in paragraph (a) of this section, the guards of a Bank shall not be members of a labor organization which represents other categories of employees of the Bank. However, the guards of a Bank may, if they so choose, be represented by a separate labor organization of their own, or by no labor organization at all.
§ 269.3 Recognition of a labor organization and its relationship to a Federal Reserve Bank.
(a) Any labor organization shall be recognized as the exclusive bargaining representative of the employees in an appropriate unit of a Bank when that organization has been selected by the employees in said unit pursuant to the procedure set forth in § 269.5. A unit may be established in a Bank on any basis which will ensure a clear and identifiable community of interest among the employees concerned, and will promote effective relationships and the efficiency of the Bank’s operations, but no unit shall be established solely on the basis of the extent to which a labor organization or employees in the proposed unit may have sought organization.
(b) When a labor organization has been recognized as the exclusive representative of employees in an appropriate unit, it shall be entitled to act for and to negotiate agreements in good faith covering all employees in the unit, and it shall be responsible for representing the interests of all such employees without discrimination and without regard to whether they are members of that labor organization or not, provided that nothing in this Policy shall prevent an employee from adjusting his or her grievance without the intervention of the recognized labor organization. The labor organization shall be given notice of the adjustment and a reasonable opportunity to object on the sole ground that it is in conflict with the terms of the collective bargaining agreement.
(c) A Bank, through appropriate officials, shall have the obligation to meet at reasonable times with representatives of a recognized labor organization to negotiate, in good faith, with respect to personnel policies and practices affecting working conditions for employees, provided that they do not involve matters in any of the following areas:
(1) The purposes and functions of the Bank; the compensation of and hours worked by employees; any classification system used to evaluate positions; the budget of the Bank; the retirement system; any insurance or other benefit plans; internal security operations; maintenance of the efficiency of Bank operations including the determination of work methods; the right to contract out; the determination as to manpower requirements; use of technology and organization of work; and action to meet emergency situations;
(2) Management rights as to the direction of employees, including hiring, promotion, transfer, classification, assignment, layoffs, retention, suspension, demotion, discipline and discharge, provided that on matters involving the procedures to be followed by a Bank for the exercise of its rights under this subparagraph, a Bank shall, upon request, discuss such procedures with a recognized labor organization, but shall not be required to negotiate for an agreement as to them;
(3) All Bank matters specifically governed by applicable laws or regulations.
(d) At the time it requests an election to be held, any labor organization seeking recognition shall submit to a Bank a roster of its officers and representatives, a copy of its constitution and bylaws, and a statement of its objectives.
(e) Subject to the provisions of § 269.8, the exclusive recognition of a labor organization shall not preclude any employee, regardless of labor organization membership, from bringing matters of personal concern not governed by a collective bargaining agreement to the attention of appropriate officers, managers or supervisory personnel in accordance with applicable law, rule, regulation, or established Bank policy, or from choosing his or her own representative in such matters.
§ 269.4 Determination of appropriate bargaining unit.
(a) If a labor organization asserts in writing to a Bank that it holds cards requesting a representation election signed by at least thirty percent (30%) of the employees in a unit which that organization considers to be an appropriate bargaining unit, the labor organization and the Bank shall each designate a representative who together shall request the American Arbitration Association (hereinafter referred to as “Association”) to submit to them from its National Panel of Professional Labor Arbitrators a list of seven (7) impartial, qualified professional arbitrators. The two designated representatives shall meet promptly and, by alternately striking names from the list, arrive at the remaining person who, together with the two representatives, shall constitute a Special Tribunal to rule on the labor organization’s request for an election. The impartial arbitrator shall always act as the Chairperson of any Special Tribunal duly constituted under this section.
(b) In the absence of an agreement between the labor organization and the Bank on the appropriate unit, the Tribunal shall investigate the facts, hold hearings if necessary, and issue a decision as to the appropriateness of the unit for the purposes of conducting a representation election for exclusive recognition and as to related issues submitted for consideration. The expenses for this proceeding, including the fees of the association and of the arbitrator, shall be borne equally by the labor organization and the Bank. If either the Bank or the labor organization should disagree with the Special Tribunal’s decision, the party in disagreement may appeal within thirty (30) calendar days to the Federal Reserve System Labor Relations Panel referred to in § 269.11, and the decision of the System Panel shall be final and binding on the parties.
(c) If there is any dispute as to whether a labor organization holds cards signed by at least thirty percent (30%) of the employees in a unit claimed by a labor organization as appropriate or subsequently determined by the Special Tribunal as appropriate, the dispute shall be resolved by the Chairperson of the Special Tribunal, acting as a single impartial arbitrator. The expenses of such procedure, including the impartial arbitrator’s fee, shall be borne equally by the labor organization and the Bank. The decision of the Chairperson of the Special Tribunal shall be final and binding and shall not be subject to appeal to the Federal Reserve System Labor Relations Panel.
§ 269.5 Elections.
(a) Once there has been a final determination of the existence of an appropriate bargaining unit under the procedure in § 269.4, and a showing by a labor organization that it has cards signed by at least thirty percent (30%) of the employees in such unit requesting a representation election, an election shall be ordered by the Special Tribunal. A labor organization shall be recognized as the exclusive bargaining representative of the unit if it is selected by a majority of the employees in the unit actually voting.
(b) The election shall be held under the auspices of the Association and shall be subject to its election rules and regulations. However, if there should be any conflict between such rules and regulations and the provisions of this Policy, the latter shall prevail. The fees charged by the Association for its election service shall be borne equally by the labor organization and the Bank.
(c) An election to determine whether a labor organization should continue as the exclusive bargaining representative of a particular unit shall be held when requested by a petition or other bona fide showing by at least thirty percent (30%) of the employees of that unit. Any dispute as to whether thirty percent (30%) of the employees requested such an election shall be resolved by the same procedure as that set forth in § 269.4(b). The election shall be held under the auspices of the Association in the same manner described in paragraph (b) of this section. The recognition of a labor organization as the exclusive bargaining representative of a unit shall be revoked if a majority of the employees in the unit who actually vote signify approval of such revocation.
(d) Only one election may be held in any unit in a twelve (12) month period to determine whether a labor organization should become, or continue to be recognized as, the exclusive representative of the employees in that unit.
(e) Upon receipt of a request for an election from a labor organization under § 269.4(a), it shall be incumbent on the Bank, labor organization and all others to refrain from any conduct, action or policy that interferes with or restrains employees from making a fair and free choice in selecting or rejecting a bargaining representative consistent with the right of the Bank, labor organization or employees to exercise privileges of free speech in the expression of any views, argument or opinion, or the dissemination thereof, whether in oral, written, printed, graphic or visual form.
(f) The Special Tribunal shall hear and decide any post-election objections of a Bank or labor organization filed with it claiming that a violation of paragraph (e) of this section has improperly affected the outcome of the election. Such objections must be filed with the Special Tribunal no later than five (5) business days after the date of election. In the event of such violation by a Bank, labor organization or other individuals or organizations which the Special Tribunal finds sufficient to have prejudiced the outcome of an election, appropriate remedial action shall be taken in the form of setting aside the election results and ordering a new election, provided, however, that an appeal from the order of the Special Tribunal may be taken within thirty (30) calendar days to the Federal Reserve System Labor Relations Panel by either the affected Bank or labor organization. The ruling of the System Panel shall be final and binding. Neither the Special Tribunal nor the Federal Reserve System Labor Relations Panel shall have the authority to direct a Bank to recognize a labor organization as the exclusive collective bargaining representative without a valid election being held in which a majority of the employees actually voting have so designated such labor organization.
(g) The Special Tribunal and the Federal Reserve System Labor Relations Panel will adhere to any rules and regulations promulgated by the Board of Governors for the administration of the provisions of paragraphs (e) and (f) of this section.
§ 269.6 Unfair labor practices.
(a) It shall be an unfair labor practice for a Bank to: (1) Interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in § 269.2(a); (2) dominate or interfere with the formation or administration of any labor organization, or to contribute financial or other support to it; (3) encourage or discourage membership in any labor organization by discrimination in regard to hire or tenure of employment or any term or condition of employment; (4) refuse to bargain collectively with the representatives of its employees subject to the provisions of § 269.3 (b) and (c).
(b) It shall be an unfair labor practice for a labor organization, its agents or representatives to: (1) Restrain or coerce employees in the exercise of the rights guaranteed in § 269.2(a); (2) cause or attempt to cause a Bank to Discriminate against an employee in violation of paragraph (a)(3) of this section; (3) refuse to bargain collectively with a Bank, provided the labor organization is the exclusive representative of a unit of employees.
(c) Notwithstanding anything previously stated in this section, the expression of any view, argument or opinion, or the dissemination thereof, whether in oral, written, printed, graphic or visual form, shall not constitute or be evidence of an unfair labor practice, if such expression contains no threat of reprisal or force, or promise of benefit.
(d) The Federal Reserve System Labor Relations Panel will adhere to the rules and regulations promulgated by the Board of Governors for the prevention and remedy of the unfair labor practices listed herein.
§ 269.7 Approval of agreement and required contents.
Any agreement entered into with a labor organization as the exclusive representative of employees in a unit must be approved by the President of the Bank or a designated officer representative. All agreements with labor organizations shall also be subject to the requirement that the administration of all matters covered by the agreement shall be governed by the provisions of applicable laws and Federal Reserve System rules and regulations, and the agreement shall at all times be applied subject to such laws and regulations.
§ 269.8 Grievance procedures.
(a) Subject to the provisions of § 269.3(b), an agreement entered into with a labor organization as the exclusive representative of employees in a unit may contain a grievance procedure, applicable only to employees in such unit and which shall be the exclusive means for a labor organization and/or an employee to obtain resolution of a grievance arising under such agreement.
(b) Grievance procedures established by a labor agreement may also include provisions for arbitration of unresolved grievances by a tripartite panel under the Voluntary Labor Arbitration Rules of the Association with the impartial arbitrator selected by the Bank and labor organization representatives on the arbitration panel to be the Chairperson. In such event, arbitration shall extend only to grievances which involve the interpretation and application of specific provisions of a labor agreement and not to any other matters or to changes in or proposed changes in the agreement. Arbitration may only be invoked by labor organization on behalf of individual employees with their concurrence.
§ 269.9 Mediation of negotiation impasses.
In the event of an impasse in negotiations between the parties for a collective bargaining agreement, either the labor organization or the Bank may request the appointment of a qualified neutral person as a mediator to assist the parties in attempting to resolve the impasse. The parties will meet promptly with the mediator, and all matters discussed, as well as any documents submitted, shall not be publicly divulged for any reason. The cost of the mediator shall be borne equally by the parties.
§ 269.10 Time for internal labor organization business, consultations and negotiations.
Solicitation of memberships, dues or other internal labor organization business shall be conducted during the nonduty hours of the employees concerned. Officially requested or approved consultation between management executives and representatives of a labor organization shall, whenever practicable, be conducted on official time, but the President or a duly authorized officer of a Bank may require that negotiations with a labor organization be conducted during the nonduty hours of the Bank.
§ 269.11 Federal Reserve System Labor Relations Panel.
There shall be established a Federal Reserve System Labor Relations Panel, which shall consist of three members: one member of the Board of Governors of the Federal Reserve System, who shall be Chairperson of the Panel, and two public members. Each member shall be selected by the Board of Governors; provided, however, that the public members shall not have any present or past affiliation with the Federal Reserve System. Initially, one of the two public members shall be appointed for a term of two years, and the other for a term of three years. Thereafter, each public member shall be appointed for a term of three years, except that in the case of an unexpired term of a former member, the successor shall be appointed to fill such unexpired term. Upon the expiration of their term of office, public members may continue to serve until their successors are appointed and have qualified. A public member may be removed by the Board only upon notice and hearing, and only for neglect of duty or malfeasance in office. The Panel shall be responsible for the duties assigned to it as set forth in this Policy.
§ 269.12 Amendment.
This policy may be amended upon appropriate legal notice to all Federal Reserve Banks and labor organizations recognized, or seeking recognition, at any such Bank under this Policy. In no instance shall an amendment be applied retroactively.
PART 269a – DEFINITIONS
§ 269a.1 Party.
The term Party means any person, employee, group of employees, labor organization, or bank as defined in § 269.2 of this chapter (a) filing a charge, petition, application, or rquest pursuant to these rules and regulations, (b) named as a party in a charge, complaint, petition, application, or request, or (c) whose intervention has been permitted or directed by the investigator, the hearing officer, or the panel, as the case may be, but nothing shall be construed to prevent the panel, or any officer designated by it, from limiting any party’s participation in the proceedings to the extent of his interest as determined by the investigator, hearing officer, or panel.
§ 269a.2 Party in interest.
The term party in interest means any person, employee, group of employees, labor organization, or bank that will be or is directly affected by the resolution of any charge, complaint, petition, application, or request presented to or being considered by the panel or its designated officers. Any (a) labor organization (not a charging party nor a charged party) attempting to organize the employees of a bank or that is or was recently a party to a collective bargaining agreement with a bank named as a party in a charge, complaint, petition, application, or a request, or (b) bank (not a charging party nor a charged party) that acts as the employer of any person named in a charge, complaint, petition, or request shall be deemed to be also a party in interest and shall be entitled to notification and service of all relevant procedures and documents.
§ 269a.3 Intervenor.
The term intervenor means the party in a proceeding whose intervention has been permitted or directed by the panel or its designated officer.
§ 269a.4 Investigator.
The term investigator means the officer designated by the panel to investigate and determine whether or not a complainant has established a prima facie case, as defined in § 269b.210 of this subchapter.
§ 269a.5 Hearing officer.
The term hearing officer means the officer designated by the panel to conduct hearings pursuant to § 269b.420 et seq. of this subchapter and whose duties and power are enumerated in § 269b.442 of this subchapter.
PART 269b – CHARGES OF UNFAIR LABOR PRACTICES
Charges of Violations of § 269.6 (of the Policy)
§ 269b.110 Charges.
A charge that any bank or labor organization, or agents or representatives of a bank or labor organization, has engaged in or is engaging in any act prohibited under § 269.6 of the policy or has failed to take any action required by § 269.6 of the policy may be filed by any party in interest, or its representative, within 60 days after the alleged violations or within 60 days after the charging party has become or should have become aware of the alleged violation.
§ 269b.111 Filing of charges.
Any charge pursuant to § 269b.110 shall be in writing and signed. An original and three copies of such charge, together with one copy for each charged party named, shall be transmitted to the Secretary of the Federal Reserve System Labor Relations Panel, 20th Street and Constitution Avenue NW., Washington, DC 20551. Within 5 days after receipt of a properly filed charge that meets the formal requirements set forth in § 269b.112, the Secretary will cause a copy of such charge to be served on each party against whom the charge is made and upon all other potential parties in interest.
§ 269b.112 Contents of the charge.
A charge shall contain the following:
(a) The full name, address, and telephone number of the person, bank, or labor organization making the charge (hereinafter referred to as the charging party) and of the person signing the charge who shall state also his relation to or his capacity with the complainant. Where discrimination is alleged, all known discriminatees shall be named;
(b) The name, address, and telephone number of the bank or labor organization against whom the charge is made (hereinafter referred to as the respondent) and of any parties in interest;
(c) A clear and concise statement of the facts constituting the alleged unfair labor practice, including the time and place of occurrence of the particular acts, and a statement of the portion or portions of the policy alleged to have been violated. A charge shall not incorporate by reference affidavits or other documents submitted in support of the charge;
(d) A statement of the relief sought;
(e) A statement of any other remedies invoked for the redress of the alleged violations of the policy and the results, if any, of their invocation. If the issue in such charge is subject to an established grievance procedure, the complainant must irrevocably elect, prior to the completion of the first applicable step of the grievance procedure, whether he will invoke the grievance procedure or whether he will invoke the unfair labor practice procedures of the panel. A charge which is withdrawn or rejected by the panel as defective prior to the institution of any formal proceedings by the panel shall not prejudice the filing of a grievance on the same matter, unless the parties otherwise so provide;
(f) A declaration by the person signing the charge, that its contents are true and correct to the best of his knowledge and belief, such declaration to be subject to applicable provisions of the Federal Criminal Code (18 U.S.C. 1001).
§ 269b.113 Withdrawal or settlement.
A charge may be withdrawn or settlement of the matter may be reached without consent of the panel at any time. In connection with any such settlement the parties in interest shall prepare and sign a settlement agreement which shall record that the settlement is mutually satisfactory, shall stipulate any occurrences which constituted unfair labor practices and shall set forth the terms of the settlement.
§ 269b.120 Answer to a charge.
The respondent shall file an answer to the charge with the Secretary of the panel within 15 days after service of the charge. Upon application and for good cause shown, the panel may extend the time within which the answer shall be filed. One copy of the answer shall be served on each party with proof of service furnished to the Secretary, and the original, which shall be signed, and four copies shall be filed with the Secretary.
§ 269b.121 Contents of answer.
The answer shall contain:
(a) A specific admission or denial, and where appropriate, explanation thereof; or if the respondent is without knowledge of the allegation, he shall so state and such statement shall operate as a denial. Admissions or denials may be to all or part of an allegation but shall be responsive to the substance of the allegation;
(b) A specified, detailed statement of any affirmative defense;
(c) A clear and concise statement of the facts and matters of law relied upon constituting the grounds of defense.
Preliminary Investigation
§ 269b.210 Referral to National Center for Dispute Settlement.
(a) Within 5 days after the answer to the charge has been or should have been filed, the panel may refer the matter, accompanied by a general or particularized request, to the National Center for Dispute Settlement of the American Arbitration Association (hereinafter referred to as the Center) to make an investigation and to determine whether the charging party has established a prima facie case.
(b) For the purposes of this part, a prima facie case means a case where allegations of an unfair labor practice that have been presented give reasonable cause to believe that such practice may have occurred, but where evidentiary proceedings are necessary for determination of whether the allegations are substantiated.
(c) The Center may use its own personnel or may hire individuals on a contract basis to conduct such investigations. The panel may consolidate or sever proceedings conducted pursuant to this part.
(d) Any party may request the Center or other appointing authority to withdraw appointment of the investigator within 3 days after designation on the basis of previously demonstrated personal bias, conflict of interest, or prejudice. Such a request shall set forth in detail the matter alleged to constitute grounds for disqualification. Denial of a request by the Center or other appointing authority shall be substantiated in writing and transmitted to the requesting party, and shall be submitted to the panel together with the complete report of the investigator required in § 269b.240(b).
§ 269b.220 Priority; acceleration of proceedings.
(a) A charge of “refusal to bargain” or a charge that, if sustained, would require the setting aside of an election or the conduct of a new election shall be given priority.
(b) The parties, individually or jointly, may petition the panel at any time to invoke immediately the formal hearing procedures set forth in § 269b.410. They may also petition the panel to entertain the matter itself without prior investigation and/or without the formal hearing procedure set forth in § 269b.410. The panel is empowered also on its own motion to so accelerate disposition of the case.
(c) Before accelerating a case the panel may utilize whatever proceedings it may deem appropriate and timely to allow parties in interest to comment on the proposed course of action.
§ 269b.230 Assessment of costs; posting of bond.
(a) The panel shall normally bear the costs of an investigation conducted pursuant to § 269b.210, but the panel may require that the charging party, the respondent, and/or other parties in interest or intervenors, or several of them, shall bear a portion or all of the costs therefor. With respect to each case where an investigation is directed by the panel, the charging party may, in the discretion of the panel, be required to file a cost bond, or equivalent security, of $500, unless the panel fixes a different amount.
(b) Among the circumstances that may be the basis for payment of costs by other than the panel are cases where a clearly spurious charge has been filed or where the filing of a charge was necessary to redress the respondent’s flagrant misconduct.
(c) The bond or equivalent security shall be to secure the payment of the costs of the investigation as may be assessed by the panel. In those cases where the panel does not assess such costs, the bond posted and the cost thereof shall be reimbursed to the charging party. The panel may require also the posting of a cost bond by the respondent or other party to the proceeding, who shall be entitled to reimbursement of the cost of the bond in the event that no costs of investigation are assessed upon such party by the panel.
(d) Notification of the panel’s decision that a bond shall be required shall be effected by registered mail, such notice to advise of the amount of the bond required and the period by which it shall be posted.
(e) Absent good cause shown, failure of a party to file timely such cost bond or equivalent security may be ground for dismissal or other administrative sanctions deemed appropriate by the Panel.
§ 269b.240 The investigation.
(a) The purpose of the investigation is (1) to ascertain, analyze, and apply the relevant facts in order to determine whether or not formal proceedings are warranted and (2) to assist, by mediation and other appropriate means, the parties to reach a mutually satisfactory resolution of the issues as an alternative to the hearing process. In so doing, the investigator is not limited to the allegations set forth in the charge and may advise the charging party to amend his charge. In addition, he should adduce facts pertaining to the remedy as well as to the alleged violation. Investigation should also adduce facts pertaining to the jurisdiction of the panel and the timeliness of the charge. If the charge is untimely on its face, no investigation shall be required except to determine whether or not attending circumstances warrant waiving the time requirements, set forth in § 269b.110. The investigator may request the appearance of parties and witnesses, may cause, the production of relevant document, and may take or cause depositions to be taken.
(b) When the investigation has been completed, the Center shall issue a written determination whether the charging party has established a prima facie case, whether the charge was timely filed, and whether the charge is within the jurisdiction of the panel, and reasons therefor. This determination shall be served upon the panel and all parties. The panel shall receive also the complete report of the investigator.
Appeal From the Center’s Determination
§ 269b.310 Appeal rights.
Where the investigator has found that a prima facie case does not exist, a party, including an intervenor but excluding the respondent or other parties having the same interest as the respondent, within 5 days after receiving the Center’s determination may petition the panel to set aside the determination and to cause formal proceedings, set forth in § 269b.410, to be invoked. The panel may grant such petition only on grounds that the Center or its agents were arbitrary, capricious, or acted contrary to law or the policy, or that the investigator’s determination is clearly erroneous. The filing requirements for such a petition shall be the same as that for the filing of a charge, as set forth in § 269b.111.
§ 269b.320 Proceedings before the panel.
The panel shall issue its decision within 15 days after the receipt of the petition provided for in § 269b.310 or by the end of that period shall announce that it will require briefs by the parties. Such announcement shall specify the requirements as to contents of the briefs, and the time for submission, which shall vary to meet the circumstances of the matter appealed. The panel, at such time, may also require oral argument or the production of evidence or may so order oral argument and/or the production of evidence after examination of the briefs. The panel shall issue its final decision within 20 days after briefs have been filed, evidence has been produced, or oral argument has been conducted.
Formal Proceedings
§ 269b.410 Notice of hearing.
If formal proceedings are found to be needed under the above procedures, and if no satisfactory settlement has been reached within 5 days after finding that a prima facie case exists, the Secretary of the panel, unless there is cause for granting an extension of time, shall issue and cause to be served upon the parties a notice of hearing. The panel shall appoint, pursuant to § 269b.420, a hearing officer to hold a hearing and issue a report to the panel containing findings of fact, conclusions of law, and recommendations including, where appropriate, remedial action to be taken and notices to be posted. The Secretary shall furnish to the hearing officer the investigator’s report and all other relevant information in the panel’s possession.
§ 269b.420 Designation of hearing officer.
(a) The panel, absent special circumstances, shall employ the center to select the hearing officer to conduct the hearing at a site most convenient to the parties and witnesses. The individual who performed the investigation, pursuant to § 269b.210, shall be barred from acting as a hearing officer on the same matter, unless all parties in interest agree to his participation. The selection of the hearing officer, to the extent practicable, shall be done with the concurrence of the parties.
(b) Any party may request the hearing officer, at any time following his designation and before the filing of his decision, to withdraw on grounds of previously demonstrated personal bias, conflict of interest, or prejudice by filing with him promptly upon the discovery of the alleged facts a timely affidavit setting forth in detail the matters alleged to constitute grounds for disqualification. If, in the opinion of the hearing officer, such affidavit is filed with due diligence and is sufficient on its face, he shall forthwith disqualify himself and withdraw from the proceeding. If he does not so withdraw, he shall so rule upon the record, stating the grounds for his ruling and proceed with the hearing, or, if the hearing has closed, he shall proceed with the issuance of his decision, and his ruling shall be subject to the same review by the panel that is given to the rest of his decision.
(c) The costs of conducting the hearing and of the hearing officer shall be borne by the panel. Witness fees and expenses shall be paid by the party at whose instance the witnesses appear.
§ 269b.430 Contents of notice of hearing.
The notice of hearing shall include:
(a) A copy of the charge;
(b) A statement of the time of the hearing which shall be not less than 10 days after service of the notice of hearing, except in extraordinary circumstances. All charges involving a “refusal to bargain” allegation and all charges, if sustained, that would require the setting aside of an election, or the conducting of a new election shall be given first priority;
(c) A statement of the place and nature of hearing;
(d) A statement of the legal authority and jurisdiction under which the hearing is to be held;
(e) A reference to the particular section of the policy and rules and regulations of this chapter involved;
(f) A copy of the determination, if any, made causing the invocation of these formal proceedings.
§ 269b.440 Conduct of hearing.
(a) Hearing shall be public unless otherwise ordered by the hearing officer or the panel. An official reporter shall make the only official transcript of such proceedings.
(b) Copies of the official transcript will not be provided to the parties, but may be purchased by arrangement with the official reporter or with such costs as the panel may otherwise assess, or may be examined in the offices of the panel and/or the hearing officer subject to such conditions as the panel may prescribe.
(c) A charging party in asserting that an unfair labor practice has been committed within the meaning of the policy, shall have the burden of proving the allegations of the charge, or the amended charge, by a preponderance of the evidence.
(d) The parties shall not be bound by the technical rules of evidence, but the hearing officer, may, in his discretion, exclude any evidence or offer of proof if he finds that its probative value is substantially outweighed by the risk that its admission will either necessitate undue consumption of time or create substantial danger of undue prejudice or confusion.
§ 269b.441 Rights of parties.
(a) Any party shall have the right to appear at such hearing in person, by counsel, or by other representative, to call, examine, and cross-examine witnesses as may be required for a full and true disclosure of the facts, and to introduce into the record documentary or other relevant evidence, except that the participation of any party shall be limited to the extent permitted by the hearing officer. Five copies of such documentary evidence shall be submitted unless the hearing officer permits a reduced number for good cause shown.
(b) Any party shall be entitled, upon request, to a reasonable period at the close of the hearing for oral argument, which shall be included in the stenographic report of the hearing.
(c) Any party shall be entitled to file a brief to the hearing officer within 10 days after the close of the hearing, but no reply brief may be filed except upon special permission of the hearing officer. A party filing a brief must file the original and one copy with the hearing officer along with proof of service of a copy of such brief to all parties. Requests for extension of time to file briefs must be made to the hearing officer who must receive the request at least 3 days prior to the expiration of time fixed for filing of briefs and notice of the request shall be served simultaneously on all other parties, and proof of service shall be furnished. If a request for extension of time is based on the need for a copy of the transcript prior to filing a brief, such request must be made to the hearing officer before the hearing is closed and must be ruled on prior to the close of the hearing.
§ 269b.442 Duties and powers of the hearing officer.
The hearing officer shall inquire fully into the facts as to whether the respondent has engaged or is engaging in an unfair labor practice as set forth in the charge or the amended charge. The hearing officer shall have authority, with respect to cases assigned to him, between the time he is designated and transfer of the case to the panel, subject to the rules and regulations in this subchapter, to:
(a) Grant requests for attendance of witnesses and production of documents;
(b) Rule upon petitions to quash requests made pursuant to paragraph (a) of this section;
(c) Call, examine, and cross-examine parties and witnesses as may be required for a full and true disclosure of the facts and to introduce into the record documentary or other evidence;
(d) Rule upon offers of proof and receive relevant evidence;
(e) Take or cause depositions to be taken whenever the ends of justice would be served thereby;
(f) Limit lines of questioning or testimony which are repetitive, cumulative, or irrelevant;
(g) Regulate the course of the hearing and, if appropriate or necessary, exclude persons or counsel from the hearing for contemptuous conduct and strike all related testimony of witnesses refusing to answer any proper question;
(h) Hold such prehearing conferences as may be necessary to expedite proceedings and hold such other conferences for the settlement or simplification of the issues by consent of the parties or upon his own motion;
(i) Dispose of procedural requests, motions, or similar matters which shall be made part of the record of the proceeding, including motions referred to the hearing officer by the panel, and motions to amend pleadings, also to recommend dismissal of cases or portions thereof, and to order hearings reopened or, upon motion, consolidated prior to issuance of the hearing officer’s report and recommendations;
(j) Request the parties at any time during the hearing to state their respective positions concerning any issue in the case or theory in support thereof;
(k) Require the parties, if necessary, to file written briefs in support of their positions;
(l) Take any other action necessary under the foregoing and authorized by the rules and regulations in this subchapter.
§ 269b.443 Motions before or after a hearing.
All motions (including motions for intervention), other than those made during a hearing, shall be made in writing to the Secretary of the panel, shall briefly state the relief sought, shall set forth the grounds for such motion, and shall be accompanied 3 days thereafter by proof of service on all parties. Answering statements, if any, must be served on all parties and the original thereof, together with two copies and statement of service, shall be filed with the Secretary within 5 days after service of the moving papers, unless the Secretary directs otherwise. Motions may be referred to the hearing officer whose ruling shall be made upon the record or the motion may be stayed until such time as the panel reviews the hearing officer’s report and recommendations.
§ 269b.444 Objection to conduct of hearing; other motions during hearing.
Any objection with respect to the conduct of the hearing, including any objection to the introduction of evidence, or any other motion during the course of the hearing, including a request to allow intervention, may be stated orally or in writing accompanied by a short statement of the grounds for such objection, and included in the record. No such objection shall be deemed waived by further participation in the hearing and such objection shall not stay the conduct of the hearing. Automatic exceptions will be allowed to all adverse rulings and shall be considered by the panel upon its review of the hearing officer’s report and recommendations, if exception to the ruling is included in a statement of exceptions submitted to the panel after the close of the hearing, subject to the requirements of § 269b.520.
§ 269b.450 Submission of hearing officer’s report to the panel.
After the close of the hearing, and the receipt of briefs, if any, the hearing officer shall prepare a report and recommendations, containing findings of fact, conclusions of law, including judgments as to the credibility of witnesses where appropriate, and the reasons or basis therefor, and recommendations as to the disposition of the case, and, where appropriate, including the remedial action and notices to be posted. After he has caused his report and recommendations to be served promptly on all parties to the proceeding, he shall transfer the case to the panel including his report and recommendations and the complete record. Such submission shall be made within 20 days after the close of the hearing and the receipt of briefs, if any, unless otherwise extended by the panel. The record shall include the charge, notice of hearing, service sheet, motions, rulings, orders, official transcript of the hearing, stipulations, objections, depositions, documentary evidence, exhibits, and any briefs or other documents submitted to the parties.
Panel Review of Hearing Officer’s Report and Recommended Decision
§ 269b.510 Review by panel.
The panel shall review the report and recommendations of each hearing officer, the record of the hearing, and such other documents as enumerated in § 269b.450, whether or not any party files an appeal, unless the parties file with the panel a settlement agreement within 10 days after service of the hearing officer’s report upon them. In the course of such review, the panel may require oral argument or written briefs on any relevant issue within such time limits as the panel may prescribe, and may reopen the record in any case and receive further evidence.
§ 269b.520 Exceptions to hearing officer’s report.
(a) Any party may file with the panel exceptions to the hearing officer’s report and recommendations, and any ruling contained therein, if made within 10 days after service of the report and recommendations. The Panel may, for good cause shown, extend the time for filing such exceptions upon written request, with copies served simultaneously on the other parties, received not later than 3 days before the date exceptions are due. Requests for oral argument will not be considered unless filed with exceptions.
(b) Any exception to a ruling, finding, conclusion, or recommendation which is not specifically urged shall be deemed to have been waived, although the panel may on its own motion rule upon any matter in the report and recommendations.
(c) Any exception which fails to comply with the following requirements may be disregarded:
(1) The exceptions shall set forth specifically the questions of procedure, fact, law, or policy to which exceptions are taken;
(2) The exceptions shall identify the part of the hearing officer’s report to which objection is made;
(3) The exceptions shall designate by precise citation of page the portions of the record relied on, shall state the grounds for the exceptions, and shall include the citation of authorities unless set forth in a supporting brief.
(d) Any brief in support of exceptions shall contain no matter not included within the scope of the exceptions and shall contain in the order indicated, the following:
(1) A concise statement of the case containing all that is material to the consideration of the questions presented;
(2) A specification of the questions involved and to be argued;
(3) The argument, presenting clearly the points of fact and law relied on in support of the position taken on each question, with specific page reference to the transcript and the legal or other material relied on.
(e) Answering briefs to the exceptions, and cross-exceptions and supporting briefs will not be permitted without special leave of the panel. Requests for oral argument will not be considered unless accompanying such petition for special leave.
(f) Five copies of exceptions and briefs must be filed with the panel along with a statement of service of copies of the exceptions and supporting briefs upon all parties.
§ 269b.530 Briefs in support of the hearing officer’s report.
Any party may file a brief in support of the hearing officer’s report and recommendations subject to the same time limits and rules pertaining to filing exceptions and briefs in support thereof, as set forth in § 269b.520.
§ 269b.540 Action by the panel.
After considering the hearing officer’s report and recommendations, the record, any other documents, any exceptions filed, and any oral argument permitted, the panel shall issue its written decision. Upon finding that the respondent is engaging in or has engaged in an unfair labor practice, the panel shall order the respondent to cease and desist from such conduct and may require the respondent to take such affirmative corrective action as the panel deems appropriate to effectuate the Policy. Such action by the panel may include, but shall not be limited to, orders to provide back pay, provide reinstatement, set aside an election, bargain, and award recognition. Upon finding no violation of the policy, the panel shall dismiss the case. The panel’s decision and order setting forth the remedial action, if any, required shall be conspicuously posted by the parties.
Compliance
§ 269b.610 Procedures.
Where remedial action is ordered or provided for in a settlement agreement, a report to the panel that such action has been taken and that compliance with the decision and orders of the panel has been effected shall be submitted within the period of time specified in the panel’s decision. The panel is empowered to utilize whatever administrative procedures it deems necessary to ascertain compliance.
§ 269b.620 Action by panel.
In any case where it is found, after a hearing, that the respondent has failed to comply with the final decision and order of the panel, the panel shall be empowered to take whatever action may be appropriate and shall expect the full cooperation of the Board of Governors of the Federal Reserve System in obtaining such compliance. Among the actions that may be taken by the panel against a noncomplying respondent labor organization, after a show cause hearing, may be suspension of that labor organization’s checkoff privileges or recognition as exclusive bargaining representative for such period of time as determined by the panel.
General Rules
§ 269b.710 Rules to be liberally construed.
(a) Whenever the panel finds that unusual circumstances or good cause exist and that strict compliance with the terms of the rules and regulations in this subchapter will work an injustice or unfairness, it shall construe the rules and regulations in this subchapter liberally to prevent injustices and to effectuate the purposes of the policy.
(b) When an act is required or allowed to be done at or within a specified time, the panel may at any time, in its discretion, order the period altered where it shall be manifest that strict adherence will work surprise or injustice or interfere with the proper effectuation of the policy.
§ 269b.720 Computation of time for filing papers.
In computing any period of time prescribed by or allowed by the panel, the day of the act, event, or default after which the designated period of time begins to run, shall not be included. The last day of the period so computed is to be included, unless it is a Saturday, Sunday, or the applicable local legal holiday in which event the period shall run until the end of the next day which is neither a Saturday, Sunday, or legal holiday. When the period of time prescribed, or allowed, is seven days or less, intermediate Saturdays, Sundays, and legal holidays shall be excluded from the computations. When the rules and regulations in this subchapter require the filing of any paper, such document must be received by the panel or the officer or agent designated by it to receive such matter before the close of business of the last day of the time limit, if any, for such filing or extension of the time that may have been granted.
§ 269b.730 Number of copies; form.
Except as otherwise provided in the regulations in this subchapter, any documents or papers shall be filed with four copies in addition to the original. All matters filed shall be printed, typed, or otherwise legibly duplicated; carbon copies of typewritten matter will be accepted if they are clearly legible.
§ 269b.731 Signature.
The original of each document filed shall be signed by the party or by an attorney or representative of record for the party, or by an officer of the party and shall contain the address and telephone number of the person signing it.
§ 269b.740 Service of pleading and other paper; statement of service.
(a) Method of service. Notices of hearings, decisions, orders, and other papers may be served personally or by registered or certified mail or by telegraph.
(b) Upon whom served. Unless otherwise provided in the rules and regulations in this subchapter, all papers except complaints, petitions, and papers relating to requests for appearance or production of documents, shall be served upon all counsel of record and upon parties not represented by counsel or by their agents designated by them or by law and upon the panel, or its designated officers or agents, where appropriate. Service upon such counsel or representative shall constitute service upon the party, but a copy also shall be transmitted to the party.
(c) Proof of service. The party or person serving the papers or process shall submit simultaneously to the panel or its designated representative, or the individual conducting the proceeding, a written statement of such service. Failure to file a statement of service shall not affect the validity of the service. Proof of service, except where otherwise provided, shall be required only if subsequent to the receipt of a statement of service a question is raised with respect to proper service.
§ 269b.750 Requests for appearance of witnesses and production of documents.
Parties may request appearance of witnesses and production of documents by filing application therefor, depending upon the stage of the proceedings at which the request is made, with the officer conducting the investigation or hearing, or with the panel. Such application shall name and identify the witnesses or documents sought and shall briefly state the need for such appearance or production. The officer with whom such request is filed shall rule upon each such request and the record of the proceeding shall contain a record of that ruling and the basis therefor. The record shall also contain a statement of reasons for any request for the appearance of witnesses or production of documents initiated by a presiding officer.
SUBCHAPTER B – FEDERAL OPEN MARKET COMMITTEE
PART 270 – OPEN MARKET OPERATIONS OF FEDERAL RESERVE BANKS
Regulations Relating to Open Market Operations of Federal Reserve Banks
§ 270.1 Authority.
This part is issued by the Federal Open Market Committee (the “Committee”) pursuant to authority conferred upon it by sections 12A and 14 of the Federal Reserve Act (12 U.S.C. 263, 355).
§ 270.2 Definitions.
(a) The term obligations means Government securities, U.S. agency securities, bankers’ acceptances, bills of exchange, cable transfers, bonds, notes, warrants, debentures, and other obligations that Federal Reserve banks are authorized by law to purchase and sell.
(b) The term Government securities means direct obligations of the United States (i.e., U.S. bonds, notes, certificates of indebtedness, and Treasury bills) and obligations fully guaranteed as to principal and interest by the United States.
(c) The term U.S. agency securities means obligations that are direct obligations of, or are fully guaranteed as to principal and interest by, any agency of the United States.
(d) The term System Open Market Account means the obligations acquired pursuant to authorizations and directives issued by the Committee and held on behalf of all Federal Reserve banks.
§ 270.3 Governing principles.
As required by section 12A of the Federal Reserve Act, the time, character, and volume of all purchases and sales of obligations in the open market by Federal Reserve banks are governed with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the country.
§ 270.4 Transactions in obligations.
(a) Each Federal Reserve bank shall engage in open market operations under section 14 of the Federal Reserve Act only in accordance with this part and with the authorizations and directives issued by the Committee from time to time, and no Reserve bank shall decline to engage in open market operations as directed by the Committee.
(b) Transactions for the System Open Market Account shall be executed by a Federal Reserve bank selected by the Committee. The participations of the several Federal Reserve banks in such account and in the profits and losses on transactions for the account shall be allocated in accordance with principles determined by the Committee from time to time.
(c) In accordance with such limitations, terms, and conditions as are prescribed by law and in authorizations and directives issued by the Committee, the Reserve bank selected by the Committee is authorized and directed –
(1) To buy and sell Government securities and U.S. agency securities in the open market for the System Open Market Account, and to exchange maturing securities with the issuer;
(2) To buy and sell banker’s acceptances in the open market for its own account;
(3) To buy Government securities, U.S. agency securities, and banker’s acceptances of the kinds described above, under agreements for repurchase of such obligations, in the open market for its own account; and
(4) To buy and sell foreign currencies in the form of cable transfers in the open market for the System Open Market Account and to maintain for such account reciprocal currency arrangements with foreign banks among those designated by the Board of Governors of the Federal Reserve System under § 214.5 of this chapter (Regulation N).
(d) The Federal Reserve banks are authorized and directed to engage in such other operations as the Committee may from time to time determine to be reasonably necessary to the effective conduct of open market operations and the effectuation of open market policies.
PART 271 – RULES REGARDING AVAILABILITY OF INFORMATION
Subpart A – General
§ 271.1 Authority, purpose, and scope.
(a) Authority and purpose. This part establishes mechanisms for carrying out the Federal Open Market Committee’s (Committee) statutory responsibilities relating to the disclosure, production, or withholding of information to facilitate the Committee’s interactions with the public. In this regard, the Committee has determined that the Committee, or its delegees, may disclose exempt information of the Committee, in accordance with the procedures set forth in this part, whenever it is necessary or appropriate to do so in the exercise of any of the Committee’s authorities, including but not limited to authority granted to the Committee in the Freedom of Information Act, 5 U.S.C. 552, and section 12A of the Federal Reserve Act, 12 U.S.C. 263. The Committee has determined that all such disclosures made in accordance with the rules and procedures specified in this part are authorized by law. This part also sets forth the categories of information made available to the public, the procedures for obtaining information and records, the procedures for limited release of exempt information, and the procedures for protecting confidential business information.
(b) Scope. (1) Subpart A of this part contains general provisions and definitions of terms used in this part.
(2) Subpart B of this part implements the Freedom of Information Act (FOIA) (5 U.S.C. 552).
(3) Subpart C of this part sets forth the procedures with respect to subpoenas, orders compelling production, and other process.
§ 271.2 Definitions.
For purposes of this part:
(a) Board means the Board of Governors of the Federal Reserve System established by the Federal Reserve Act of 1913 (38 Stat. 251).
(b) Committee means the Chair of the Committee or the Chair’s designee.
(c) Exempt information means information that is exempt from disclosure pursuant to § 271.15(a).
(d) Federal Reserve Bank or Reserve Bank means one of the District Banks authorized by the Federal Reserve Act, 12 U.S.C. 222, including any branch of any such bank.
(e) Records of the Committee or Committee records include all information coming into the possession of the Committee or any member thereof or of any officer, employee, or agent of the Committee, the Board, or any Federal Reserve Bank, in the performance of duties for, or pursuant to the direction of, the Committee. These records include rules, statements, decisions, minutes, memoranda, letters, reports, transcripts, accounts, charts, and other written material.
(f) Search means:
(1) A reasonable search of such records of the Committee as seem likely in the particular circumstances to contain information of the kind requested.
(2) As part of the Committee’s search for responsive records, the Committee is not obligated to conduct any research, create any document, or modify an electronic program or automated information system.
(g) Working day means any day except Saturday, Sunday, or a legal Federal holiday.
§ 271.3 Certification of record; service of subpoenas or other process.
(a) Certification of record. The secretary of the Committee may certify the authenticity of any Committee record, or any copy of such record, for any purpose, and for or before any duly constituted Federal or state court, tribunal, or agency.
(b) Service of subpoenas or other process. Subpoenas or other judicial or administrative process demanding access to any Committee records or making any claim against the Committee or against Committee members or staff in their official capacity shall be addressed to and served upon the Secretary of the Committee, Federal Open Market Committee, 20th Street & Constitution Avenue NW, Washington, DC 20551. The Committee does not accept service of process on behalf of any employee in respect of purely private legal disputes.
§ 271.4 Prohibition against disclosure.
Except as provided in this part or as otherwise authorized, no officer, employee, or agent of the Board or any Reserve Bank shall disclose or permit the disclosure of any exempt information of the Committee to any person other than Board or Reserve Bank officers, employees, or agents properly entitled to such information in the performance of duties for, or pursuant to the direction of, the Committee.
Subpart B – Published Information and Records Available to Public; Procedures for Requests
§ 271.10 Published information.
(a)
(1) A description of its organization;
(2) Statements of the general course and method by which its functions are channeled and determined, including the nature and requirements of procedures;
(3) Rules of procedure;
(4) Substantive rules, interpretations of general applicability, and statements of general policy formulated and adopted by the Committee;
(5) Every amendment, revision, or repeal of the foregoing in paragraphs (a)(1) through (4) of this section; and
(6) Other notices as required by law.
(b) Publicly available information – (1) Electronic reading room. Information relating to the Committee, including its open market operations, is made publicly available on the websites of the Board and the Federal Reserve Banks, as well as in the Committee’s electronic reading room, https://www.federalreserve.gov/foia/fomc/readingrooms.htm#rr1. The Committee also makes the following records available in its electronic reading room.
(i) Final opinions, including concurring and dissenting opinions, as well as final orders and written agreements, made in the adjudication of cases.
(ii) Statements of policy and interpretations adopted by the Committee that are not published in the
(iii) Administrative staff manuals and instructions to staff that affect the public.
(iv) Copies of all records, regardless of form or format –
(A) That have been released to any person under § 271.11; and
(B)(1) That because of the nature of their subject matter, the Committee has determined have become or are likely to become the subject of subsequent requests for substantially the same records; or
(2) That have been requested three or more times.
(v) A general index of the records referred to in paragraph (b)(1)(iv) of this section.
(2) Inspection in electronic format at Reserve Banks. The Committee may determine that certain classes of publicly available filings shall be made available for inspection in electronic format only at the Reserve Bank where those records are filed.
(3) Privacy protection. The Committee may delete identifying details from any public record to prevent a clearly unwarranted invasion of personal privacy.
§ 271.11 Records available to the public upon request.
(a) Procedures for requesting records. (1) Requesters are encouraged to submit requests electronically using the online request form located at www.federalreserve.gov/secure/forms/FOMCForm.aspx. Alternatively, requests may be submitted in writing to the Secretary of the Committee, Federal Open Market Committee, 20th Street and Constitution Avenue NW, Washington, DC 20551; or sent by facsimile to the Secretary of the Committee, (202) 452-2921. Clearly mark the request FREEDOM OF INFORMATION ACT REQUEST.
(2) A request may not be combined with any other request or FOIA appeal.
(b) Contents of request. A request must include:
(1) The requester’s name, address, daytime telephone number, and an email address if available.
(2) A description of the records that enables the Committee to identify and produce the records with reasonable effort and without unduly burdening or significantly interfering with any of the Committee’s operations. Whenever possible, the request should include specific information about each record sought, such as the date, title or name, author, recipient, and subject matter of the record.
(3) A statement agreeing to pay the applicable fees. If the information requested is not intended for a commercial use (as defined in § 271.16(d)(1)) and the requester seeks a reduction or waiver of fees because he or she is either a representative of the news media, an educational institution, or a noncommercial scientific institution, the requester should include the information called for in § 271.16(g)(2).
(c) Perfected and defective requests. (1) The Committee will consider the request to be perfected on the date the secretary of the Committee receives a request that contains all of the information required by paragraphs (b)(1) through (3) of this section.
(2) The Committee need not accept or process a request that does not reasonably describe the records requested or that does not otherwise comply with the requirements of this section.
(3) The Committee may return a defective request, specifying the deficiency. The requester may submit a corrected request, which will be treated as a new request.
§ 271.12 Processing requests.
(a) Receipt of requests. Upon receipt of any request that satisfies the requirements set forth in § 271.11, the Committee shall assign the request to the appropriate processing schedule, pursuant to paragraph (b) of this section. The date of receipt for any request, including one that is addressed incorrectly or that is referred to the Committee by another agency or by a Federal Reserve Bank, is the date the secretary of the Committee actually receives the request.
(b) Multitrack processing. (1) The Committee provides different levels of processing for categories of requests under this section.
(i) Requests for records that are readily identifiable by the Committee and that have already been cleared for public release or can easily be cleared for public release may qualify for simple processing.
(ii) All other requests shall be handled under normal processing procedures, unless expedited processing has been granted pursuant to paragraph (c) of this section.
(2) The Committee will make the determination whether a request qualifies for simple processing. A requester may contact the Committee to learn whether a particular request has been assigned to simple processing. If the request has not qualified for simple processing, the requester may limit the scope of the request in order to qualify for simple processing by contacting the Committee in writing, by letter or email, or by telephone.
(c) Expedited processing. (1) A request for expedited processing may be made at any time. A request for expedited processing must be clearly labeled “Expedited Processing Requested.” The Committee will process requests and appeals on an expedited basis whenever it is determined that they involve:
(i) Circumstances in which the lack of expedited processing could reasonably be expected to pose an imminent threat to the life or physical safety of an individual; or
(ii) An urgency to inform the public about an actual or alleged Federal Government activity, if made by a person who is primarily engaged in disseminating information.
(2) A requester who seeks expedited processing must submit a statement, certified to be true and correct, explaining in detail the basis for making the request for expedited processing. For example, under paragraph (c)(1)(ii) of this section, a requester who is not a full-time member of the news media must establish that the requester is a person whose primary professional activity or occupation is information dissemination, though it need not be the requester’s sole occupation. Such a requester also must establish a particular urgency to inform the public about the Government activity involved in the request – one that extends beyond the public’s right to know about Federal Government activity generally. The existence of numerous articles published on a given subject can be helpful in establishing the requirement that there be an “urgency to inform” the public on the topic. As a matter of administrative discretion, the Committee may waive the formal certification requirement.
(3) Within 10 calendar days of receipt of a request for expedited processing, the Committee will notify the requester of its decision on the request. A denial of expedited processing may be appealed to the Committee in accordance with § 271.14. The Committee will respond to the appeal within 10 working days of receipt of the appeal.
(d) Priority of responses. The Committee will normally process requests in the order they are received in the separate processing tracks, except when expedited processing is granted in which case the request will be processed as soon as practicable.
(e) Time limits. The time for response to requests shall be 20 working days from when a request is perfected. Exceptions to the 20-day time limit are only as follows:
(1) In the case of expedited treatment under paragraph (c) of this section, the Committee shall give the expedited request priority over non-expedited requests and shall process the expedited request as soon as practicable.
(2) Where the running of such time is suspended for a requester to address fee requirements pursuant to § 271.16(c)(1) or (2).
(3) In unusual circumstances, as defined in 5 U.S.C. 552(a)(6)(B), the Committee may:
(i) Extend the 20-day time limit for a period of time not to exceed 10 working days, where the Committee has provided written notice to the requester setting forth the reasons for the extension and the date on which a determination is expected to be dispatched; and
(ii) Extend the 20-day time limit for a period of more than 10 working days where the Committee has provided the requester with an opportunity to modify the scope of the FOIA request so that it can be processed within that time frame or with an opportunity to arrange an alternative time frame for processing the original request or a modified request, and has notified the requester that the Committee’s FOIA Public Liaison is available to assist the requester for purposes of this paragraph (e)(3)(ii) and in the resolution of any disputes between the requester and the Committee, and of the requester’s right to seek dispute resolution services from the Office of Government Information Services.
§ 271.13 Responses to requests.
(a) When the Committee receives a perfected request, it will conduct a reasonable search of Committee records in its possession on the date the Committee’s search begins and will review any responsive information it locates.
(b) If a request covers documents that were created by, obtained from, or classified by another agency, the Committee may refer the request for such documents to that agency for a response and inform the requester promptly of the referral. To the extent there is confidential supervisory information, as that term is defined by 12 CFR 261.2(b), contained within Committee records, disclosure of such information will be handled in consultation with the Board.
(c) In responding to a request, the Committee will withhold information under this section only if –
(1) The Committee reasonably foresees that disclosure would harm an interest protected by an exemption described in § 271.15(a); or
(2) Disclosure is prohibited by law.
(d) The Committee will take reasonable steps necessary to segregate and release nonexempt information.
(e) The Committee shall notify the requester of:
(1) The Committee’s determination of the request;
(2) The reasons for the determination;
(3) An estimate of the amount of information withheld, if any. An estimate is not required if the amount of information is otherwise indicated by deletions marked on records that are disclosed in part or if providing an estimate would harm an interest protected by an applicable exemption;
(4) The right of the requester to seek assistance from the Committee’s FOIA Public Liaison; and
(5) When an adverse determination is made, the Committee will advise the requester in writing of that determination and will further advise the requester of:
(i) The right of the requester to appeal any adverse determination within 90 calendar days after the date of the determination, as specified in § 271.14;
(ii) The right of the requester to seek dispute resolution services from the Committee’s FOIA Public Liaison or from the Office of Government Information Services; and
(iii) The name and title or position of the person responsible for the adverse determination.
(f) Adverse determinations, or denials of requests, include decisions that the requested record is exempt, in whole or in part; the request does not reasonably describe the records sought; the information requested is not a record subject to the FOIA; the requested record does not exist, cannot be located, or has been destroyed; or the requested record is not readily reproducible in the form or format sought by the requester. Adverse determinations also include denials involving fees or fee waiver matters or denials of requests for expedited treatment.
(g) The Committee will normally send responsive, nonexempt documents to the requester by email but may use other means as arranged between the Committee and the requester or as determined by the Committee. The Committee will attempt to provide records in the format requested by the requester.
§ 271.14 Appeals.
(a) If the Committee makes an adverse determination as defined in § 271.13(f), the requester may file a written appeal with the Committee, as follows:
(1) The appeal should prominently display the phrase FREEDOM OF INFORMATION ACT APPEAL on the first page, and can be submitted online at https://www.federalreserve.gov/foia/fomc/appeals.htm or, if sent by mail, addressed to the Secretary of the Committee, Federal Open Market Committee, 20th Street and Constitution Avenue NW, Washington, DC 20551; or sent by facsimile to the Secretary of the Committee, (202) 452-2921. If the requester is appealing the denial of expedited treatment, the appeal should clearly be labeled “Appeal for Expedited Processing.”
(2) A request for records under § 271.11 may not be combined in the same letter with an appeal.
(3) To be considered timely, an appeal must be postmarked, or in the case of electronic submissions, transmitted, within 90 calendar days after the date of the adverse determination.
(b) Except as provided in § 271.12(c)(3), the Committee shall make a determination regarding any appeal within 20 working days of actual receipt of the appeal by the Committee. If an adverse determination is upheld on appeal, in whole or in part, the determination letter shall notify the appealing party of the right to seek judicial review and of the availability of dispute resolution services from the Office of Government Information Services as a non-exclusive alternative to litigation.
(c) The Committee may reconsider an adverse determination, including one on appeal, if intervening circumstances or additional facts not known at the time of the adverse determination come to the attention of the Committee.
§ 271.15 Exemptions from disclosure.
(a) Types of records exempt from disclosure. Pursuant to 5 U.S.C. 552(b), the following records of the Committee are exempt from disclosure under this part.
(1) Any information that is specifically authorized under criteria established by an Executive order to be kept secret in the interest of national defense or foreign policy and is in fact properly classified pursuant to the Executive order.
(2) Any information related solely to the internal personnel rules and practices of the Committee.
(3) Any information specifically exempted from disclosure by statute to the extent required by 5 U.S.C. 552(b)(3).
(4) Any matter that is a trade secret or that constitutes commercial or financial information obtained from a person and that is privileged or confidential.
(5) Inter- or intra-agency memorandums or letters that would not be available by law to a party other than an agency in litigation with the Committee, provided that the deliberative process privilege shall not apply to records that were created 25 years or more before the date on which the records were requested.
(6) Any information contained in personnel and medical files and similar files the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
(7) Any records or information compiled for law enforcement purposes, to the extent permitted under 5 U.S.C. 552(b)(7).
(8) Any matter that is contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions, including a state financial institution supervisory agency.
(b) Release of exempt information. (1) Except where disclosure is expressly prohibited by statute, regulation, or order, the Committee may release records that are exempt from mandatory disclosure whenever the Committee determines that such disclosure would be in the public interest.
(2) The fact that the Committee has determined to release particular exempt information does not waive the Committee’s ability to withhold similar exempt information in response to the same or a different request.
(c) Delayed release. Except as required by law, publication in the
(1) Interfere with accomplishing the objectives of the Committee in the discharge of its statutory functions;
(2) Interfere with the orderly conduct of the foreign affairs of the United States;
(3) Permit speculators or others to gain unfair profits or other unfair advantages by speculative trading in securities or otherwise;
(4) Result in unnecessary or unwarranted disturbances in the securities markets;
(5) Interfere with the orderly execution of the objectives or policies of other Government agencies; or
(6) Impair the ability to negotiate any contract or otherwise harm the commercial or financial interest of the United States, the Committee, any Federal Reserve Bank, or any department or agency of the United States.
§ 271.16 Fee schedules; waiver of fees.
(a) Fee schedules. Consistent with the limitations set forth in 5 U.S.C. 552(a)(4)(A)(viii), the fees applicable to a request for records pursuant to § 271.11 are set forth in Table 1 to this section. These fees cover only the full allowable direct costs of search, duplication, and review. No fees will be charged where the average cost of collecting the fee (calculated at $5.00) exceeds the amount of the fee.
(b) For purposes of computing fees. (1) Search time includes all time spent looking for material that is responsive to a request, including line-by-line identification of material within documents. Such activity is distinct from “review” of material to determine whether the material is exempt from disclosure.
(2) Direct costs mean those expenditures that the Committee actually incurs in searching for, reviewing, and duplicating records in response to a request made under § 271.11, as shown in table 1 to this section.
(3) Duplication refers to the process of making a copy, in any format, of a document.
(4) Review refers to the process of examining documents that have been located as being potentially responsive to a request for records to determine whether any portion of a document is exempt from disclosure. It includes doing all that is necessary to prepare the documents for release, including the redaction of exempt information. It does not include time spent resolving general legal or policy issues regarding the application of exemptions.
(c) Payment procedures. The Committee may assume that a person requesting records pursuant to § 271.11 will pay the applicable fees, unless the request includes a limitation on fees to be paid or seeks a waiver or reduction of fees pursuant to paragraph (g) of this section.
(1) Advance notification of fees. If the estimated charges are likely to exceed the amount authorized by the requester, the secretary of the Committee shall notify the requester of the estimated amount. Upon receipt of such notice, the requester may confer with the secretary of the Committee to reformulate the request to lower the costs or may authorize a higher amount. The time period for responding to requests under § 271.12(e) and the processing of the request will be suspended until the requester agrees in writing to pay the applicable fees.
(2) Advance payment. The Committee may require advance payment of any fee estimated to exceed $250. The Committee may also require full payment in advance where a requester has previously failed to pay a fee in a timely fashion. The time period for responding to a request under § 271.12(e), and the processing of the request shall be suspended until the Committee receives the required payment.
(3) Late charges. The Committee may assess interest charges when fee payment is not made within 30 days of the date on which the billing was sent. Interest is at the rate prescribed in 31 U.S.C. 3717 and accrues from the date of the billing.
(d) Categories of uses. The fees assessed depend upon the intended use for the records requested. In determining which category is appropriate, the Committee will look to the intended use set forth in the request for records. Where a requester’s description of the use is insufficient to make a determination, the Committee may seek additional clarification before categorizing the request.
(1) A commercial use requester is one who requests records for a use or purpose that furthers the commercial, trade, or profit interests of the requester or the person on whose behalf the request is made, which can include furthering those interests through litigation.
(2) Representative of the news media is any person or entity that gathers information of potential interest to a segment of the public, uses its editorial skills to turn the raw materials into a distinct work, and distributes that work to an audience, including organizations that disseminate solely on the internet. The term “news” means information that is about current events or that would be of current interest to the public. A non-affiliated journalist who demonstrates a solid basis for expecting publication through a news media entity, such as a publishing contract or past publication record, will be considered as a representative of the news media.
(3) Educational institution is any school that operates a program of scholarly research. A requester in this fee category must show that the request is made in connection with his or her role at the educational institution. The Committee may seek verification from the requester that the request is in furtherance of scholarly research.
(4) Noncommercial scientific institution is an institution that is not operated on a “commercial” basis, as defined in paragraph (d)(1) of this section, and that is operated solely for the purpose of conducting scientific research the results of which are not intended to promote any particular product or industry. A requester in this category must show that the request is authorized by and is made under the auspices of a qualifying institution and that the records are sought to further scientific research and are not for a commercial use.
(5) All other requesters refers to those requesters who do not fall within any of the categories described in paragraphs (d)(1) through (4) of this section.
(6) Please refer to table 1 to this section to determine what fees apply for different categories of users.
(e) Nonproductive search. Fees for search and review may be charged even if no responsive documents are located or if the request is denied.
(f) Aggregated requests. A requester may not file multiple requests at the same time, solely in order to avoid payment of fees. If the Committee reasonably believes that a requester is separating a single request into a series of requests for the purpose of evading the assessment of fees, the Committee may aggregate any such requests and charge accordingly. It is considered reasonable for the Committee to presume that multiple requests of this type made within a 30-day period have been made to avoid fees. Multiple requests involving unrelated matters cannot be aggregated.
(g) Waiver or reduction of fees. A request for a waiver or reduction of the fees, and the justification for the waiver, shall be included with the request for records to which it pertains. If a waiver is requested and the requester has not indicated in writing an agreement to pay the applicable fees if the waiver request is denied, the time for response to the request for documents, as set forth in § 271.12(e), shall not begin until either a waiver has been granted or, if the waiver is denied, until the requester has agreed to pay the applicable fees.
(1) The Committee shall grant a waiver or reduction of fees where it is determined both that disclosure of the information is in the public interest because it is likely to contribute significantly to public understanding of the operation or activities of the government, and that the disclosure of information is not primarily in the commercial interest of the requester. In making this determination, the Committee will consider the following factors:
(i) Whether the subject of the records would shed light on identifiable operations or activities of the government with a connection that is direct and clear, not remote or attenuated; and
(ii) Whether disclosure of the information is likely to contribute significantly to public understanding of those operations or activities. This factor is satisfied when the following criteria are met:
(A) Disclosure of the requested records must be meaningfully informative about government operations or activities. The disclosure of information that already is in the public domain, in either the same or a substantially identical form, would not be meaningfully informative if nothing new would be added to the public’s understanding.
(B) The disclosure must contribute to the understanding of a reasonably broad audience of persons interested in the subject, as opposed to the individual understanding of the requester. A requester’s expertise in the subject area as well as the requester’s ability and intention to effectively convey information to the public must be considered. The Committee will presume that a representative of the news media will satisfy this consideration.
(iii) The disclosure must not be primarily in the commercial interest of the requester. A commercial interest includes any commercial, trade, profit, or litigation interest.
(2) A request for a waiver or reduction of fees shall include:
(i) A clear statement of the requester’s interest in the documents;
(ii) The use proposed for the documents and whether the requester will derive income or other benefit for such use;
(iii) A statement of how the public will benefit from such use and from the Committee’s release of the documents;
(iv) A description of the method by which the information will be disseminated to the public; and
(v) If specialized use of the information is contemplated, a statement of the requester’s qualifications that are relevant to that use.
(3) The requester has the burden to present evidence or information in support of a request for a waiver or reduction of fees.
(4) The Committee shall notify the requester of its determination on the request for a waiver or reduction of fees. The requester may appeal a denial in accordance with § 271.14(a).
(5) Where only some of the records to be released satisfy the requirements for a waiver of fees, a waiver must be granted for those records.
(6) A request for a waiver or reduction of fees should be made when the request for records is first submitted to the Committee and should address the criteria referenced in paragraphs (g)(1) through (5) of this section. A requester may submit a fee waiver request at a later time so long as the underlying record request is pending or on administrative appeal. When a requester who has committed to pay fees subsequently asks for a waiver of those fees and that waiver is denied, the requester must pay any costs incurred up to the date the fee waiver request was received.
(h) Restrictions on charging fees. (1) If the Committee fails to comply with the FOIA’s time limits in which to respond to a request, the Committee may not charge search fees, or, in the instances of requests from requesters described in paragraphs (d)(2) through (4) of this section, will not charge duplication fees, except as permitted under paragraphs (h)(2) through (4) of this section.
(2) If the Committee has determined that unusual circumstances exist, as described in 5 U.S.C. 552(a)(6)(B), and has provided timely written notice to the requester and subsequently responds within the additional 10 working days provided in § 271.12(e)(3), the Committee may charge search fees, or in the case of requesters described in paragraphs (d)(2) through (4) of this section, may charge duplication fees.
(3) If the Committee has determined that unusual circumstances exist, as described in 5 U.S.C. 552(a)(6)(B), and more than 5,000 pages are necessary to respond to the request, the Committee may charge search fees, or, in the case of requesters described in paragraphs (d)(2) through (4) of this section, may charge duplication fees, if the Committee has:
(i) Provided timely written notice of unusual circumstances to the requester in accordance with the FOIA; and
(ii) Discussed with the requester via written mail, email, or telephone (or made not less than three good-faith attempts to do so) how the requester could effectively limit the scope of the request in accordance with 5 U.S.C. 552(a)(6)(B)(ii).
(4) If a court has determined that exceptional circumstances exist, as defined by the FOIA, a failure to comply with the time limits shall be excused for the length of time provided by the court order.
(i) Employee requests. In connection with any request by an employee, former employee, or applicant for employment, for records for use in prosecuting a grievance or complaint of discrimination against the Committee, fees shall be waived where the total charges (including charges for information provided under the Privacy Act of 1974 (5 U.S.C. 552a)) are $50 or less; but the Committee may waive fees in excess of that amount.
(j) Special services. The Committee may agree to provide, and set fees to recover the costs of, special services not covered by the FOIA, such as certifying records or information and sending records by special methods such as express mail or overnight delivery.
Table 1 to § 271.16 – Fees
| Type of requester | Search costs per hour | Review costs per hour | Duplication costs |
|---|---|---|---|
| Commercial | Clerical/Technical staff, $20 | Clerical/Technical staff, $20 | Photocopy per standard page, .10. |
| Professional/Supervisory staff, $40 | Professional/Supervisory staff, $40 | Other types of duplication, Direct Costs. | |
| Manager/Senior professional staff, $65 | Manager/Senior professional staff, $65 | ||
| Computer search, including computer search time, output, operator’s salary, Direct Costs | |||
| Educational; or Non-commercial scientific; or News media | Costs waived | Costs waived | First 100 pages Photocopy per standard page, .10. Other types of duplication, Direct Costs. |
| All other requesters | First 2 hours | Costs waived | First 100 pages |
| Clerical/Technical staff, $20 | Photocopy per standard page, .10. | ||
| Professional/Supervisory staff, $40 | Other types of duplication, Direct Costs. | ||
| Manager/Senior professional staff, $65 | |||
| Computer search, including computer search time, output, operator’s salary, Direct Costs |
Subpart C – Subpoenas, Orders Compelling Production, and Other Process
§ 271.20 Subpoenas, orders compelling production, and other process.
(a) Advice by person served. Any person, whether or not an officer or employee of the Committee, of the Board, or of a Federal Reserve Bank, who is served with a subpoena, order, or other judicial or administrative process requiring the production of exempt information of the Committee or requiring the person’s testimony regarding such Committee information in any proceeding, shall:
(1) Promptly inform the Committee’s General Counsel of the service and all relevant facts, including the documents, information, or testimony demanded, and any facts relevant to the Committee in determining whether the material requested should be made available;
(2) Inform the entity issuing the process of the substance of this part; and
(3) At the appropriate time, inform the court or tribunal that issued the process of the substance of this part.
(b) Appearance by person served. Unless authorized by the Committee or as ordered by a Federal court in a judicial proceeding in which the Committee has had the opportunity to appear and oppose discovery, any person who is required to respond to a subpoena or other legal process concerning exempt Committee information shall attend at the time and place required and respectfully decline to disclose or to give any testimony with respect to the information, basing such refusal upon the provisions of this part. If the court or other body orders the disclosure of the information or the giving of testimony, the person having the information shall continue to decline to disclose such information and shall promptly report the facts to the Committee for such action as the Committee may deem appropriate.
PART 272 – RULES OF PROCEDURE
§ 272.1 Authority.
This part is issued by the Federal Open Market Committee (the Committee) pursuant to the requirement of section 552 of title 5 of the United States Code that every agency shall publish in the
§ 272.2 Functions of the Committee.
The procedures followed by the Committee are designed to facilitate the effective performance of the Committee’s statutory functions with respect to the regulation and direction of open market operations conducted by the Federal Reserve banks and with respect to certain direct transactions between the Reserve banks and the United States. In determining the policies to be followed in such operations, the Committee considers information regarding business and credit conditions and domestic and international economic and financial developments, and other pertinent information gathered and submitted by its staff and the staffs of the Board of Governors of the Federal Reserve System (the Board) and the Federal Reserve banks. Against the background of such information, the Committee takes actions from time-to-time to regulate and direct the open market operations of the Reserve banks. Such policy actions ordinarily are taken through the adoption and transmission to the Federal Reserve banks of regulations, authorizations, and directives.
§ 272.3 Meetings.
(a) Place and frequency. The Committee meets in Washington, DC, at least four times each year and oftener if deemed necessary. Meetings are held upon the call of the Chair of the Board or at the request of any three members of the Committee. Notices of calls by the Chair of the Board to other members are given by the Secretary of the Committee in writing, by telephone, or electronic means. Requests of any three members for the calling of a meeting shall state the time therefor and shall be filed in writing, by telephone, or electronic means with the Secretary who shall forthwith notify all members of the Committee in writing, by telephone, or electronic means. When the Secretary has sent notices to all members of the Committee that a meeting has been requested by three members and of the time therefor, a meeting is deemed to have been called. If, in the judgment of the Chair, circumstances require that a meeting be called at such short notice that one or more members cannot be present in person, such members may participate in the meeting by telephone conference arrangements or by electronic means.
(b) Alternates. Whenever any member of the Committee representing Federal Reserve banks shall find that the member will be unable to attend a meeting of the Committee, the member shall promptly notify the member’s alternate and the Secretary of the Committee in writing, by telephone, or electronic means, and upon receipt of such notice such alternate shall advise the Secretary whether the alternate will attend such meeting.
(c) Quorum. Seven members, at least one of whom represents a Federal Reserve Bank, constitute a quorum of the Committee for purposes of transacting business except that, if there are fewer than seven members in office, then the number of members in office constitute a quorum. For purposes of this paragraph (c), members of the Committee include alternates acting in the absence of members. Less than a quorum may adjourn a meeting of the Committee from time to time until a quorum is in attendance.
(d) Attendance at meetings. Attendance at Committee meetings is restricted to members and alternate members of the Committee, the Presidents of Federal Reserve Banks who are not at the time members or alternates, staff officers of the Committee, the Manager, and such other advisers as the Committee may invite from time to time.
(e) Meeting agendas. The Secretary, in consultation with the Chair, prepares an agenda of matters to be discussed at each meeting and the Secretary transmits the agenda to the members of the Committee within a reasonable time in advance of such meeting. In general, the agendas include reports by the Manager on open market operations since the previous meeting, and ratification by the Committee of such operations; reports by Economists on, and Committee discussion of, the economic and financial situation and outlook; Committee discussion of monetary policy and action with respect thereto; and such other matters as may be considered necessary.
§ 272.4 Committee actions.
(a) Actions at meetings. Actions are taken at meetings of the Committee except as described below.
(b) Actions between meetings. Special circumstances may make it desirable in the public interest for Committee members to consider an action to modify an outstanding Committee authorization or directive at a time when it is not feasible to call a meeting. Whenever, in the judgment of the Chair, such circumstances have arisen, the relevant information and recommendations for action are transmitted to the members by the Secretary, and the members communicate their votes to the Secretary. If the action is approved by a majority of the members, advice to that effect is promptly given by the Secretary to the members of the Committee and to the Reserve bank selected to execute transactions for the System Open Market Account. All communications of recommended actions and votes under this paragraph shall be in writing, by telephone, or electronic means; if the communication is made orally, the Secretary shall cause a written record to be made without delay. An action taken between meetings has the force and effect of an action at a meeting: Provided, however, That if a meeting is held before the execution of any operations pursuant to the action, the action is null and void unless it is ratified and confirmed by the Committee at such meeting.
(c) Delegations of authority. In special circumstances, the Committee may delegate authority to take an action, subject to such instructions or guidelines as the Committee deems proper. Such delegations of authority may be made to the Chair; to a subcommittee consisting of the Chair and the Vice Chair of the Committee and the Vice Chair of the Board (or in the absence of the Chair or of the Vice Chair of the Board the members of the Board designated by the Chair as alternates, and in the absence of the Vice Chair of the Committee the alternate for the Vice Chair); or to any other member or members of the Committee. An action taken pursuant to such a delegation of authority has the force and effect of an action taken by the Committee.
(d) Technical changes to Committee rules. The Secretary of the Committee (or the acting secretary) is authorized to make technical corrections, such as spelling, grammar, construction, and organization (including removal of obsolete provisions and references), to the Committee’s rules, regulations, and orders and other records of Committee action but only with the concurrence of the Committee’s General Counsel.
(e) Effective date. Committee action ordinarily is made effective as of the time it is taken because the nature of the subject matter and the action taken is such that the public interest and the proper discharge of the Committee’s responsibilities so require. Occasionally, however, the Committee may specify that an action is to be effective at some different time.
§ 272.5 Notice and public procedure.
There ordinarily is no published notice of proposed action by the Committee or public procedure thereon, as described in section 553 of title 5 of the United States Code, because such notice and procedure are impracticable, unnecessary, or contrary to the public interest.
PART 281 – STATEMENTS OF POLICY
§ 281.1 Policy regarding the Government in the Sunshine Act.
On September 13, 1976, there was enacted into law the Government in the Sunshine Act, Pub. L. No. 94-409, 90 Stat. 1241 (“Sunshine Act”), established for the purpose of providing the public with the “fullest practicable information regarding the decisionmaking processes of the Federal Government * * * while protecting the rights of individuals and the ability of the Government to carry out its responsibilities.” The Federal Open Market Committee (“FOMC”) is a separate and independent statutory body within the Federal Reserve System. In no respect is it an agent or “subdivision” of the Board of Governors of the Federal Reserve System (“Board of Governors”). It was originally established by the Banking Act of 1933 and restructured in its present form by the Banking Act of 1935 and subsequent legislation in 1942 (generally see 12 U.S.C. 263(a)). The FOMC’s membership is composed of the seven members of the Board of Governors and five representatives of the Federal Reserve Banks who are selected annually in accordance with the procedures set forth in Section 12A of the Federal Reserve Act, 12 U.S.C. 263(a). Members of the Board of Governors serve in an ex officio capacity on the FOMC by reason of their appointment as Members of the Board of Governors, not as a result of an appointment “to such position” (the FOMC) by the President. Representatives of the Reserve Banks serve on the FOMC not as a result of an appointment “to such position” by the President, but rather by virtue of their positions with the Reserve Banks and their selection pursuant to Section 12A of the Federal Reserve Act. It is clear therefore that the FOMC does not fall within the scope of an “agency” or “subdivision” as defined in the Sunshine Act and consequently is not subject to the provisions of that Act. As explained below, the Act would not require the FOMC to hold its meetings in open session even if the FOMC were covered by the Act. However, despite the conclusion reached that the Sunshine Act does not apply to the FOMC, the FOMC has determined that its procedures and timing of public disclosure already are conducted in accordance with the spirit of the Sunshine Act, as that Act would apply to deliberations of the nature engaged in by the FOMC. In the foregoing regard, the FOMC has noted that while the Act calls generally for open meetings of multi-member Federal agencies, 10 specific exemptions from the open meeting requirement are provided to assure the ability of the Government to carry out its responsibilities. Among the exemptions provided is that which authorizes any agency operating under the Act to conduct closed meetings where the subject of a meeting involves information “the premature disclosure of which would – in the case of an agency which regulates currencies, securities, commodities, or financial institutions, be likely to lead to significant financial speculation in currencies, securities, or commodities.” As to meetings closed under such exemption, the Act requires the maintenance of either a transcript, electronic recording or minutes and sets forth specified, detailed requirements as to the contents and timing of disclosure of certain portions or all of such minutes. The Act permits the withholding from the public of the minutes where disclosure would be likely to produce adverse consequences of the nature described in the relevant exemptions. The FOMC has reviewed the agenda of its monthly meetings for the past three years and has determined that all such meetings could have been closed pursuant to the exemption dealing with finanical speculation or other exemptions set forth in the Sunshine Act. The FOMC has further determined that virtually all of its substantive deliberations could have been preserved pursuant to the Act’s minutes requirements and that such minutes could similarly have been protected against premature disclosure under the provisions of the Act. The FOMC’s deliberations are currently reported by means of a document entitled “Record of Policy Actions” which is released to the public approximately one month after the meeting to which it relates. The Record of Policy Actions complies with the Act’s minutes requirements in that it contains a full and accurate report of all matters of policy discussed and views presented, clearly sets forth all policy actions taken by the FOMC and the reasons therefor, and includes the votes by individual members on each policy action. The timing of release of the Record of Policy Actions is fully consistent with the Act’s provisions assuring against premature release of any item of discussion in an agency’s minutes that contains information of a sensitive financial nature. In fact, by releasing the comprehensive Record of Policy Actions to the public approximately a month after each meeting, the FOMC exceeds the publication requirements that would be mandated by the letter of the Sunshine Act. Recognizing the Congressional purpose underlying the enactment of the Sunshine Act, the FOMC has determined to continue its current practice and timing of public disclosures in the conviction that its operations thus conducted are consistent with the intent and spirit of the Sunshine Act.