12 CFR Part 3 — Capital Adequacy Standards

PART 3—CAPITAL ADEQUACY STANDARDS Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818, 1828(n), 1828 note, 1831n note, 1835, 3907, 3909, 5371, 5371 note, 5412(b)(2)(B), and Pub. L. 116-136, 134 Stat. 281. Source: 50 FR 10216, Mar. 14, 1985, unless otherwise noted. Subpart A—General Provisions Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted. § 3.1 Purpose, applicability, reservations of authority, and timing. (a) Purpose. (b) Limitation of authority. (c) Applicability. (1) Minimum capital requirements and overall capital adequacy standards. (2) Regulatory capital. (3) Risk-weighted assets. (ii) Each advanced approaches national bank or Federal savings association must use the methodologies in subpart E (and subpart F of this part for a market risk national bank or Federal savings association) to calculate advanced approaches total risk-weighted assets. (4) Disclosures. (ii) Each market risk national bank or Federal savings association must make the public disclosures described in subpart F of this part. (iii) Each advanced approaches national bank or Federal savings association must make the public disclosures described in subpart E of this part. (d) Reservation of authority Additional capital in the aggregate. (2) Regulatory capital elements. (ii) Notwithstanding the criteria for regulatory capital instruments set forth in subpart C of this part, the OCC may find that a capital element may be included in a national bank's or Federal savings association's common equity tier 1 capital, additional tier 1 capital, or tier 2 capital on a permanent or temporary basis consistent with the loss absorption capacity of the element and in accordance with § 3.20(e). (3) Risk-weighted asset amounts. (4) Total leverage. (5) Consolidation of certain exposures. (6) Other reservation of authority. (e) Notice and response procedures. (f) Timing. (i) Except as described in paragraph (f)(1)(ii) of this section, beginning on January 1, 2014, calculate advanced approaches total risk-weighted assets in accordance with subpart E and, if applicable, subpart F of this part and, beginning on January 1, 2015, calculate standardized total risk-weighted assets in accordance with subpart D and, if applicable, subpart F of this part; (ii) [Reserved] (iii) Beginning on January 1, 2014, calculate and maintain minimum capital ratios in accordance with subparts A, B, and C of this part, provided, however, that such national bank or Federal savings association must: (A) From January 1, 2014 to December 31, 2014, maintain a minimum common equity tier 1 capital ratio of 4 percent, a minimum tier 1 capital ratio of 5.5 percent, a minimum total capital ratio of 8 percent, and a minimum leverage ratio of 4 percent; and (B) From January 1, 2015 to December 31, 2017, an advanced approaches national bank or Federal savings association: ( 1 ( 2 (2) Subject to the transition provisions in subpart G of this part, a national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association or a savings and loan holding company that is an advanced approaches national bank or Federal savings association must: (i) Beginning on January 1, 2015, calculate standardized total risk-weighted assets in accordance with subpart D, and if applicable, subpart F of this part; and (ii) Beginning on January 1, 2015, calculate and maintain minimum capital ratios in accordance with subparts A, B and C of this part, provided, however, that from January 1, 2015 to December 31, 2017, a savings and loan holding company that is an advanced approaches national bank or Federal savings association: (A) Is not required to maintain a supplementary leverage ratio; and (B) Must calculate a supplementary leverage ratio in accordance with § 3.10(c), and must report the calculated supplementary leverage ratio on any applicable regulatory reports. (3) Beginning on January 1, 2016, and subject to the transition provisions in subpart G of this part, a national bank or Federal savings association is subject to limitations on distributions and discretionary bonus payments with respect to its capital conservation buffer and any applicable countercyclical capital buffer amount, in accordance with subpart B of this part. (4) No national bank or Federal savings association that is not an advanced approaches bank or advanced approaches savings association is subject to this part 3 until January 1, 2015. (5) A national bank or Federal savings association that changes from one category of national bank or Federal savings association to another of such categories must comply with the requirements of its category in this part, including applicable transition provisions of the requirements in this part, no later than on the first day of the second quarter following the change in the national bank's or Federal savings association's category. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 79 FR 57740, Sept. 26, 2014; 84 FR 35248, July 22, 2019; 84 FR 56374, Oct. 22, 2019; 84 FR 59263, Nov. 1, 2019] § 3.2 Definitions. As used in this part: Additional tier 1 capital Adjusted allowances for credit losses (AACL) Advanced approaches national bank or Federal savings association Advanced approaches total risk-weighted assets (1) The sum of: (i) Credit-risk-weighted assets; (ii) Credit valuation adjustment (CVA) risk-weighted assets; (iii) Risk-weighted assets for operational risk; and (iv) For a market risk national bank or Federal savings association only, advanced market risk-weighted assets; minus (2) Excess eligible credit reserves not included in the national bank's or Federal savings association's tier 2 capital. Advanced market risk-weighted assets Affiliate Allocated transfer risk reserves Allowances for loan and lease losses (ALLL) Asset-backed commercial paper (ABCP) program Asset-backed commercial paper (ABCP) program sponsor (1) Establishes an ABCP program; (2) Approves the sellers permitted to participate in an ABCP program; (3) Approves the exposures to be purchased by an ABCP program; or (4) Administers the ABCP program by monitoring the underlying exposures, underwriting or otherwise arranging for the placement of debt or other obligations issued by the program, compiling monthly reports, or ensuring compliance with the program documents and with the program's credit and investment policy. Bank holding company Bank Holding Company Act et seq. Bankruptcy remote Basis derivative contract i.e., Call Report Carrying value Category II national bank or Federal savings association (1) A national bank or Federal savings association that is a subsidiary of a Category II banking organization, as defined pursuant to 12 CFR 252.5 or 12 CFR 238.10, as applicable; or (2) A national bank or Federal savings association 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 national bank's or Federal savings association'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 national bank or Federal savings association 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 ( 2 (iii) After meeting the criteria in paragraph (2)(ii) of this definition, a national bank or Federal savings association continues to be a Category II national bank or Federal savings association until the national bank or Federal savings association has: (A)( 1 ( 2 (B) Less than $100 billion in total consolidated assets, as reported on the Call Report, for each of the four most recent calendar quarters. Category III national bank or Federal savings association (1) A national bank or Federal savings association that is a subsidiary of a Category III banking organization, as defined pursuant to 12 CFR 252.5 or 12 CFR 238.10, as applicable; (2) A national bank or Federal savings association that is a subsidiary of a depository institution that meets the criteria in paragraph (3)(ii)(A) or (B) of this definition; or (3) A national bank or Federal savings association 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 $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 is calculated based on its total consolidated assets, as reported on the Call Report, for the most recent quarter or average of the most recent quarters, as applicable; or (B) Has: ( 1 ( 2 2 i iii ( i ( ii ( iii (iii) After meeting the criteria in paragraph (3)(ii) of this definition, a national bank or Federal savings association continues to be a Category III national bank or Federal savings association until the national bank or Federal savings association: (A) Has: ( 1 ( 2 ( 3 ( 4 (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 Category II national bank or Federal savings association. Central counterparty (CCP) CFTC Clean-up call Cleared transaction (1) The following transactions are cleared transactions: (i) A transaction between a CCP and a national bank or Federal savings association that is a clearing member of the CCP where the national bank or Federal savings association enters into the transaction with the CCP for the national bank's or Federal savings association's own account; (ii) A transaction between a CCP and a national bank or Federal savings association that is a clearing member of the CCP where the national bank or Federal savings association is acting as a financial intermediary on behalf of a clearing member client and the transaction offsets another transaction that satisfies the requirements set forth in § 3.3(a); (iii) A transaction between a clearing member client national bank or Federal savings association and a clearing member where the clearing member acts as a financial intermediary on behalf of the clearing member client and enters into an offsetting transaction with a CCP, provided that the requirements set forth in § 3.3(a) are met; or (iv) A transaction between a clearing member client national bank or Federal savings association and a CCP where a clearing member guarantees the performance of the clearing member client national bank or Federal savings association to the CCP and the transaction meets the requirements of § 3.3(a)(2) and (3). (2) The exposure of a national bank or Federal savings association that is a clearing member to its clearing member client is not a cleared transaction where the national bank or Federal savings association is either acting as a financial intermediary and enters into an offsetting transaction with a CCP or where the national bank or Federal savings association provides a guarantee to the CCP on the performance of the client. 3 3 Clearing member Clearing member client Client-facing derivative transaction Collateral agreement (1) Under applicable law in the relevant jurisdictions, other than: (i) 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 4 4 (ii) Where the agreement is subject by its terms to any of the laws referenced in paragraph (1)(i) of this definition; or (2) Other than to the extent necessary for the counterparty to comply with the requirements of part 47, subpart I of part 252, and part 382 of this title 12, as applicable. Commercial end-user (1)(i) Is using derivative contracts to hedge or mitigate commercial risk; and (ii)(A) Is not an entity described in section 2(h)(7)(C)(i)(I) through (VIII) of the Commodity Exchange Act (7 U.S.C. 2(h)(7)(C)(i)(I) through (VIII)); or (B) Is not a “financial entity” for purposes of section 2(h)(7) of the Commodity Exchange Act (7 U.S.C. 2(h)) by virtue of section 2(h)(7)(C)(iii) of the Act (7 U.S.C. 2(h)(7)(C)(iii)); or (2)(i) Is using derivative contracts to hedge or mitigate commercial risk; and (ii) Is not an entity described in section 3C(g)(3)(A)(i) through (viii) of the Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(3)(A)(i) through (viii)); or (3) Qualifies for the exemption in section 2(h)(7)(A) of the Commodity Exchange Act (7 U.S.C. 2(h)(7)(A)) by virtue of section 2(h)(7)(D) of the Act (7 U.S.C. 2(h)(7)(D)); or (4) Qualifies for an exemption in section 3C(g)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(1)) by virtue of section 3C(g)(4) of the Act (15 U.S.C. 78c-3(g)(4)). Commitment Commodity derivative contract Commodity Exchange Act et seq. Common equity tier 1 capital Common equity tier 1 minority interest (1) A consolidated subsidiary of a national bank or Federal savings association; and (2) Not owned by the national bank or Federal savings association. Company Control. controls (1) Owns, controls, or holds with power to vote 25 percent or more of a class of voting securities of the company; or (2) Consolidates the company for financial reporting purposes. Core capital Corporate exposure (1) An exposure to a sovereign, the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, the European Stability Mechanism, the European Financial Stability Facility, a multi-lateral development bank (MDB), a depository institution, a foreign bank, a credit union, or a public sector entity (PSE); (2) An exposure to a GSE; (3) A residential mortgage exposure; (4) A pre-sold construction loan; (5) A statutory multifamily mortgage; (6) A high volatility commercial real estate (HVCRE) exposure; (7) A cleared transaction; (8) A default fund contribution; (9) A securitization exposure; (10) An equity exposure; or (11) An unsettled transaction. (12) A policy loan; (13) A separate account; or (14) A Paycheck Protection Program covered loan as defined in section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)). Country risk classification (CRC) Covered debt instrument (1) Issued by a global systemically important BHC, as defined in 12 CFR 217.2, and that is an eligible debt security, as defined in 12 CFR 252.61, or that is pari passu (2) Issued by a Covered IHC, as defined in 12 CFR 252.161, and that is an eligible Covered IHC debt security, as defined in 12 CFR 252.161, or that is pari passu (3) Issued by a global systemically important banking organization, as defined in 12 CFR 252.2 other than a global systemically important BHC, as defined in 12 CFR 217.2; or issued by a subsidiary of a global systemically important banking organization that is not a global systemically important BHC, other than a Covered IHC, as defined in 12 CFR 252.161; and where (i) The instrument is eligible for use to comply with an applicable law or regulation requiring the issuance of a minimum amount of instruments to absorb losses or recapitalize the issuer or any of its subsidiaries in connection with a resolution, receivership, insolvency, or similar proceeding of the issuer or any of its subsidiaries; or (ii) The instrument is pari passu pari passu (4) Provided that, for purposes of this definition, covered debt instrument Covered savings and loan holding company (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 HOLA; 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. 1842(k)); (2) A top-tier savings and loan holding company that is an insurance underwriting company; or (3)(i) A top-tier savings and loan 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. Credit derivative Credit-enhancing interest-only strip (CEIO) (1) Represents a contractual right to receive some or all of the interest and no more than a minimal amount of principal due on the underlying exposures of a securitization; and (2) Exposes the holder of the CEIO to credit risk directly or indirectly associated with the underlying exposures that exceeds a pro rata share of the holder's claim on the underlying exposures, whether through subordination provisions or other credit-enhancement techniques. Credit-enhancing representations and warranties (1) Early default clauses and similar warranties that permit the return of, or premium refund clauses covering, 1-4 family residential first mortgage loans that qualify for a 50 percent risk weight for a period not to exceed 120 days from the date of transfer. These warranties may cover only those loans that were originated within 1 year of the date of transfer; (2) Premium refund clauses that cover assets guaranteed, in whole or in part, by the U.S. Government, a U.S. Government agency or a GSE, provided the premium refund clauses are for a period not to exceed 120 days from the date of transfer; or (3) Warranties that permit the return of underlying exposures in instances of misrepresentation, fraud, or incomplete documentation. Credit risk mitigant Credit-risk-weighted assets (1) Total wholesale and retail risk-weighted assets as calculated under § 3.131; (2) Risk-weighted assets for securitization exposures as calculated under § 3.142; and (3) Risk-weighted assets for equity exposures as calculated under § 3.151. Credit union et seq. Current Expected Credit Losses (CECL) Current exposure Current exposure methodology Custodian Custody bank Default fund contribution Depository institution Depository institution holding company Derivative contract Discretionary bonus payment (1) The national bank or Federal savings association retains discretion as to whether to make, and the amount of, the payment until the payment is awarded to the executive officer; (2) The amount paid is determined by the national bank or Federal savings association without prior promise to, or agreement with, the executive officer; and (3) The executive officer has no contractual right, whether express or implied, to the bonus payment. Distribution (1) A reduction of tier 1 capital through the repurchase of a tier 1 capital instrument or by other means, except when a national bank or Federal savings association, within the same quarter when the repurchase is announced, fully replaces a tier 1 capital instrument it has repurchased by issuing another capital instrument that meets the eligibility criteria for: (i) A common equity tier 1 capital instrument if the instrument being repurchased was part of the national bank's or Federal savings association's common equity tier 1 capital, or (ii) A common equity tier 1 or additional tier 1 capital instrument if the instrument being repurchased was part of the national bank's or Federal savings association's tier 1 capital; (2) A reduction of tier 2 capital through the repurchase, or redemption prior to maturity, of a tier 2 capital instrument or by other means, except when a national bank or Federal savings association, within the same quarter when the repurchase or redemption is announced, fully replaces a tier 2 capital instrument it has repurchased by issuing another capital instrument that meets the eligibility criteria for a tier 1 or tier 2 capital instrument; (3) A dividend declaration or payment on any tier 1 capital instrument; (4) A dividend declaration or interest payment on any tier 2 capital instrument if the national bank or Federal savings association has full discretion to permanently or temporarily suspend such payments without triggering an event of default; or (5) Any similar transaction that the OCC determines to be in substance a distribution of capital. Dodd-Frank Act Early amortization provision (1) Is triggered solely by events not directly related to the performance of the underlying exposures or the originating national bank or Federal savings association (such as material changes in tax laws or regulations); or (2) Leaves investors fully exposed to future draws by borrowers on the underlying exposures even after the provision is triggered. Effective notional amount Eligible ABCP liquidity facility Eligible clean-up call (1) Is exercisable solely at the discretion of the originating national bank or Federal savings association or servicer; (2) Is not structured to avoid allocating losses to securitization exposures held by investors or otherwise structured to provide credit enhancement to the securitization; and (3)(i) For a traditional securitization, is only exercisable when 10 percent or less of the principal amount of the underlying exposures or securitization exposures (determined as of the inception of the securitization) is outstanding; or (ii) For a synthetic securitization, is only exercisable when 10 percent or less of the principal amount of the reference portfolio of underlying exposures (determined as of the inception of the securitization) is outstanding. Eligible credit derivative th (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 or n th (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; (7) If the credit derivative is a credit default swap or n th (8) If the credit derivative is a total return swap and the national bank or Federal savings association records net payments received on the swap as net income, the national bank or Federal savings association records offsetting deterioration in the value of the hedged exposure (either through reductions in fair value or by an addition to reserves). Eligible credit reserves (1) For a national bank or Federal savings association that has not adopted CECL, all general allowances that have been established through a charge against earnings to cover estimated credit losses associated with on- or off-balance sheet wholesale and retail exposures, including the ALLL associated with such exposures, but excluding allocated transfer risk reserves established pursuant to 12 U.S.C. 3904 and other specific reserves created against recognized losses; and (2) For a national bank or Federal savings association that has adopted CECL, all general allowances that have been established through a charge against earnings or retained earnings to cover expected credit losses associated with on- or off-balance sheet wholesale and retail exposures, including AACL associated with such exposures. Eligible credit reserves exclude allocated transfer risk reserves established pursuant to 12 U.S.C. 3904, allowances that reflect credit losses on purchased credit deteriorated assets and available-for-sale debt securities, and other specific reserves created against recognized losses. Eligible guarantee (1) Is written; (2) Is either: (i) Unconditional; or (ii) A contingent obligation of the U.S. government or its agencies, the enforceability of which is dependent upon some affirmative action on the part of the beneficiary of the guarantee or a third party (for example, meeting servicing requirements); (3) Covers all or a pro rata portion of all contractual payments of the obligated party on the reference exposure; (4) Gives the beneficiary a direct claim against the protection provider; (5) Is not unilaterally cancelable by the protection provider for reasons other than the breach of the contract by the beneficiary; (6) Except for a guarantee by a sovereign, is legally enforceable against the protection provider in a jurisdiction where the protection provider has sufficient assets against which a judgment may be attached and enforced; (7) Requires the protection provider to make payment to the beneficiary on the occurrence of a default (as defined in the guarantee) of the obligated party on the reference exposure in a timely manner without the beneficiary first having to take legal actions to pursue the obligor for payment; (8) Does not increase the beneficiary's cost of credit protection on the guarantee in response to deterioration in the credit quality of the reference exposure; (9) Is not provided by an affiliate of the national bank or Federal savings association, unless the affiliate is an insured depository institution, foreign bank, securities broker or dealer, or insurance company that: (i) Does not control the national bank or Federal savings association; and (ii) Is subject to consolidated supervision and regulation comparable to that imposed on depository institutions, U.S. securities broker-dealers, or U.S. insurance companies (as the case may be); and (10) For purposes of §§ 3.141 through 3.145 and subpart D of this part, is provided by an eligible guarantor. Eligible guarantor (1) A sovereign, the Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage Corporation (Farmer Mac), the European Stability Mechanism, the European Financial Stability Facility, a multilateral development bank (MDB), a depository institution, a bank holding company, a savings and loan holding company, a credit union, a foreign bank, or a qualifying central counterparty; or (2) An entity (other than a special purpose entity): (i) That at the time the guarantee is issued or anytime thereafter, has issued and outstanding an unsecured debt security without credit enhancement that is investment grade; (ii) Whose creditworthiness is not positively correlated with the credit risk of the exposures for which it has provided guarantees; and (iii) That is not an insurance company engaged predominately in the business of providing credit protection (such as a monoline bond insurer or re-insurer). Eligible margin loan (1) An extension of credit where: (i) The extension of credit is collateralized exclusively by liquid and readily marketable debt or equity securities, or gold; (ii) The collateral is marked-to-fair value daily, and the transaction is subject to daily margin maintenance requirements; and (iii) The extension of credit is conducted under an agreement that provides the national bank or Federal savings association the right to accelerate and terminate the extension of credit and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, insolvency, liquidation, conservatorship, or similar proceeding, of the counterparty, provided that, in any such case: (A) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than 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, 5 6 5 6 (B) 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, and part 382, of this title 12, as applicable. (2) In order to recognize an exposure as an eligible margin loan for purposes of this subpart, a national bank or Federal savings association must comply with the requirements of § 3.3(b) with respect to that exposure. Eligible servicer cash advance facility (1) The servicer is entitled to full reimbursement of advances, except that a servicer may be obligated to make non-reimbursable advances for a particular underlying exposure if any such advance is contractually limited to an insignificant amount of the outstanding principal balance of that exposure; (2) The servicer's right to reimbursement is senior in right of payment to all other claims on the cash flows from the underlying exposures of the securitization; and (3) The servicer has no legal obligation to, and does not make advances to the securitization if the servicer concludes the advances are unlikely to be repaid. Employee stock ownership plan Equity derivative contract Equity exposure (1) A security or instrument (whether voting or non-voting) that represents a direct or an indirect ownership interest in, and is a residual claim on, the assets and income of a company, unless: (i) The issuing company is consolidated with the national bank or Federal savings association under GAAP; (ii) The national bank or Federal savings association is required to deduct the ownership interest from tier 1 or tier 2 capital under this part; (iii) The ownership interest incorporates a payment or other similar obligation on the part of the issuing company (such as an obligation to make periodic payments); or (iv) The ownership interest is a securitization exposure; (2) A security or instrument that is mandatorily convertible into a security or instrument described in paragraph (1) of this definition; (3) An option or warrant that is exercisable for a security or instrument described in paragraph (1) of this definition; or (4) Any other security or instrument (other than a securitization exposure) to the extent the return on the security or instrument is based on the performance of a security or instrument described in paragraph (1) of this definition. ERISA et seq. Exchange rate derivative contract Excluded covered debt instrument (1) Is held in connection with market making-related activities permitted under 12 CFR 44.4, provided that a direct exposure or an indirect exposure to a covered debt instrument is held for 30 business days or less; and (2) Has been designated as an excluded covered debt instrument by the national bank or Federal savings association that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, pursuant to 12 CFR 3.22(c)(5)(iv)(A). Executive officer Expected credit loss (ECL) (1) For a wholesale exposure to a non-defaulted obligor or segment of non-defaulted retail exposures that is carried at fair value with gains and losses flowing through earnings or that is classified as held-for-sale and is carried at the lower of cost or fair value with losses flowing through earnings, zero. (2) For all other wholesale exposures to non-defaulted obligors or segments of non-defaulted retail exposures, the product of the probability of default (PD) times the loss given default (LGD) times the exposure at default (EAD) for the exposure or segment. (3) For a wholesale exposure to a defaulted obligor or segment of defaulted retail exposures, the national bank's or Federal savings association's impairment estimate for allowance purposes for the exposure or segment. (4) Total ECL is the sum of expected credit losses for all wholesale and retail exposures other than exposures for which the national bank or Federal savings association has applied the double default treatment in § 3.135. Exposure amount (1) For the on-balance sheet component of an exposure (other than an available-for-sale or held-to-maturity security, if the national bank or Federal savings association has made an AOCI opt-out election (as defined in § 3.22(b)(2)); an OTC derivative contract; a repo-style transaction or an eligible margin loan for which the national bank or Federal savings association determines the exposure amount under § 3.37; a cleared transaction; a default fund contribution; or a securitization exposure), the national bank's or Federal savings association's carrying value of the exposure. (2) For a security (that is not a securitization exposure, equity exposure, or preferred stock classified as an equity security under GAAP) classified as available-for-sale or held-to-maturity if the national bank or Federal savings association has made an AOCI opt-out election (as defined in § 3.22(b)(2)), the national bank's or Federal savings association's carrying value (including net accrued but unpaid interest and fees) for the exposure less any net unrealized gains on the exposure and plus any net unrealized losses on the exposure. (3) For available-for-sale preferred stock classified as an equity security under GAAP if the national bank or Federal savings association has made an AOCI opt-out election (as defined in § 3.22(b)(2)), the national bank's or Federal savings association's carrying value of the exposure less any net unrealized gains on the exposure that are reflected in such carrying value but excluded from the national bank's or Federal savings association's regulatory capital components. (4) For the off-balance sheet component of an exposure (other than an OTC derivative contract; a repo-style transaction or an eligible margin loan for which the national bank or Federal savings association calculates the exposure amount under § 3.37; a cleared transaction; a default fund contribution; or a securitization exposure), the notional amount of the off-balance sheet component multiplied by the appropriate credit conversion factor (CCF) in § 3.33. (5) For an exposure that is an OTC derivative contract, the exposure amount determined under § 3.34. (6) For an exposure that is a cleared transaction, the exposure amount determined under § 3.35. (7) For an exposure that is an eligible margin loan or repo-style transaction for which the bank calculates the exposure amount as provided in § 3.37, the exposure amount determined under § 3.37. (8) For an exposure that is a securitization exposure, the exposure amount determined under § 3.42. Federal Deposit Insurance Act Federal Deposit Insurance Corporation Improvement Act Federal savings association Fiduciary or custodial and safekeeping account Financial collateral (1) In the form of: (i) Cash on deposit with the national bank or Federal savings association (including cash held for the national bank or Federal savings association by a third-party custodian or trustee); (ii) Gold bullion; (iii) Long-term debt securities that are not resecuritization exposures and that are investment grade; (iv) Short-term debt instruments that are not resecuritization exposures and that are investment grade; (v) Equity securities that are publicly traded; (vi) Convertible bonds that are publicly traded; or (vii) Money market fund shares and other mutual fund shares if a price for the shares is publicly quoted daily; and (2) In which the national bank and Federal savings association has a perfected, first-priority security interest or, outside of the United States, the legal equivalent thereof (with the exception of cash on deposit; and notwithstanding the prior security interest of any custodial agent or any priority security interest granted to a CCP in connection with collateral posted to that CCP). Financial institution (1) A bank holding company; savings and loan holding company; nonbank financial institution supervised by the Board under Title I of the Dodd-Frank Act; 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; national association, state member bank, or state non-member bank that is not a depository institution; insurance company; securities holding company as defined in section 618 of the Dodd-Frank Act; broker or dealer registered with the SEC under section 15 of the Securities Exchange Act; futures commission merchant as defined in section 1a of the Commodity Exchange Act; swap dealer as defined in section 1a of the Commodity Exchange Act; or security-based swap dealer as defined in section 3 of the Securities Exchange Act; (2) Any designated financial market utility, as defined in section 803 of the Dodd-Frank Act; (3) Any entity 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) or (2) of this definition; or (4) Any other company: (i) Of which the national bank or Federal savings association owns: (A) An investment in GAAP equity instruments of the company with an adjusted carrying value or exposure amount equal to or greater than $10 million; or (B) More than 10 percent of the company's issued and outstanding common shares (or similar equity interest), and (ii) Which is predominantly engaged in the following activities: (A) Lending money, securities or other financial instruments, including servicing loans; (B) Insuring, guaranteeing, indemnifying against loss, harm, damage, illness, disability, or death, or issuing annuities; (C) Underwriting, dealing in, making a market in, or investing as principal in securities or other financial instruments; or (D) Asset management activities (not including investment or financial advisory activities). (5) For the purposes of this definition, a company is “predominantly engaged” in an activity or activities if: (i) 85 percent or more of the total consolidated annual gross revenues (as determined in accordance with applicable accounting standards) of the company is either of the two most recent calendar years were derived, directly or indirectly, by the company on a consolidated basis from the activities; or (ii) 85 percent or more of the company's consolidated total assets (as determined in accordance with applicable accounting standards) as of the end of either of the two most recent calendar years were related to the activities. (6) Any other company that the OCC may determine is a financial institution based on activities similar in scope, nature, or operation to those of the entities included in paragraphs (1) through (4) of this definition. (7) For purposes of this part, “financial institution” does not include the following entities: (i) GSEs; (ii) Small business investment companies, as defined in section 102 of the Small Business Investment Act of 1958 (15 U.S.C. 662); (iii) Entities designated as Community Development Financial Institutions (CDFIs) under 12 U.S.C. 4701 et seq. (iv) Entities registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1) or foreign equivalents thereof; (v) Entities to the extent that the national bank's or Federal savings association's investment in such entities would qualify as a community development investment under section 24 (Eleventh) of the National Bank Act; and (vi) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of ERISA, 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. First-lien residential mortgage exposure Foreign bank Forward agreement FR Y-9LP FR Y-15 GAAP Gain-on-sale General obligation Government-sponsored enterprise Guarantee High volatility commercial real estate (HVCRE) exposure (1) A credit facility secured by land or improved real property that, prior to being reclassified by the depository institution as a non-HVCRE exposure pursuant to paragraph (6) of this definition— (i) Primarily finances, has financed, or refinances the acquisition, development, or construction of real property; (ii) Has the purpose of providing financing to acquire, develop, or improve such real property into income-producing real property; and (iii) Is dependent upon future income or sales proceeds from, or refinancing of, such real property for the repayment of such credit facility; (2) An HVCRE exposure does not include a credit facility financing— (i) The acquisition, development, or construction of properties that are— (A) One- to four-family residential properties. Credit facilities that do not finance the construction of one- to four-family residential structures, but instead solely finance improvements such as the laying of sewers, water pipes, and similar improvements to land, do not qualify for the one- to four-family residential properties exclusion; (B) Real property that would qualify as an investment in community development; or (C) Agricultural land; (ii) The acquisition or refinance of existing income-producing real property secured by a mortgage on such property, if the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the national bank's or Federal savings association's applicable loan underwriting criteria for permanent financings; (iii) Improvements to existing income-producing improved real property secured by a mortgage on such property, if the cash flow being generated by the real property is sufficient to support the debt service and expenses of the real property, in accordance with the national bank's or Federal savings association's applicable loan underwriting criteria for permanent financings; or (iv) Commercial real property projects in which— (A) The loan-to-value ratio is less than or equal to the applicable maximum supervisory loan-to-value ratio as determined by the OCC; (B) The borrower has contributed capital of at least 15 percent of the real property's appraised, `as completed' value to the project in the form of— ( 1 ( 2 ( 3 ( 4 (C) The borrower contributed the minimum amount of capital described under paragraph (2)(iv)(B) of this definition before the national bank or Federal savings association advances funds (other than the advance of a nominal sum made in order to secure the national bank's or Federal savings association's lien against the real property) under the credit facility, and such minimum amount of capital contributed by the borrower is contractually required to remain in the project until the HVCRE exposure has been reclassified by the national bank or Federal savings association as a non-HVCRE exposure under paragraph (6) of this definition; (3) An HVCRE exposure does not include any loan made prior to January 1, 2015; and (4) An HVCRE exposure does not include a credit facility reclassified as a non-HVCRE exposure under paragraph (6) of this definition. (5) Value of contributed real property: For the purposes of this HVCRE exposure definition, the value of any real property contributed by a borrower as a capital contribution shall be the appraised value of the property as determined under standards prescribed pursuant to section 1110 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 3339), in connection with the extension of the credit facility or loan to such borrower. (6) Reclassification as a non-HVCRE exposure: For purposes of this HVCRE exposure definition and with respect to a credit facility and a national bank or Federal savings association, a national bank or Federal savings association may reclassify an HVCRE exposure as a non-HVCRE exposure upon— (i) The substantial completion of the development or construction of the real property being financed by the credit facility; and (ii) Cash flow being generated by the real property being sufficient to support the debt service and expenses of the real property, in accordance with the national bank's or Federal savings association's applicable loan underwriting criteria for permanent financings. (7) For purposes of this definition, a national bank or Federal savings association is not required to reclassify a credit facility that was originated on or after January 1, 2015 and prior to April 1, 2020. Home country Independent collateral Indirect exposure Insurance company Insurance underwriting company Insured depository institution Interest rate derivative contract International Lending Supervision Act et seq. Investing bank Investment fund (1) Where all or substantially all of the assets of the company are financial assets; and (2) That has no material liabilities. Investment grade Investment in a covered debt instrument Investment in the capital of an unconsolidated financial institution Investment in the national bank's or Federal savings association's own capital instrument Junior-lien residential mortgage exposure Main index Market risk national bank or Federal savings association Minimum transfer amount Money market fund Mortgage servicing assets (MSAs) Multilateral development bank (MDB) National Bank Act Net independent collateral amount Netting set (1) That is not subject to such a master netting agreement; or (2) Where the national bank or Federal savings association has identified specific wrong-way risk. Non-significant investment in the capital of an unconsolidated financial institution N th -to-default credit derivative th Operating entity Original maturity (1) For a commitment that is not subject to extension or renewal, the stated expiration date of the commitment; or (2) For a commitment that is subject to extension or renewal, the earliest date on which the national bank or Federal savings association can, at its option, unconditionally cancel the commitment. Originating national bank or Federal savings association, (1) Directly or indirectly originated or securitized the underlying exposures included in the securitization; or (2) Serves as an ABCP program sponsor to the securitization. Over-the-counter (OTC) derivative contract (1) Between a national bank or Federal savings association that is a clearing member and a counterparty where the national bank or Federal savings association is acting as a financial intermediary and enters into a cleared transaction with a CCP that offsets the transaction with the counterparty; or (2) In which a national bank or Federal savings association that is a clearing member provides a CCP a guarantee on the performance of the counterparty to the transaction. Performance standby letter of credit (or performance bond) Pre-sold construction loan (1) The loan is made in accordance with prudent underwriting standards, meaning that the national bank or Federal savings association has obtained sufficient documentation that the buyer of the home has a legally binding written sales contract and has a firm written commitment for permanent financing of the home upon completion; (2) The purchaser is an individual(s) that intends to occupy the residence and is not a partnership, joint venture, trust, corporation, or any other entity (including an entity acting as a sole proprietorship) that is purchasing one or more of the residences for speculative purposes; (3) The purchaser has entered into a legally binding written sales contract for the residence; (4) The purchaser has not terminated the contract; (5) The purchaser has made a substantial earnest money deposit of no less than 3 percent of the sales price, which is subject to forfeiture if the purchaser terminates the sales contract; provided that, the earnest money deposit shall not be subject to forfeiture by reason of breach or termination of the sales contract on the part of the builder; (6) The earnest money deposit must be held in escrow by the national bank or Federal savings association or an independent party in a fiduciary capacity, and the escrow agreement must provide that in an event of default arising from the cancellation of the sales contract by the purchaser of the residence, the escrow funds shall be used to defray any cost incurred by the national bank or Federal savings association; (7) The builder must incur at least the first 10 percent of the direct costs of construction of the residence (that is, actual costs of the land, labor, and material) before any drawdown is made under the loan; (8) The loan may not exceed 80 percent of the sales price of the presold residence; and (9) The loan is not more than 90 days past due, or on nonaccrual. Protection amount (P) Publicly-traded (1) Any exchange registered with the SEC as a national securities exchange under section 6 of the Securities Exchange Act; 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 instrument in question. Public sector entity (PSE) Qualifying central bank (1) A Federal Reserve Bank; (2) The European Central Bank; and (3) The central bank of any member country of the OECD, if: (i) Sovereign exposures to the member country would receive a zero percent risk-weight under § 3.32; and (ii) The sovereign debt of the member country is not in default or has not been in default during the previous 5 years. Qualifying central counterparty (QCCP) (1)(i) Is a designated financial market utility (FMU) under Title VIII of the Dodd-Frank Act; (ii) If not located in the United States, is regulated and supervised in a manner equivalent to a designated FMU; or (iii) Meets the following standards: (A) The central counterparty requires all parties to contracts cleared by the counterparty to be fully collateralized on a daily basis; (B) The national bank or Federal savings association demonstrates to the satisfaction of the OCC that the central counterparty: ( 1 ( 2 ( 3 (2)(i) Provides the national bank or Federal savings association with the central counterparty's hypothetical capital requirement or the information necessary to calculate such hypothetical capital requirement, and other information the national bank or Federal savings association is required to obtain under §§ 3.35(d)(3) and 3.133(d)(3); (ii) Makes available to the OCC and the CCP's regulator the information described in paragraph (2)(i) of this definition; and (iii) Has not otherwise been determined by the OCC to not be a QCCP due to its financial condition, risk profile, failure to meet supervisory risk management standards, or other weaknesses or supervisory concerns that are inconsistent with the risk weight assigned to qualifying central counterparties under §§ 3.35 and 3.133. (3) Exception. A QCCP that fails to meet the requirements of a QCCP in the future may still be treated as a QCCP under the conditions specified in § 3.3(f). Qualifying master netting agreement (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; and (2) The agreement provides the national bank or Federal savings association 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 7 7 (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, and part 382, of this title 12, as applicable. Regulated financial institution Repo-style transaction (1) The transaction is based solely on liquid and readily marketable securities, cash, or gold; (2) The transaction is marked-to-fair value daily and subject to daily margin maintenance requirements; (3)(i) The transaction is a “securities contract” or “repurchase agreement” under section 555 or 559, respectively, of the Bankruptcy Code (11 U.S.C. 555 or 559), a qualified financial contract under section 11(e)(8) of the Federal Deposit Insurance Act, or a netting contract between or among financial institutions under sections 401-407 of the Federal Deposit Insurance Corporation Improvement Act or the Federal Reserve Board's Regulation EE (12 CFR part 231); or (ii) If the transaction does not meet the criteria set forth in paragraph (3)(i) of this definition, then either: (A) The transaction is executed under an agreement that provides the national bank or Federal savings association the right to accelerate, terminate, and close-out the transaction on a net basis and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case: ( 1 8 1 8 ( 2 (B) The transaction is: ( 1 ( 2 (4) In order to recognize an exposure as a repo-style transaction for purposes of this subpart, a national bank or Federal savings association must comply with the requirements of § 3.3(e) of this part with respect to that exposure. Resecuritization Resecuritization exposure (1) An on- or off-balance sheet exposure to a resecuritization; (2) An exposure that directly or indirectly references a resecuritization exposure. (3) An exposure to an asset-backed commercial paper program is not a resecuritization exposure if either: (i) The program-wide credit enhancement does not meet the definition of a resecuritization exposure; or (ii) The entity sponsoring the program fully supports the commercial paper through the provision of liquidity so that the commercial paper holders effectively are exposed to the default risk of the sponsor instead of the underlying exposures. Residential mortgage exposure (1)(i) That is primarily secured by a first or subsequent lien on one-to-four family residential property; or (ii) With an original and outstanding amount of $1 million or less that is primarily secured by a first or subsequent lien on residential property that is not one-to-four family; and (2) For purposes of calculating capital requirements under subpart E of this part, managed as part of a segment of exposures with homogeneous risk characteristics and not on an individual-exposure basis. Revenue obligation Savings and loan holding company Securities and Exchange Commission (SEC) Securities Exchange Act Securitization exposure (1) An on-balance sheet or off-balance sheet credit exposure (including credit-enhancing representations and warranties) that arises from a traditional securitization or synthetic securitization (including a resecuritization), or (2) An exposure that directly or indirectly references a securitization exposure described in paragraph (1) of this definition. Securitization special purpose entity (securitization SPE) Separate account (1) The account must be legally recognized as a separate account under applicable law; (2) The assets in the account must be insulated from general liabilities of the insurance company under applicable law in the event of the insurance company's insolvency; (3) The insurance company must invest the funds within the account as directed by the contract holder in designated investment alternatives or in accordance with specific investment objectives or policies; and (4) All investment gains and losses, net of contract fees and assessments, must be passed through to the contract holder, provided that the contract may specify conditions under which there may be a minimum guarantee but must not include contract terms that limit the maximum investment return available to the policyholder. Servicer cash advance facility Significant investment in the capital of an unconsolidated financial institution Small Business Act Small Business Investment Act Sovereign Sovereign default Sovereign exposure (1) A direct exposure to a sovereign; or (2) An exposure directly and unconditionally backed by the full faith and credit of a sovereign. Specific wrong-way risk (1) The counterparty and issuer of the collateral supporting the transaction; or (2) The counterparty and the reference asset of the transaction, are affiliates or are the same entity. Speculative grade Standardized market risk-weighted assets Standardized total risk-weighted assets (1) The sum of: (i) Total risk-weighted assets for general credit risk as calculated under § 3.31; (ii) Total risk-weighted assets for cleared transactions and default fund contributions as calculated under § 3.35; (iii) Total risk-weighted assets for unsettled transactions as calculated under § 3.38; (iv) Total risk-weighted assets for securitization exposures as calculated under § 3.42; (v) Total risk-weighted assets for equity exposures as calculated under §§ 3.52 and 3.53; and (vi) For a market risk national bank or Federal savings association only, standardized market risk-weighted assets; minus (2) Any amount of a national bank's or Federal savings association's allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, that is not included in tier 2 capital and any amount of “allocated transfer risk reserves. Statutory multifamily mortgage 9 9 (1) The loan is made in accordance with prudent underwriting standards; (2) The principal amount of the loan at origination does not exceed 80 percent of the value of the property (or 75 percent of the value of the property if the loan is based on an interest rate that changes over the term of the loan) where the value of the property is the lower of the acquisition cost of the property or the appraised (or, if appropriate, evaluated) value of the property; (3) All principal and interest payments on the loan must have been made on a timely basis in accordance with the terms of the loan for at least one year prior to applying a 50 percent risk weight to the loan, or in the case where an existing owner is refinancing a loan on the property, all principal and interest payments on the loan being refinanced must have been made on a timely basis in accordance with the terms of the loan for at least one year prior to applying a 50 percent risk weight to the loan; (4) Amortization of principal and interest on the loan must occur over a period of not more than 30 years and the minimum original maturity for repayment of principal must not be less than 7 years; (5) Annual net operating income (before making any payment on the loan) generated by the property securing the loan during its most recent fiscal year must not be less than 120 percent of the loan's current annual debt service (or 115 percent of current annual debt service if the loan is based on an interest rate that changes over the term of the loan) or, in the case of a cooperative or other not-for-profit housing project, the property must generate sufficient cash flow to provide comparable protection to the national bank or Federal savings association; and (6) The loan is not more than 90 days past due, or on nonaccrual. Sub-speculative grade Subsidiary Synthetic exposure Synthetic securitization (1) All or a portion of the credit risk of one or more underlying exposures is retained or transferred to one or more third parties through the use of one or more credit derivatives or guarantees (other than a guarantee that transfers only the credit risk of an individual retail exposure); (2) The credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority; (3) Performance of the securitization exposures depends upon the performance of the underlying exposures; and (4) All or substantially all of the underlying exposures are financial exposures (such as loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities). Tangible capital means Tier 1 capital Tier 1 minority interest Tier 2 capital Total capital Total capital minority interest Total leverage exposure Traditional securitization (1) All or a portion of the credit risk of one or more underlying exposures is transferred to one or more third parties other than through the use of credit derivatives or guarantees; (2) The credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority; (3) Performance of the securitization exposures depends upon the performance of the underlying exposures; (4) All or substantially all of the underlying exposures are financial exposures (such as loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities); (5) The underlying exposures are not owned by an operating company; (6) The underlying exposures are not owned by a small business investment company defined in section 302 of the Small Business Investment Act; (7) The underlying exposures are not owned by a firm an investment in which qualifies as a community development investment under section 24(Eleventh) of the National Bank Act; (8) The OCC may determine that a transaction in which the underlying exposures are owned by an investment firm that exercises substantially unfettered control over the size and composition of its assets, liabilities, and off-balance sheet exposures is not a traditional securitization based on the transaction's leverage, risk profile, or economic substance; (9) The OCC may deem a transaction that meets the definition of a traditional securitization, notwithstanding paragraph (5), (6), or (7) of this definition, to be a traditional securitization based on the transaction's leverage, risk profile, or economic substance; and (10) The transaction is not: (i) An investment fund; (ii) A collective investment fund (as defined in 12 CFR 9.18 (national banks), 12 CFR 151.40 (Federal saving associations); (iii) An employee benefit plan (as defined in paragraphs (3) and (32) of section 3 of ERISA), 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; (iv) A synthetic exposure to the capital of a financial institution to the extent deducted from capital under § 3.22; or (v) Registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1) or foreign equivalents thereof. Tranche Two-way market Unconditionally cancelable Underlying exposures Unregulated financial institution U.S. Government agency Value-at-Risk (VaR) Variation margin Variation margin agreement Variation margin amount Variation margin threshold Volatility derivative contract Wrong-way risk [78 FR 62157, 62273, Oct. 11, 2013, as amended at 79 FR 44123, July 30, 2014; 79 FR 57740, Sept. 26, 2014; 79 FR 78293, Dec. 30, 2014; 80 FR 41415, July 15, 2015; 82 FR 56661, Nov. 29, 2017; 84 FR 4237, Feb. 14, 2019; 84 FR 35248, July 22, 2019; 84 FR 59263, Nov. 1, 2019; 84 FR 61792, Nov. 13, 2019; 84 FR 68031, Dec. 13, 2019; 85 FR 4400, Jan. 24, 2020; 85 FR 4577, Jan. 27, 2020; 85 FR 20393, Apr. 13, 2020; 85 FR 42640, July 14, 2020; 86 FR 724, Jan. 6, 2021] § 3.3 Operational requirements for counterparty credit risk. For purposes of calculating risk-weighted assets under subparts D and E of this part: (a) Cleared transaction. (1) The offsetting transaction must be identified by the CCP as a transaction for the clearing member client. (2) The collateral supporting the transaction must be held in a manner that prevents the national bank or Federal savings association from facing any loss due to an event of default, including from a liquidation, receivership, insolvency, or similar proceeding of either the clearing member or the clearing member's other clients. Omnibus accounts established under 17 CFR parts 190 and 300 satisfy the requirements of this paragraph (a). (3) The national bank or Federal savings association must conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from a default or receivership, insolvency, liquidation, or similar proceeding) the relevant court and administrative authorities would find the arrangements of paragraph (a)(2) of this section to be legal, valid, binding and enforceable under the law of the relevant jurisdictions. (4) The offsetting transaction with a clearing member must be transferable under the transaction documents and applicable laws in the relevant jurisdiction(s) to another clearing member should the clearing member default, become insolvent, or enter receivership, insolvency, liquidation, or similar proceedings. (b) Eligible margin loan. (1) Meets the requirements of paragraph (1)(iii) of the definition of eligible margin loan in § 3.2, and (2) Is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions. (c) Qualifying cross-product master netting agreement. (d) Qualifying master netting agreement. (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 paragraph (2) of the definition of qualifying master netting agreement in § 3.2; and (ii) In the event of a legal challenge (including one resulting from default or from receivership, 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 (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 § 3.2. (e) Repo-style transaction. (1) Meets the requirements of paragraph (3) of the definition of repo-style transaction in § 3.2, and (2) Is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions. (f) Failure of a QCCP to satisfy the rule's requirements. §§ 3.4-3.9 [Reserved] Subpart B—Capital Ratio Requirements and Buffers Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted. § 3.10 Minimum capital requirements. (a) Minimum capital requirements. (i) A common equity tier 1 capital ratio of 4.5 percent. (ii) A tier 1 capital ratio of 6 percent. (iii) A total capital ratio of 8 percent. (iv) A leverage ratio of 4 percent. (v) For advanced approaches national banks or Federal savings associations or, for Category III OCC-regulated institutions, a supplementary leverage ratio of 3 percent. (vi) For Federal savings associations, a tangible capital ratio of 1.5 percent. (2) A qualifying community banking organization (as defined in § 3.12), that is subject to the community bank leverage ratio framework (as defined in § 3.12), is considered to have met the minimum capital requirements in this paragraph (a). (b) Standardized capital ratio calculations. (1) Common equity tier 1 capital ratio. (2) Tier 1 capital ratio. (3) Total capital ratio. (4) Leverage ratio. (5) Federal savings association tangible capital ratio. (c) Supplementary leverage ratio. (i) The mean of the on-balance sheet assets calculated as of each day of the reporting quarter; and (ii) The mean of the off-balance sheet exposures calculated as of the last day of each of the most recent three months, minus the applicable deductions under § 3.22(a), (c), and (d). (2) For purposes of this part, total leverage exposure (i) The balance sheet carrying value of all of the national bank or Federal savings association's on-balance sheet assets, plus less less less (ii)(A) For a national bank or Federal savings association that uses the current exposure methodology under § 3.34(b) for its standardized risk-weighted assets, the potential future credit exposure (PFE) for each derivative contract or each single-product netting set of derivative contracts (including a cleared transaction except as provided in paragraph (c)(2)(ix) of this section and, at the discretion of the national bank or Federal savings association, excluding a forward agreement treated as a derivative contract that is part of a repurchase or reverse repurchase or a securities borrowing or lending transaction that qualifies for sales treatment under GAAP), to which the national bank or Federal savings association is a counterparty as determined under § 3.34, but without regard to § 3.34(c), provided that: ( 1 ( 2 (B)( 1 1 ( 2 (iii)(A)( 1 ( 2 ( 3 2 (B)( 1 Replacement Cost V CVM r CVM p ; Where: V CVM r CVM p ( 2 1 MA ( 3 1 (C) For derivative contracts that are not cleared through a QCCP, the cash collateral received by the recipient counterparty is not segregated (by law, regulation, or an agreement with the counterparty); (D) Variation margin is calculated and transferred on a daily basis based on the mark-to-fair value of the derivative contract; (E) The variation margin transferred under the derivative contract or the governing rules of the CCP or QCCP for a cleared transaction is the full amount that is necessary to fully extinguish the net current credit exposure to the counterparty of the derivative contracts, subject to the threshold and minimum transfer amounts applicable to the counterparty under the terms of the derivative contract or the governing rules for a cleared transaction; (F) The variation margin is in the form of cash in the same currency as the currency of settlement set forth in the derivative contract, provided that for the purposes of this paragraph (c)(2)(iii)(F), currency of settlement means any currency for settlement specified in the governing qualifying master netting agreement and the credit support annex to the qualifying master netting agreement, or in the governing rules for a cleared transaction; and (G) The derivative contract and the variation margin are governed by a qualifying master netting agreement between the legal entities that are the counterparties to the derivative contract or by the governing rules for a cleared transaction, and the qualifying master netting agreement or the governing rules for a cleared transaction must explicitly stipulate that the counterparties agree to settle any payment obligations on a net basis, taking into account any variation margin received or provided under the contract if a credit event involving either counterparty occurs; (iv) The effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the derivative contract) of a credit derivative, or other similar instrument, through which the national bank or Federal savings association provides credit protection, provided that: (A) The national bank or Federal savings association may reduce the effective notional principal amount of the credit derivative by the amount of any reduction in the mark-to-fair value of the credit derivative if the reduction is recognized in common equity tier 1 capital; (B) The national bank or Federal savings association may reduce the effective notional principal amount of the credit derivative by the effective notional principal amount of a purchased credit derivative or other similar instrument, provided that the remaining maturity of the purchased credit derivative is equal to or greater than the remaining maturity of the credit derivative through which the national bank or Federal savings association provides credit protection and that: ( 1 pari passu ( 2 pari passu pari passu ( 3 ( 4 (v) Where a national bank or Federal savings association acting as a principal has more than one repo-style transaction with the same counterparty and has offset the gross value of receivables due from a counterparty under reverse repurchase transactions by the gross value of payables under repurchase transactions due to the same counterparty, the gross value of receivables associated with the repo-style transactions less (A) The offsetting transactions have the same explicit final settlement date under their governing agreements; (B) The right to offset the amount owed to the counterparty with the amount owed by the counterparty is legally enforceable in the normal course of business and in the event of receivership, insolvency, liquidation, or similar proceeding; and (C) Under the governing agreements, the counterparties intend to settle net, settle simultaneously, or settle according to a process that is the functional equivalent of net settlement, (that is, the cash flows of the transactions are equivalent, in effect, to a single net amount on the settlement date), where both transactions are settled through the same settlement system, the settlement arrangements are supported by cash or intraday credit facilities intended to ensure that settlement of both transactions will occur by the end of the business day, and the settlement of the underlying securities does not interfere with the net cash settlement; (vi) The counterparty credit risk of a repo-style transaction, including where the national bank or Federal savings association acts as an agent for a repo-style transaction and indemnifies the customer with respect to the performance of the customer's counterparty in an amount limited to the difference between the fair value of the security or cash its customer has lent and the fair value of the collateral the borrower has provided, calculated as follows: (A) If the transaction is not subject to a qualifying master netting agreement, the counterparty credit risk (E*) for transactions with a counterparty must be calculated on a transaction by transaction basis, such that each transaction i i i E i i i (B) If the transaction is subject to a qualifying master netting agreement, the counterparty credit risk (E*) must be calculated as the greater of zero and the total fair value of the instruments, gold, or cash that the national bank or Federal savings association has lent, sold subject to repurchase or provided as collateral to a counterparty for all transactions included in the qualifying master netting agreement (ΣE i less i E* = max {0, [ΣE i i (vii) If a national bank or Federal savings association acting as an agent for a repo-style transaction provides a guarantee to a customer of the security or cash its customer has lent or borrowed with respect to the performance of the customer's counterparty and the guarantee is not limited to the difference between the fair value of the security or cash its customer has lent and the fair value of the collateral the borrower has provided, the amount of the guarantee that is greater than the difference between the fair value of the security or cash its customer has lent and the value of the collateral the borrower has provided; (viii) The credit equivalent amount of all off-balance sheet exposures of the national bank or Federal savings association, excluding repo-style transactions, repurchase or reverse repurchase or securities borrowing or lending transactions that qualify for sales treatment under GAAP, and derivative transactions, determined using the applicable credit conversion factor under § 3.33(b), provided, however, that the minimum credit conversion factor that may be assigned to an off-balance sheet exposure under this paragraph is 10 percent; and (ix) For a national bank or Federal savings association that is a clearing member: (A) A clearing member national bank or Federal savings association that guarantees the performance of a clearing member client with respect to a cleared transaction must treat its exposure to the clearing member client as a derivative contract for purposes of determining its total leverage exposure; (B) A clearing member national bank or Federal savings association that guarantees the performance of a CCP with respect to a transaction cleared on behalf of a clearing member client must treat its exposure to the CCP as a derivative contract for purposes of determining its total leverage exposure; (C) A clearing member national bank or Federal savings association that does not guarantee the performance of a CCP with respect to a transaction cleared on behalf of a clearing member client may exclude its exposure to the CCP for purposes of determining its total leverage exposure; (D) A national bank or Federal savings association that is a clearing member may exclude from its total leverage exposure the effective notional principal amount of credit protection sold through a credit derivative contract, or other similar instrument, that it clears on behalf of a clearing member client through a CCP as calculated in accordance with paragraph (c)(2)(iv) of this section; and (E) Notwithstanding paragraphs (c)(2)(ix)(A) through (C) of this section, a national bank or Federal savings association may exclude from its total leverage exposure a clearing member's exposure to a clearing member client for a derivative contract, if the clearing member client and the clearing member are affiliates and consolidated for financial reporting purposes on the national bank's or Federal savings association's balance sheet. (x) A custodial bank shall exclude from its total leverage exposure the lesser of: (A) The amount of funds that the custody bank has on deposit at a qualifying central bank; and (B) The amount of funds that the custody bank's clients have on deposit at the custody bank that are linked to fiduciary or custodial and safekeeping accounts. For purposes of this paragraph (c)(2)(x), a deposit account is linked to a fiduciary or custodial and safekeeping account if the deposit account is provided to a client that maintains a fiduciary or custodial and safekeeping account with the custody bank, and the deposit account is used to facilitate the administration of the fiduciary or custody and safekeeping account. (d) Advanced approaches capital ratio calculations. (1) Common equity tier 1 capital ratio. (i) The ratio of the national bank's or Federal savings association's common equity tier 1 capital to standardized total risk-weighted assets; and (ii) The ratio of the national bank's or Federal savings association's common equity tier 1 capital to advanced approaches total risk-weighted assets. (2) Tier 1 capital ratio. (i) The ratio of the national bank's or Federal savings association's tier 1 capital to standardized total risk-weighted assets; and (ii) The ratio of the national bank's or Federal savings association's tier 1 capital to advanced approaches total risk-weighted assets. (3) Total capital ratio. (i) The ratio of the national bank's or Federal savings association's total capital to standardized total risk-weighted assets; and (ii) The ratio of the national bank's or Federal savings association's advanced-approaches-adjusted total capital to advanced approaches total risk-weighted assets. A national bank's or Federal savings association's advanced-approaches-adjusted total capital is the national bank's or Federal savings association's total capital after being adjusted as follows: (A) An advanced approaches national bank or Federal savings association must deduct from its total capital any allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, included in its tier 2 capital in accordance with § 3.20(d)(3); and (B) An advanced approaches national bank or Federal savings association must add to its total capital any eligible credit reserves that exceed the national bank's or Federal savings association's total expected credit losses to the extent that the excess reserve amount does not exceed 0.6 percent of the national bank's or Federal savings association's credit risk-weighted assets. (4) Federal savings association tangible capital ratio. (e) Capital adequacy. (2) A national bank or Federal savings association must have a process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive strategy for maintaining an appropriate level of capital. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 79 FR 57740, Sept. 26, 2014; 80 FR 41415, July 15, 2015; 84 FR 4238, Feb. 14, 2019; 84 FR 35248, July 22, 2019; 84 FR 59264, Nov. 1, 2019; 84 FR 61792, Nov. 13, 2019; 85 FR 4401, Jan. 24, 2020; 85 FR 4577, Jan. 27, 2020; 85 FR 57959, Sept. 17, 2020; 86 FR 725, Jan. 6, 2021] § 3.11 Capital conservation buffer and countercyclical capital buffer amount. (a) Capital conservation buffer Composition of the capital conservation buffer. (2) Definitions. (i) Eligible retained income. (A) The national bank's or Federal savings association's net income, calculated in accordance with the instructions to the Call Report, 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 national bank's or Federal savings association's net income, calculated in accordance with the instructions to the Call Report, for the four calendar quarters preceding the current calendar quarter. (ii) Maximum payout ratio. (iii) Maximum payout amount. (iv) Private sector credit exposure. (v) Leverage buffer standard. (3) Calculation of capital conservation buffer. (A) The national bank or Federal savings association's common equity tier 1 capital ratio minus the national bank or Federal savings association 's minimum common equity tier 1 capital ratio requirement under § 3.10; (B) The national bank or Federal savings association's tier 1 capital ratio minus the national bank or Federal savings association's minimum tier 1 capital ratio requirement under § 3.10; and (C) The national bank or Federal savings association's total capital ratio minus the national bank or Federal savings association's minimum total capital ratio requirement under § 3.10; or (ii) Notwithstanding paragraphs (a)(3)(i)(A)-(C) of this section, if the national bank's or Federal savings association's common equity tier 1, tier 1 or total capital ratio is less than or equal to the national bank's or Federal savings association's minimum common equity tier 1, tier 1 or total capital ratio requirement under § 3.10, respectively, the national bank's or Federal savings association's capital conservation buffer is zero. (4) Limits on distributions and discretionary bonus payments. (ii) A national bank or Federal savings association, with a capital conservation buffer that is greater than 2.5 percent plus 100 percent of its applicable countercyclical capital buffer, in accordance with paragraph (b) of this section and, if applicable, a leverage buffer greater than its leverage buffer standard is not subject to a maximum payout amount under this section. (iii) Negative eligible retained income. (A) Eligible retained income is negative; (B) Capital conservation buffer was less than 2.5 percent as of the end of the previous calendar quarter; and (C) If applicable, leverage buffer, calculated as of the last day of the previous calendar quarter, was less than its leverage buffer standard. (iv) Prior approval. Table 1 to § 3.11—Calculation of Maximum Payout Amount Capital conservation buffer Maximum payout ratio Greater than 2.5 percent plus 100 percent of the national bank's or Federal savings association's applicable countercyclical capital buffer amount No payout ratio limitation applies. Less than or equal to 2.5 percent plus 100 percent of the national bank's or Federal savings association's applicable countercyclical capital buffer amount, and 60 percent. Less than or equal to 1.875 percent plus 75 percent of the national bank's or Federal savings association's applicable countercyclical capital buffer amount, and 40 percent. Less than or equal to 1.25 percent plus 50 percent of the national bank's or Federal savings association's applicable countercyclical capital buffer amount, and 20 percent. Less than or equal to 0.625 percent plus 25 percent of the national bank's or Federal savings association's applicable countercyclical capital buffer amount 0 percent. (v) Other limitations on distributions. (b) Countercyclical capital buffer amount General. (i) Extension of capital conservation buffer. (ii) Amount. (iii) Weighting. (iv) Location. (B) If, in accordance with subparts D or E of this part, the national bank or Federal savings association has assigned to a private sector credit exposure a risk weight associated with a protection provider on a guarantee or credit derivative, the location of the exposure is the national jurisdiction where the protection provider is located. (C) The location of a securitization exposure is the location of the underlying exposures, or, if the underlying exposures are located in more than one national jurisdiction, the national jurisdiction where the underlying exposures with the largest aggregate unpaid principal balance are located. For purposes of this paragraph (b), the location of an underlying exposure shall be the location of the borrower, determined consistent with paragraph (b)(1)(iv)(A) of this section. (2) Countercyclical capital buffer amount for credit exposures in the United States Initial countercyclical capital buffer amount with respect to credit exposures in the United States. (ii) Adjustment of the countercyclical capital buffer amount. 10 10 (iii) Range of countercyclical capital buffer amount. (iv) Adjustment determination. (v) Effective date of adjusted countercyclical capital buffer amount Increase adjustment. (B) Decrease adjustment. (vi) Twelve month sunset. (3) Countercyclical capital buffer amount for foreign jurisdictions. (c) Calculation of maximum payout ratio for a national bank or Federal savings association that is a subsidiary of a U.S. top-tier bank holding company that has more than $700 billion in total assets as reported on the company's most recent Consolidated Financial Statement for Bank Holding Companies (Form FR Y-9C) or more than $10 trillion in assets under custody as reported on the company's most recent Banking Organization Systemic Risk Report (Form FR Y-15) Maximum Payout Ratio. (2) Leverage buffer. (ii) A national bank or Federal savings association that is a subsidiary of a U.S. top-tier bank holding company that has more than $700 billion in total assets as reported on the company's most recent Consolidated Financial Statement for Bank Holding Companies (Form FR Y-9C) or more than $10 trillion in assets under custody as reported on the company's most recent Banking Organization Systemic Risk Report (Form FR Y-15) has a leverage buffer that is equal to the national bank's or Federal savings association's supplementary leverage ratio minus 3 percent, calculated as of the last day of the previous calendar quarter. (iii) Notwithstanding paragraph (c)(2)(ii) of this section, if the supplementary leverage ratio of the national bank or Federal savings association that is a subsidiary of a U.S. top-tier bank holding company that has more than $700 billion in total assets as reported on the company's most recent Consolidated Financial Statement for Bank Holding Companies (Form FR Y-9C) or more than $10 trillion in assets under custody as reported on the company's most recent Banking Organization Systemic Risk Report (Form FR Y-15) is less than or equal to 3 percent, the national bank's or Federal savings association's leverage buffer is zero. Table 2 to § 3.11—Calculation of Maximum Payout Leverage buffer Maximum payout Greater than the national bank's or Federal savings association's leverage buffer standard No payout ratio limitation applies. Less than or equal to 100 percent of the national bank's or Federal savings association's leverage buffer standard, and 60 percent. Less than or equal to 75 percent of the national bank's or Federal savings association's leverage buffer standard, and 40 percent. Less than or equal to 50 percent of national bank's or Federal savings association's leverage buffer standard, and 20 percent. Less than or equal to 25 percent of the national bank's or Federal savings association's leverage buffer standard 0 percent. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 35249, July 22, 2019; 84 FR 59265, Nov. 1, 2019; 85 FR 15915, Mar. 20, 2020; 90 FR 55287, Dec. 1, 2025] § 3.12 Community bank leverage ratio framework. (a) Community bank leverage ratio framework. (2) For purposes of this section, a qualifying community banking organization means a national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association and that satisfies all of the following criteria: (i) Has a leverage ratio of greater than 8 percent; (ii) Has total consolidated assets of less than $10 billion, calculated in accordance with the reporting instructions to the Call Report as of the end of the most recent calendar quarter; (iii) Has off-balance sheet exposures of 25 percent or less of its total consolidated assets as of the end of the most recent calendar quarter, calculated as the sum of the notional amounts of the exposures listed in paragraphs (a)(2)(iii)(A) through (I) of this section, divided by total consolidated assets, each as of the end of the most recent calendar quarter: (A) The unused portion of commitments (except for unconditionally cancellable commitments); (B) Self-liquidating, trade-related contingent items that arise from the movement of goods; (C) Transaction-related contingent items, including performance bonds, bid bonds, warranties, and performance standby letters of credit; (D) Sold credit protection through ( 1 ( 2 (E) Credit-enhancing representations and warranties; (F) Securities lent and borrowed, calculated in accordance with the reporting instructions to the Call Report; (G) Financial standby letters of credit; (H) Forward agreements that are not derivative contracts; and (I) Off-balance sheet securitization exposures; and (iv) Has total trading assets plus trading liabilities, calculated in accordance with the reporting instructions to the Call Report of 5 percent or less of the national bank's or Federal savings association's total consolidated assets, each as of the end of the most recent calendar quarter. (3)(i) A qualifying community banking organization may elect to use the community bank leverage ratio framework if it makes an opt-in election under this paragraph (a)(3). (ii) For purposes of this paragraph (a)(3), a qualifying community banking organization makes an election to use the community bank leverage ratio framework by completing the applicable reporting requirements of its Call Report. (iii)(A) A qualifying community banking organization that has elected to use the community bank leverage ratio framework may opt out of the community bank leverage ratio framework by completing the applicable risk-based and leverage ratio reporting requirements necessary to demonstrate compliance with § 3.10(a)(1) in its Call Report or by otherwise providing this information to the OCC. (B) A qualifying community banking organization that opts out of the community bank leverage ratio framework pursuant to paragraph (a)(3)(iii)(A) of this section must comply with § 3.10(a)(1) immediately. (b) Calculation of the leverage ratio. (1) Make adjustments and deductions from tier 2 capital for purposes of § 3.22(c); or (2) Calculate and deduct from tier 1 capital an amount resulting from insufficient tier 2 capital under § 3.22(f). (c) Treatment when ceasing to meet the qualifying community banking organization requirements. (2) The grace period begins as of the end of the calendar quarter in which the national bank or Federal savings association ceases to satisfy the criteria to be a qualifying community banking organization provided in paragraph (a)(2) of this section. The grace period ends on the last day of the fourth consecutive calendar quarter following the beginning of the grace period. (3) During the grace period, the national bank or Federal savings association continues to be treated as a qualifying community banking organization for the purpose of this part and must continue calculating and reporting its leverage ratio under this section unless the national bank or Federal savings association has opted out of using the community bank leverage ratio framework under paragraph (a)(3) of this section. (4) During the grace period, the qualifying community banking organization continues to be considered to have met the minimum capital requirements under § 3.10(a)(1), the capital ratio requirements for the well capitalized capital category under § 6.4(b)(1)(i)(A) through (D) of this chapter, and any other capital or leverage requirements to which the qualifying community banking organization is subject, and must continue calculating and reporting its leverage ratio under this section. (5) Notwithstanding paragraphs (c)(1) through (4) of this section, a national bank or Federal savings association that no longer meets the definition of a qualifying community banking organization as a result of a merger or acquisition has no grace period and immediately ceases to be a qualifying community banking organization. Such a national bank or Federal savings association must comply with the minimum capital requirements under § 3.10(a)(1) and must report the required capital measures under § 3.10(a)(1) for the quarter in which it ceases to be a qualifying community banking organization. (6) Notwithstanding paragraphs (c)(1) through (4) of this section, a national bank or Federal savings association that has a leverage ratio of 7 percent or less does not have a grace period and must comply with the minimum capital requirements under § 3.10(a)(1) and must report the required capital measures under § 3.10(a)(1) for the quarter in which it reports a leverage ratio of 7 percent or less. (7) Notwithstanding paragraphs (c)(1) through (4) of this section, a national bank or Federal savings association that has spent eight or more of the previous twenty quarters within the grace period may not use the grace period in the current quarter. If the national bank or Federal savings association does not meet the definition of a qualifying community banking organization in the current quarter, the national bank or Federal savings association must immediately comply with the minimum capital requirements under § 3.10(a)(1) and must report the required capital measures under § 3.10(a)(1). [84 FR 61792, Nov. 13, 2019, as amended at 85 FR 77359, Dec. 2, 2020; 91 FR 22988, Apr. 29, 2026] §§ 3.13-3.19 [Reserved] Subpart C—Definition of Capital Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted. § 3.20 Capital components and eligibility criteria for regulatory capital instruments. (a) Regulatory capital components. (1) Common equity tier 1 capital; (2) Additional tier 1 capital; and (3) Tier 2 capital. (b) Common equity tier 1 capital. (1) Any common stock instruments (plus any related surplus) issued by the national bank or Federal savings association, net of treasury stock, and any capital instruments issued by mutual banking organizations, that meet all the following criteria: (i) The instrument is paid-in, issued directly by the national bank or Federal savings association, and represents the most subordinated claim in a receivership, insolvency, liquidation, or similar proceeding of the national bank or Federal savings association; (ii) The holder of the instrument is entitled to a claim on the residual assets of the national bank or Federal savings association that is proportional with the holder's share of the national bank's or Federal savings association's issued capital after all senior claims have been satisfied in a receivership, insolvency, liquidation, or similar proceeding; (iii) The instrument has no maturity date, can only be redeemed via discretionary repurchases with the prior approval of the OCC, and does not contain any term or feature that creates an incentive to redeem; (iv) The national bank or Federal savings association did not create at issuance of the instrument through any action or communication an expectation that it will buy back, cancel, or redeem the instrument, and the instrument does not include any term or feature that might give rise to such an expectation; (v) Any cash dividend payments on the instrument are paid out of the national bank's or Federal savings association's net income or retained earnings and are not subject to a limit imposed by the contractual terms governing the instrument. (vi) The national bank or Federal savings association has full discretion at all times to refrain from paying any dividends and making any other distributions on the instrument without triggering an event of default, a requirement to make a payment-in-kind, or an imposition of any other restrictions on the national bank or Federal savings association; (vii) Dividend payments and any other distributions on the instrument may be paid only after all legal and contractual obligations of the national bank or Federal savings association have been satisfied, including payments due on more senior claims; (viii) The holders of the instrument bear losses as they occur equally, proportionately, and simultaneously with the holders of all other common stock instruments before any losses are borne by holders of claims on the national bank or Federal savings association with greater priority in a receivership, insolvency, liquidation, or similar proceeding; (ix) The paid-in amount is classified as equity under GAAP; (x) The national bank or Federal savings association, or an entity that the national bank or Federal savings association controls, did not purchase or directly or indirectly fund the purchase of the instrument; (xi) The instrument is not secured, not covered by a guarantee of the national bank or Federal savings association or of an affiliate of the national bank or Federal savings association, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument; (xii) The instrument has been issued in accordance with applicable laws and regulations; and (xiii) The instrument is reported on the national bank's or Federal savings association's regulatory financial statements separately from other capital instruments. (2) Retained earnings. (3) Accumulated other comprehensive income (AOCI) as reported under GAAP. 1 1 See (4) Any common equity tier 1 minority interest, subject to the limitations in § 3.21. (5) Notwithstanding the criteria for common stock instruments referenced above, a national bank's or Federal savings association's common stock issued and held in trust for the benefit of its employees as part of an employee stock ownership plan does not violate any of the criteria in paragraph (b)(1)(iii), paragraph (b)(1)(iv) or paragraph (b)(1)(xi) of this section, provided that any repurchase of the stock is required solely by virtue of ERISA for an instrument of a national bank or Federal savings association that is not publicly-traded. In addition, an instrument issued by a national bank or Federal savings association to its employee stock ownership plan does not violate the criterion in paragraph (b)(1)(x) of this section. (c) Additional tier 1 capital. (1) Instruments (plus any related surplus) that meet the following criteria: (i) The instrument is issued and paid-in; (ii) The instrument is subordinated to depositors, general creditors, and subordinated debt holders of the national bank or Federal savings association in a receivership, insolvency, liquidation, or similar proceeding; (iii) The instrument is not secured, not covered by a guarantee of the national bank or Federal savings association or of an affiliate of the national bank or Federal savings association, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument; (iv) The instrument has no maturity date and does not contain a dividend step-up or any other term or feature that creates an incentive to redeem; and (v) If callable by its terms, the instrument may be called by the national bank or Federal savings association only after a minimum of five years following issuance, except that the terms of the instrument may allow it to be called earlier than five years upon the occurrence of a regulatory event that precludes the instrument from being included in additional tier 1 capital, a tax event, or if the issuing entity is required to register as an investment company pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq. (A) The national bank or Federal savings association must receive prior approval from the OCC to exercise a call option on the instrument. (B) The national bank or Federal savings association does not create at issuance of the instrument, through any action or communication, an expectation that the call option will be exercised. (C) Prior to exercising the call option, or immediately thereafter, the national bank or Federal savings association must either: Replace the instrument to be called with an equal amount of instruments that meet the criteria under paragraph (b) of this section or this paragraph (c); 2 2 (vi) Redemption or repurchase of the instrument requires prior approval from the OCC. (vii) The national bank or Federal savings association has full discretion at all times to cancel dividends or other distributions on the instrument without triggering an event of default, a requirement to make a payment-in-kind, or an imposition of other restrictions on the national bank or Federal savings association except in relation to any distributions to holders of common stock or instruments that are pari passu with the instrument. (viii) Any cash dividend payments on the instrument are paid out of the national bank's or Federal savings association's net income or retained earnings. (ix) The instrument does not have a credit-sensitive feature, such as a dividend rate that is reset periodically based in whole or in part on the national bank's or Federal savings association's credit quality, but may have a dividend rate that is adjusted periodically independent of the national bank's or Federal savings association's credit quality, in relation to general market interest rates or similar adjustments. (x) The paid-in amount is classified as equity under GAAP. (xi) The national bank or Federal savings association, or an entity that the national bank or Federal savings association controls, did not purchase or directly or indirectly fund the purchase of the instrument. (xii) The instrument does not have any features that would limit or discourage additional issuance of capital by the national bank or Federal savings association, such as provisions that require the national bank or Federal savings association to compensate holders of the instrument if a new instrument is issued at a lower price during a specified time frame. (xiii) If the instrument is not issued directly by the national bank or Federal savings association or by a subsidiary of the national bank or Federal savings association that is an operating entity, the only asset of the issuing entity is its investment in the capital of the national bank or Federal savings association, and proceeds must be immediately available without limitation to the national bank or Federal savings association or to the national bank's or Federal savings association's top-tier holding company in a form which meets or exceeds all of the other criteria for additional tier 1 capital instruments. 3 3 De minimis (xiv) For an advanced approaches national bank or Federal savings association, the governing agreement, offering circular, or prospectus of an instrument issued after the date upon which the national bank or Federal savings association becomes subject to this part as set forth in § 3.1(f) must disclose that the holders of the instrument may be fully subordinated to interests held by the U.S. government in the event that the national bank or Federal savings association enters into a receivership, insolvency, liquidation, or similar proceeding. (2) Tier 1 minority interest, subject to the limitations in § 3.21, that is not included in the national bank's or Federal savings association's common equity tier 1 capital. (3)(i) Any and all instruments that qualified as tier 1 capital under the OCC's general risk-based capital rules under appendix A to this part (national banks), 12 CFR part 167 (Federal savings associations) as then in effect, that were issued under the Small Business Jobs Act of 2010 4 5 4 5 (ii) Any preferred stock instruments issued under the U.S. Department of the Treasury's Emergency Capital Investment Program pursuant to section 104A of the Community Development Banking and Financial Institutions Act of 1994, added by the Consolidated Appropriations Act, 2021. 6 6 (4) Notwithstanding the criteria for additional tier 1 capital instruments referenced above: (i) An instrument issued by a national bank or Federal savings association and held in trust for the benefit of its employees as part of an employee stock ownership plan does not violate any of the criteria in paragraph (c)(1)(iii) of this section, provided that any repurchase is required solely by virtue of ERISA for an instrument of a national bank or Federal savings association that is not publicly-traded. In addition, an instrument issued by a national bank or Federal savings association to its employee stock ownership plan does not violate the criteria in paragraph (c)(1)(v) or paragraph (c)(1)(xi) of this section; and (ii) An instrument with terms that provide that the instrument may be called earlier than five years upon the occurrence of a rating agency event does not violate the criterion in paragraph (c)(1)(v) of this section provided that the instrument was issued and included in a national bank's or Federal savings association's tier 1 capital prior to January 1, 2014, and that such instrument satisfies all other criteria under this § 3.20(c). (d) Tier 2 Capital. (1) Instruments (plus related surplus) that meet the following criteria: (i) The instrument is issued and paid-in; (ii) The instrument is subordinated to depositors and general creditors of the national bank or Federal savings association; (iii) The instrument is not secured, not covered by a guarantee of the national bank or Federal savings association or of an affiliate of the national bank or Federal savings association, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument in relation to more senior claims; (iv) The instrument has a minimum original maturity of at least five years. At the beginning of each of the last five years of the life of the instrument, the amount that is eligible to be included in tier 2 capital is reduced by 20 percent of the original amount of the instrument (net of redemptions) and is excluded from regulatory capital when the remaining maturity is less than one year. In addition, the instrument must not have any terms or features that require, or create significant incentives for, the national bank or Federal savings association to redeem the instrument prior to maturity; 7 7 (v) The instrument, by its terms, may be called by the national bank or Federal savings association only after a minimum of five years following issuance, except that the terms of the instrument may allow it to be called sooner upon the occurrence of an event that would preclude the instrument from being included in tier 2 capital, a tax event, or if the issuing entity is required to register as an investment company pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq. (A) The national bank or Federal savings association must receive the prior approval of the OCC to exercise a call option on the instrument. (B) The national bank or Federal savings association does not create at issuance, through action or communication, an expectation the call option will be exercised. (C) Prior to exercising the call option, or immediately thereafter, the national bank or Federal savings association must either: Replace any amount called with an equivalent amount of an instrument that meets the criteria for regulatory capital under this section; 8 8 (vi) The holder of the instrument must have no contractual right to accelerate payment of principal or interest on the instrument, except in the event of a receivership, insolvency, liquidation, or similar proceeding of the national bank or Federal savings association. (vii) The instrument has no credit-sensitive feature, such as a dividend or interest rate that is reset periodically based in whole or in part on the national bank's or Federal savings association's credit standing, but may have a dividend rate that is adjusted periodically independent of the national bank's or Federal savings association's credit standing, in relation to general market interest rates or similar adjustments. (viii) The national bank or Federal savings association, or an entity that the national bank or Federal savings association controls, has not purchased and has not directly or indirectly funded the purchase of the instrument. (ix) If the instrument is not issued directly by the national bank or Federal savings association or by a subsidiary of the national bank or Federal savings association that is an operating entity, the only asset of the issuing entity is its investment in the capital of the national bank or Federal savings association, and proceeds must be immediately available without limitation to the national bank or Federal savings association or the national bank's or Federal savings association's top-tier holding company in a form that meets or exceeds all the other criteria for tier 2 capital instruments under this section. 9 9 de minimis (x) Redemption of the instrument prior to maturity or repurchase requires the prior approval of the OCC. (xi) For an advanced approaches national bank or Federal savings association, the governing agreement, offering circular, or prospectus of an instrument issued after the date on which the advanced approaches national bank or Federal savings association becomes subject to this part under § 3.1(f) must disclose that the holders of the instrument may be fully subordinated to interests held by the U.S. government in the event that the national bank or Federal savings association enters into a receivership, insolvency, liquidation, or similar proceeding. (2) Total capital minority interest, subject to the limitations set forth in § 3.21, that is not included in the national bank's or Federal savings association's tier 1 capital. (3) ALLL or AACL, as applicable, up to 1.25 percent of the national bank's or Federal savings association's standardized total risk-weighted assets not including any amount of the ALLL or AACL, as applicable (and excluding in the case of a market risk national bank or Federal savings association, its standardized market risk-weighted assets). (4)(i) Any instrument that qualified as tier 2 capital under the OCC's general risk-based capital rules under appendix A to this part, 12 CFR part 167 as then in effect, that were issued under the Small Business Jobs Act of 2010, 10 11 10 11 (ii) Any debt instruments issued under the U.S. Department of the Treasury's Emergency Capital Investment Program pursuant to section 104A of the Community Development Banking and Financial Institutions Act of 1994, added by the Consolidated Appropriations Act, 2021. 12 12 (5) For a national bank or Federal savings association that makes an AOCI opt-out election (as defined in paragraph (b)(2) of § 3.22), 45 percent of pretax net unrealized gains on available-for-sale preferred stock classified as an equity security under GAAP and available-for-sale equity exposures. (6) Notwithstanding the criteria for tier 2 capital instruments referenced above, an instrument with terms that provide that the instrument may be called earlier than five years upon the occurrence of a rating agency event does not violate the criterion in paragraph (d)(1)(v) of this section provided that the instrument was issued and included in a national bank's or Federal savings association's tier 1 or tier 2 capital prior to January 1, 2014, and that such instrument satisfies all other criteria under this paragraph (d). (e) OCC approval of a capital element. (i) Was included in a national bank's or Federal savings association's tier 1 capital or tier 2 capital prior to May 19, 2010 in accordance with the OCC's risk-based capital rules that were effective as of that date and the underlying instrument may continue to be included under the criteria set forth in this section; or (ii) Is equivalent, in terms of capital quality and ability to absorb losses with respect to all material terms, to a regulatory capital element the OCC determined may be included in regulatory capital pursuant to paragraph (e)(3) of this section. (2) When considering whether a national bank or Federal savings association may include a regulatory capital element in its common equity tier 1 capital, additional tier 1 capital, or tier 2 capital, the OCC will consult with the Federal Deposit Insurance Corporation and Federal Reserve Board. (3) After determining that a regulatory capital element may be included in a national bank's or Federal savings association's common equity tier 1 capital, additional tier 1 capital, or tier 2 capital, the OCC will make its decision publicly available, including a brief description of the material terms of the regulatory capital element and the rationale for the determination. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 4238, Feb. 14, 2019; 84 FR 35249, July 22, 2019; 86 FR 15080, Mar. 22, 2021] § 3.21 Minority interest. (a)(1) Applicability. (2) Common equity tier 1 minority interest includable in the common equity tier 1 capital of the national bank or Federal savings association. (3) Tier 1 minority interest includable in the tier 1 capital of the national bank or Federal savings association. (4) Total capital minority interest includable in the total capital of the national bank or Federal savings association. (b)(1) Applicability. (i) A consolidated subsidiary of the advanced approaches national bank or Federal savings association has issued regulatory capital that is not owned by the national bank or Federal savings association; and (ii) For each relevant regulatory capital ratio of the consolidated subsidiary, the ratio exceeds the sum of the subsidiary's minimum regulatory capital requirements plus its capital conservation buffer. (2) Difference in capital adequacy standards at the subsidiary level. (3) Common equity tier 1 minority interest includable in the common equity tier 1 capital of the national bank or Federal savings association. (i) The common equity tier 1 minority interest of the subsidiary; minus (ii) The percentage of the subsidiary's common equity tier 1 capital that is not owned by the advanced approaches national bank or Federal savings association, multiplied by the difference between the common equity tier 1 capital of the subsidiary and the lower of: (A) The amount of common equity tier 1 capital the subsidiary must hold, or would be required to hold pursuant to this paragraph (b), to avoid restrictions on distributions and discretionary bonus payments under § 3.11 or equivalent standards established by the subsidiary's home country supervisor; or (B)( 1 ( 2 (4) Tier 1 minority interest includable in the tier 1 capital of the advanced approaches national bank or Federal savings association. (i) The tier 1 minority interest of the subsidiary; minus (ii) The percentage of the subsidiary's tier 1 capital that is not owned by the advanced approaches national bank or Federal savings association multiplied by the difference between the tier 1 capital of the subsidiary and the lower of: (A) The amount of tier 1 capital the subsidiary must hold, or would be required to hold pursuant to this paragraph (b), to avoid restrictions on distributions and discretionary bonus payments under § 3.11 or equivalent standards established by the subsidiary's home country supervisor, or (B)( 1 ( 2 (5) Total capital minority interest includable in the total capital of the national bank or Federal savings association. (i) The total capital minority interest of the subsidiary; minus (ii) The percentage of the subsidiary's total capital that is not owned by the advanced approaches national bank or Federal savings association multiplied by the difference between the total capital of the subsidiary and the lower of: (A) The amount of total capital the subsidiary must hold, or would be required to hold pursuant to this paragraph (b), to avoid restrictions on distributions and discretionary bonus payments under § 3.11 or equivalent standards established by the subsidiary's home country supervisor, or (B)( 1 ( 2 [84 FR 35249, July 22, 2019] § 3.22 Regulatory capital adjustments and deductions. (a) Regulatory capital deductions from common equity tier 1 capital. (1)(i) Goodwill, net of associated deferred tax liabilities (DTLs) in accordance with paragraph (e) of this section; and (ii) For an advanced approaches national bank or Federal savings association, goodwill that is embedded in the valuation of a significant investment in the capital of an unconsolidated financial institution in the form of common stock (and that is reflected in the consolidated financial statements of the advanced approaches national bank or Federal savings association), in accordance with paragraph (d) of this section; (2) Intangible assets, other than MSAs, net of associated DTLs in accordance with paragraph (e) of this section; (3) Deferred tax assets (DTAs) that arise from net operating loss and tax credit carryforwards net of any related valuation allowances and net of DTLs in accordance with paragraph (e) of this section; (4) Any gain-on-sale in connection with a securitization exposure; (5)(i) Any defined benefit pension fund net asset, net of any associated DTL in accordance with paragraph (e) of this section, held by a depository institution holding company. With the prior approval of the OCC, this deduction is not required for any defined benefit pension fund net asset to the extent the depository institution holding company has unrestricted and unfettered access to the assets in that fund. (ii) For an insured depository institution, no deduction is required. (iii) A national bank or Federal savings association must risk weight any portion of the defined benefit pension fund asset that is not deducted under paragraphs (a)(5)(i) or (a)(5)(ii) of this section as if the national bank or Federal savings association directly holds a proportional ownership share of each exposure in the defined benefit pension fund. (6) For an advanced approaches national bank or Federal savings association that has completed the parallel run process and that has received notification from the OCC pursuant to § 3.121(d), the amount of expected credit loss that exceeds its eligible credit reserves; and (7) With respect to a financial subsidiary, the aggregate amount of the national bank's or Federal savings association's outstanding equity investment, including retained earnings, in its financial subsidiaries (as defined in [12 CFR 5.39 (OCC); 12 CFR 208.77 (Board))]. A national bank or Federal savings association must not consolidate the assets and liabilities of a financial subsidiary with those of the parent bank, and no other deduction is required under paragraph (c) of this section for investments in the capital instruments of financial subsidiaries. (8)(i) A Federal savings association must deduct the aggregate amount of its outstanding investments (both equity and debt) in, and extensions of credit to, subsidiaries that are not includable subsidiaries as defined in paragraph (a)(8)(iv) of this section and may not consolidate the assets and liabilities of the subsidiary with those of the Federal savings association. Any such deductions shall be deducted from assets and common equity tier 1 except as provided in paragraphs (a)(8)(ii) and (iii) of this section. (ii) If a Federal savings association has any investments (both debt and equity) in, or extensions or credit to, one or more subsidiaries engaged in any activity that would not fall within the scope of activities in which includable subsidiaries as defined in paragraph (a)(8)(iv) of this section may engage, it must deduct such investments and extensions of credit from assets and, thus, common equity tier 1 in accordance with paragraph (a)(8)(i) of this section. (iii) If a Federal savings association holds a subsidiary (either directly or through a subsidiary) that is itself a domestic depository institution, the OCC may, in its sole discretion upon determining that the amount of common equity tier 1 that would be required would be higher if the assets and liabilities of such subsidiary were consolidated with those of the parent Federal savings association than the amount that would be required if the parent Federal savings association's investment were deducted pursuant to paragraphs (a)(8)(i) and (ii) of this section, consolidate the assets and liabilities of that subsidiary with those of the parent Federal savings association in calculating the capital adequacy of the parent Federal savings association, regardless of whether the subsidiary would otherwise be an includable subsidiary as defined in paragraph (a)(8)(iv) of this section. (iv) For purposes of this section, the term includable subsidiary means a subsidiary of a Federal savings association that: (A) Is engaged solely in activities not impermissible for a national bank; (B) Is engaged in activities not permissible for a national bank, but only if acting solely as agent for its customers and such agency position is clearly documented in the Federal savings association's files; (C) Is engaged solely in mortgage-banking activities; (D)( 1 ( 2 (E) Was a subsidiary of any Federal savings association existing as a Federal savings association on August 9, 1989: ( 1 ( 2 (b) Regulatory adjustments to common equity tier 1 capital. (i) A national bank or Federal savings association that makes an AOCI opt-out election (as defined in paragraph (b)(2) of this section), must make the adjustments required under § 3.22(b)(2)(i). (ii) A national bank or Federal savings association that is an advanced approaches national bank or Federal savings association, and a national bank or Federal savings association that has not made an AOCI opt-out election (as defined in paragraph (b)(2) of this section), must deduct any accumulated net gains and add any accumulated net losses on cash flow hedges included in AOCI that relate to the hedging of items that are not recognized at fair value on the balance sheet. (iii) A national bank or Federal savings association must deduct any net gain and add any net loss related to changes in the fair value of liabilities that are due to changes in the national bank's or Federal savings association's own credit risk. An advanced approaches national bank or Federal savings association must deduct the difference between its credit spread premium and the risk-free rate for derivatives that are liabilities as part of this adjustment. (2) AOCI opt-out election. (A) Subtract any net unrealized gains and add any net unrealized losses on available-for-sale securities; (B) Subtract any net unrealized losses on available-for-sale preferred stock classified as an equity security under GAAP and available-for-sale equity exposures; (C) Subtract any accumulated net gains and add any accumulated net losses on cash flow hedges; (D) Subtract any amounts recorded in AOCI attributed to defined benefit postretirement plans resulting from the initial and subsequent application of the relevant GAAP standards that pertain to such plans (excluding, at the national bank's or Federal savings association's option, the portion relating to pension assets deducted under paragraph (a)(5) of this section); and (E) Subtract any net unrealized gains and add any net unrealized losses on held-to-maturity securities that are included in AOCI. (ii) A national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association must make its AOCI opt-out election in the Call Report: (A) If the national bank or Federal savings association is a Category III national bank or Federal savings association, during the first reporting period after the national bank or Federal savings association meets the definition of a Category III national bank or Federal savings association in § 3.2; or (B) If the national bank or Federal savings association is not a Category III national bank or Federal savings association, during the first reporting period after the national bank or Federal savings association is required to comply with subpart A of this part as set forth in § 3.1(f). (iii) With respect to a national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association, each of its subsidiary banking organizations that is subject to regulatory capital requirements issued by the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, or the Office of the Comptroller of the Currency 21 21 (iv) With prior notice to the OCC, a national bank or Federal savings association resulting from a merger, acquisition, or purchase transaction and that is not an advanced approaches national bank or Federal savings association may change its AOCI opt-out election in its Call Report filed for the first reporting period after the date required for such national bank or Federal savings association to comply with subpart A of this part as set forth in § 3.1(f) if: (A) Other than as set forth in paragraph (b)(2)(iv)(C) of this section, the merger, acquisition, or purchase transaction involved the acquisition or purchase of all or substantially all of either the assets or voting stock of another banking organization that is subject to regulatory capital requirements issued by the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation, or the Office of the Comptroller of the Currency; 22 22 (B) Prior to the merger, acquisition, or purchase transaction, only one of the banking organizations involved in the transaction made an AOCI opt-out election under this section; and (C) A national bank or Federal savings association may, with the prior approval of the OCC, change its AOCI opt-out election under this paragraph (b) in the case of a merger, acquisition, or purchase transaction that meets the requirements set forth at paragraph (b)(2)(iv)(B) of this section, but does not meet the requirements of paragraph (b)(2)(iv)(A). In making such a determination, the OCC may consider the terms of the merger, acquisition, or purchase transaction, as well as the extent of any changes to the risk profile, complexity, and scope of operations of the national bank or Federal savings association resulting from the merger, acquisition, or purchase transaction. (c) Deductions from regulatory capital related to investments in capital instruments or covered debt instruments 23 Investment in the national bank's or Federal savings association's own capital instruments. 23 (i) A national bank or Federal savings association must deduct an investment in the national bank's or Federal savings association's own common stock instruments from its common equity tier 1 capital elements to the extent such instruments are not excluded from regulatory capital under § 3.20(b)(1); (ii) A national bank or Federal savings association must deduct an investment in the national bank's or Federal savings association's own additional tier 1 capital instruments from its additional tier 1 capital elements; and (iii) A national bank or Federal savings association must deduct an investment in the national bank's or Federal savings association's own tier 2 capital instruments from its tier 2 capital elements. (2) Corresponding deduction approach. (i) If an investment is in the form of an instrument issued by a financial institution that is not a regulated financial institution, the national bank or Federal savings association must treat the instrument as: (A) A common equity tier 1 capital instrument if it is common stock or represents the most subordinated claim in a liquidation of the financial institution; and (B) An additional tier 1 capital instrument if it is subordinated to all creditors of the financial institution and is senior in liquidation only to common shareholders. (ii) If an investment is in the form of an instrument issued by a regulated financial institution and the instrument does not meet the criteria for common equity tier 1, additional tier 1 or tier 2 capital instruments under § 3.20, the national bank or Federal savings association must treat the instrument as: (A) A common equity tier 1 capital instrument if it is common stock included in GAAP equity or represents the most subordinated claim in liquidation of the financial institution; (B) An additional tier 1 capital instrument if it is included in GAAP equity, subordinated to all creditors of the financial institution, and senior in a receivership, insolvency, liquidation, or similar proceeding only to common shareholders; (C) A tier 2 capital instrument if it is not included in GAAP equity but considered regulatory capital by the primary supervisor of the financial institution; and (D) For an advanced approaches national bank or Federal savings association, a tier 2 capital instrument if it is a covered debt instrument. (iii) If an investment is in the form of a non-qualifying capital instrument (as defined in § 3.300(c)), the national bank or Federal savings association must treat the instrument as: (A) An additional tier 1 capital instrument if such instrument was included in the issuer's tier 1 capital prior to May 19, 2010; or (B) A tier 2 capital instrument if such instrument was included in the issuer's tier 2 capital (but not includable in tier 1 capital) prior to May 19, 2010. (3) Reciprocal cross holdings in the capital of financial institutions. (ii) An advanced approaches national bank or Federal savings association must deduct an investment in any covered debt instrument that the institution holds reciprocally with another financial institution, where such reciprocal cross holdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold each other's capital or covered debt instruments, by applying the corresponding deduction approach in paragraph (c)(2) of this section. (4) Investments in the capital of unconsolidated financial institutions. 24 25 24 25 (5) Non-significant investments in the capital of unconsolidated financial institutions. 26 27 26 27 (ii) For an advanced approaches national bank or Federal savings association, the amount to be deducted under this paragraph (c)(5) from a specific capital component is equal to: (A) The advanced approaches national bank's or Federal savings association's aggregate non-significant investments in the capital of an unconsolidated financial institution and, if applicable, any investments in a covered debt instrument subject to deduction under this paragraph (c)(5), exceeding the 10 percent threshold for non-significant investments, multiplied by (B) The ratio of the advanced approaches national bank's or Federal savings association's aggregate non-significant investments in the capital of an unconsolidated financial institution (in the form of such capital component) to the national bank's or Federal savings association's total non-significant investments in unconsolidated financial institutions, with an investment in a covered debt instrument being treated as tier 2 capital for this purpose. (iii) For purposes of applying the deduction under paragraph (c)(5)(i) of this section, an advanced approaches national bank or Federal savings association that is not a subsidiary of a global systemically important banking organization, as defined in 12 CFR 252.2, may exclude from the deduction the amount of the national bank's or Federal savings association's gross long position, in accordance with § 3.22(h)(2), in investments in covered debt instruments issued by financial institutions in which the national bank or Federal savings association does not have a significant investment in the capital of the unconsolidated financial institutions up to an amount equal to 5 percent of the sum of the national bank's or Federal savings association's common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section, net of associated DTLs in accordance with paragraph (e) of this section. (iv) Prior to applying the deduction under paragraph (c)(5)(i) of this section: (A) A national bank or Federal savings association that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, may designate any investment in a covered debt instrument as an excluded covered debt instrument, as defined in § 3.2. (B) A national bank or Federal savings association that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach in paragraph (c)(2) of this section, its gross long position, calculated in accordance with paragraph (h)(2) of this section, in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(5)(iv)(A) of this section, but no longer qualifies as an excluded covered debt instrument. (C) A national bank or Federal savings association that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach in paragraph (c)(2) of this section the amount of its gross long position, calculated in accordance with paragraph (h)(2) of this section, in a direct or indirect investment in a covered debt instrument that was originally designated as an excluded covered debt instrument, in accordance with paragraph (c)(5)(iv)(A) of this section, and has been held for more than thirty business days. (D) A national bank or Federal savings association that is a subsidiary of a global systemically important BHC, as defined in 12 CFR 252.2, must deduct according to the corresponding deduction approach in paragraph (c)(2) of this section its gross long position, calculated in accordance with paragraph (h)(2) of this section, of its aggregate investment in excluded covered debt instruments that exceeds 5 percent of the sum of the national bank's or Federal savings association's common equity tier 1 capital elements minus all deductions from and adjustments to common equity tier 1 capital elements required under paragraphs (a) through (c)(3) of this section, net of associated DTLs in accordance with paragraph (e) of this section. (6) Significant investments in the capital of unconsolidated financial institutions that are not in the form of common stock. 28 28 (d) MSAs and certain DTAs subject to common equity tier 1 capital deduction thresholds. (i) The national bank or Federal savings association must deduct from common equity tier 1 capital elements the amount of each of the items set forth in this paragraph (d)(1) that, individually, exceeds 25 percent of the sum of the national bank's or Federal savings association's common equity tier 1 capital elements, less adjustments to and deductions from common equity tier 1 capital required under paragraphs (a) through (c)(3) of this section (the 25 percent common equity tier 1 capital deduction threshold). 29 29 (ii) The national bank or Federal savings association must deduct from common equity tier 1 capital elements the amount of DTAs arising from temporary differences that the national bank or Federal savings association could not realize through net operating loss carrybacks, net of any related valuation allowances and net of DTLs, in accordance with paragraph (e) of this section. A national bank or Federal savings association is not required to deduct from the sum of its common equity tier 1 capital elements DTAs (net of any related valuation allowances and net of DTLs, in accordance with § 3.22(e)) arising from timing differences that the national bank or Federal savings association could realize through net operating loss carrybacks. The national bank or Federal savings association must risk weight these assets at 100 percent. For a national bank or Federal savings association that is a member of a consolidated group for tax purposes, the amount of DTAs that could be realized through net operating loss carrybacks may not exceed the amount that the national bank or Federal savings association could reasonably expect to have refunded by its parent holding company. (iii) The national bank or Federal savings association must deduct from common equity tier 1 capital elements the amount of MSAs net of associated DTLs, in accordance with paragraph (e) of this section. (iv) For purposes of calculating the amount of DTAs subject to deduction pursuant to paragraph (d)(1) of this section, a national bank or Federal savings association may exclude DTAs and DTLs relating to adjustments made to common equity tier 1 capital under paragraph (b) of this section. A national bank or Federal savings association that elects to exclude DTAs relating to adjustments under paragraph (b) of this section also must exclude DTLs and must do so consistently in all future calculations. A national bank or Federal savings association may change its exclusion preference only after obtaining the prior approval of the OCC. (2) An advanced approaches national bank or Federal savings association must make deductions from regulatory capital as described in this paragraph (d)(2). (i) An advanced approaches national bank or Federal savings association must deduct from common equity tier 1 capital elements the amount of each of the items set forth in this paragraph (d)(2) that, individually, exceeds 10 percent of the sum of the advanced approaches national bank's or Federal savings association's common equity tier 1 capital elements, less adjustments to and deductions from common equity tier 1 capital required under paragraphs (a) through (c) of this section (the 10 percent common equity tier 1 capital deduction threshold). (A) DTAs arising from temporary differences that the advanced approaches national bank or Federal savings association could not realize through net operating loss carrybacks, net of any related valuation allowances and net of DTLs, in accordance with paragraph (e) of this section. An advanced approaches national bank or Federal savings association is not required to deduct from the sum of its common equity tier 1 capital elements DTAs (net of any related valuation allowances and net of DTLs, in accordance with § 3.22(e)) arising from timing differences that the advanced approaches national bank or Federal savings association could realize through net operating loss carrybacks. The advanced approaches national bank or Federal savings association must risk weight these assets at 100 percent. For a national bank or Federal savings association that is a member of a consolidated group for tax purposes, the amount of DTAs that could be realized through net operating loss carrybacks may not exceed the amount that the national bank or Federal savings association could reasonably expect to have refunded by its parent holding company. (B) MSAs net of associated DTLs, in accordance with paragraph (e) of this section. (C) Significant investments in the capital of unconsolidated financial institutions in the form of common stock, net of associated DTLs in accordance with paragraph (e) of this section. 30 30 (ii) An advanced approaches national bank or Federal savings association must deduct from common equity tier 1 capital elements the items listed in paragraph (d)(2)(i) of this section that are not deducted as a result of the application of the 10 percent common equity tier 1 capital deduction threshold, and that, in aggregate, exceed 17.65 percent of the sum of the advanced approaches national bank's or Federal savings association's common equity tier 1 capital elements, minus adjustments to and deductions from common equity tier 1 capital required under paragraphs (a) through (c) of this section, minus the items listed in paragraph (d)(2)(i) of this section (the 15 percent common equity tier 1 capital deduction threshold). Any goodwill that has been deducted under paragraph (a)(1) of this section can be excluded from the significant investments in the capital of unconsolidated financial institutions in the form of common stock. 31 31 (iii) For purposes of calculating the amount of DTAs subject to the 10 and 15 percent common equity tier 1 capital deduction thresholds, an advanced approaches national bank or Federal savings association may exclude DTAs and DTLs relating to adjustments made to common equity tier 1 capital under paragraph (b) of this section. An advanced approaches national bank or Federal savings association that elects to exclude DTAs relating to adjustments under paragraph (b) of this section also must exclude DTLs and must do so consistently in all future calculations. An advanced approaches national bank or Federal savings association may change its exclusion preference only after obtaining the prior approval of the OCC. (e) Netting of DTLs against assets subject to deduction. (i) The DTL is associated with the asset; and (ii) The DTL would be extinguished if the associated asset becomes impaired or is derecognized under GAAP. (2) A DTL may only be netted against a single asset. (3) For purposes of calculating the amount of DTAs subject to the threshold deduction in paragraph (d) of this section, the amount of DTAs that arise from net operating loss and tax credit carryforwards, net of any related valuation allowances, and of DTAs arising from temporary differences that the national bank or Federal savings association could not realize through net operating loss carrybacks, net of any related valuation allowances, may be offset by DTLs (that have not been netted against assets subject to deduction pursuant to paragraph (e)(1) of this section) subject to the conditions set forth in this paragraph (e). (i) Only the DTAs and DTLs that relate to taxes levied by the same taxation authority and that are eligible for offsetting by that authority may be offset for purposes of this deduction. (ii) The amount of DTLs that the national bank or Federal savings association nets against DTAs that arise from net operating loss and tax credit carryforwards, net of any related valuation allowances, and against DTAs arising from temporary differences that the national bank or Federal savings association could not realize through net operating loss carrybacks, net of any related valuation allowances, must be allocated in proportion to the amount of DTAs that arise from net operating loss and tax credit carryforwards (net of any related valuation allowances, but before any offsetting of DTLs) and of DTAs arising from temporary differences that the national bank or Federal savings association could not realize through net operating loss carrybacks (net of any related valuation allowances, but before any offsetting of DTLs), respectively. (4) A national bank or Federal savings association may offset DTLs embedded in the carrying value of a leveraged lease portfolio acquired in a business combination that are not recognized under GAAP against DTAs that are subject to paragraph (d) of this section in accordance with this paragraph (e). (5) A national bank or Federal savings association must net DTLs against assets subject to deduction under this section in a consistent manner from reporting period to reporting period. A national bank or Federal savings association may change its preference regarding the manner in which it nets DTLs against specific assets subject to deduction under this section only after obtaining the prior approval of the OCC. (f) Insufficient amounts of a specific regulatory capital component to effect deductions. (g) Treatment of assets that are deducted. (h) Net long position In general. (2) Gross long position. (i) For an equity exposure that is held directly by the national bank or Federal savings association, the adjusted carrying value of the exposure as that term is defined in § 3.51(b); (ii) For an exposure that is held directly and that is not an equity exposure or a securitization exposure, the exposure amount as that term is defined in § 3.2; (iii) For each indirect exposure, the national bank's or Federal savings association's carrying value of its investment in an investment fund or, alternatively: (A) A national bank or Federal savings association may, with the prior approval of the OCC, use a conservative estimate of the amount of its indirect investment in the national bank's or Federal savings association's own capital instruments, its indirect investment in the capital of an unconsolidated financial institution, or its indirect investment in a covered debt instrument held through a position in an index, as applicable; or (B) A national bank or Federal savings association may calculate the gross long position for an indirect exposure to the national bank's or Federal savings association's own capital the capital in an unconsolidated financial institution, or a covered debt instrument by multiplying the national bank's or Federal savings association's carrying value of its investment in the investment fund by either: ( 1 ( 2 (iv) For a synthetic exposure, the amount of the national bank's or Federal savings association's loss on the exposure if the reference capital instrument or covered debt instrument were to have a value of zero. (3) Adjustments to reflect a short position. (i) The maturity of the short position must match the maturity of the long position, or the short position must have a residual maturity of at least one year (maturity requirement); or (ii) For a position that is a trading asset or trading liability (whether on- or off-balance sheet) as reported on the national bank's or Federal savings association's Call Report, if the national bank or Federal savings association has a contractual right or obligation to sell the long position at a specific point in time and the counterparty to the contract has an obligation to purchase the long position if the national bank or Federal savings association exercises its right to sell, this point in time may be treated as the maturity of the long position such that the maturity of the long position and short position are deemed to match for purposes of the maturity requirement, even if the maturity of the short position is less than one year; and (iii) For an investment in a national bank's or Federal savings association's own capital instrument under paragraph (c)(1) of this section, an investment in the capital of an unconsolidated financial institution under paragraphs (c)(4) through (6) and (d) of this section (as applicable), and an investment in a covered debt instrument under paragraphs (c)(1), (5), and (6) of this section: (A) The national bank or Federal savings association may only net a short position against a long position in an investment in the national bank's or Federal savings association's own capital instrument under paragraph (c)(1) of this section if the short position involves no counterparty credit risk; (B) A gross long position in an investment in the national bank's or Federal savings association's own capital instrument, an investment in the capital of an unconsolidated financial institution, or an investment in a covered debt instrument due to a position in an index may be netted against a short position in the same index; (C) Long and short positions in the same index without maturity dates are considered to have matching maturities; and (D) A short position in an index that is hedging a long cash or synthetic position in an investment in the national bank's or Federal savings association's own capital instrument, an investment in the capital instrument of an unconsolidated financial institution, or an investment in a covered debt instrument can be decomposed to provide recognition of the hedge. More specifically, the portion of the index that is composed of the same underlying instrument that is being hedged may be used to offset the long position if both the long position being hedged and the short position in the index are reported as a trading asset or trading liability (whether on- or off-balance sheet) on the national bank's or Federal savings association's Call Report, and the hedge is deemed effective by the national bank's or Federal savings association's internal control processes, which have not been found to be inadequate by the OCC. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 80 FR 41415, July 15, 2015; 84 FR 4238, Feb. 14, 2019; 84 FR 35250, July 22, 2019; 84 FR 59265, Nov. 1, 2019; 84 FR 61793, Nov. 13, 2019; 86 FR 728, Jan. 6, 2021] §§ 3.23-3.29 [Reserved] Subpart D—Risk-Weighted Assets—Standardized Approach Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted. § 3.30 Applicability. (a) This subpart sets forth methodologies for determining risk-weighted assets for purposes of the generally applicable risk-based capital requirements for all national banks or Federal savings associations. (b) Notwithstanding paragraph (a) of this section, a market risk national bank or Federal savings association must exclude from its calculation of risk-weighted assets under this subpart the risk-weighted asset amounts of all covered positions, as defined in subpart F of this part (except foreign exchange positions that are not trading positions, OTC derivative positions, cleared transactions, and unsettled transactions). Risk-Weighted Assets For General Credit Risk § 3.31 Mechanics for calculating risk-weighted assets for general credit risk. (a) General risk-weighting requirements. (1) A national bank or Federal savings association must determine the exposure amount of each on-balance sheet exposure, each OTC derivative contract, and each off-balance sheet commitment, trade and transaction-related contingency, guarantee, repo-style transaction, financial standby letter of credit, forward agreement, or other similar transaction that is not: (i) An unsettled transaction subject to § 3.38; (ii) A cleared transaction subject to § 3.35; (iii) A default fund contribution subject to § 3.35; (iv) A securitization exposure subject to §§ 3.41 through 3.45; or (v) An equity exposure (other than an equity OTC derivative contract) subject to §§ 3.51 through 3.53. (2) The national bank or Federal savings association must multiply each exposure amount by the risk weight appropriate to the exposure based on the exposure type or counterparty, eligible guarantor, or financial collateral to determine the risk-weighted asset amount for each exposure. (b) Total risk-weighted assets for general credit risk equals the sum of the risk-weighted asset amounts calculated under this section. § 3.32 General risk weights. (a) Sovereign exposures Exposures to the U.S. government. (A) An exposure to the U.S. government, its central bank, or a U.S. government agency; and (B) The portion of an exposure that is directly and unconditionally guaranteed by the U.S. government, its central bank, or a U.S. government agency. This includes a deposit or other exposure, or the portion of a deposit or other exposure, that is insured or otherwise unconditionally guaranteed by the FDIC or National Credit Union Administration. (ii) A national bank or Federal savings association must assign a 20 percent risk weight to the portion of an exposure that is conditionally guaranteed by the U.S. government, its central bank, or a U.S. government agency. This includes an exposure, or the portion of an exposure, that is conditionally guaranteed by the FDIC or National Credit Union Administration. (iii) A national bank or Federal savings association must assign a zero percent risk weight to a Paycheck Protection Program covered loan as defined in section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)). (2) Other sovereign exposures. Table 1 to § 3.32—Risk Weights for Sovereign Exposures Risk weight CRC: 0-1 0 2 20 3 50 4-6 100 7 150 OECD Member with No CRC 0 Non-OECD Member with No CRC 100 Sovereign Default 150 (3) Certain sovereign exposures. (i) The exposure is denominated in the sovereign's currency; (ii) The national bank or Federal savings association has at least an equivalent amount of liabilities in that currency; and (iii) The risk weight is not lower than the risk weight that the home country supervisor allows national banks or Federal savings associations under its jurisdiction to assign to the same exposures to the sovereign. (4) Exposures to a non-OECD member sovereign with no CRC. (5) Exposures to an OECD member sovereign with no CRC. (6) Sovereign default. (b) Certain supranational entities and multilateral development banks (MDBs). (c) Exposures to GSEs. (2) A national bank or Federal savings association must assign a 100 percent risk weight to preferred stock issued by a GSE. (d) Exposures to depository institutions, foreign banks, and credit unions Exposures to U.S. depository institutions and credit unions. (2) Exposures to foreign banks. Table 2 to § 3.32—Risk Weights for Exposures to Foreign Banks Risk weight CRC: 0-1 20 2 50 3 100 4-7 150 OECD Member with No CRC 20 Non-OECD Member with No CRC 100 Sovereign Default 150 (ii) A national bank or Federal savings association must assign a 20 percent risk weight to an exposure to a foreign bank whose home country is a member of the OECD and does not have a CRC. (iii) A national bank or Federal savings association must assign a 20 percent risk-weight to an exposure that is a self-liquidating, trade-related contingent item that arises from the movement of goods and that has a maturity of three months or less to a foreign bank whose home country has a CRC of 0, 1, 2, or 3, or is an OECD member with no CRC. (iv) A national bank or Federal savings association must assign a 100 percent risk weight to an exposure to a foreign bank whose home country is not a member of the OECD and does not have a CRC, with the exception of self-liquidating, trade-related contingent items that arise from the movement of goods, and that have a maturity of three months or less, which may be assigned a 20 percent risk weight. (v) A national bank or Federal savings association must assign a 150 percent risk weight to an exposure to a foreign bank immediately upon determining that an event of sovereign default has occurred in the bank's home country, or if an event of sovereign default has occurred in the foreign bank's home country during the previous five years. (3) A national bank or Federal savings association must assign a 100 percent risk weight to an exposure to a financial institution if the exposure may be included in that financial institution's capital unless the exposure is: (i) An equity exposure; (ii) A significant investment in the capital of an unconsolidated financial institution in the form of common stock pursuant to § 3.22(d)(2)(i)(c); (iii) Deducted from regulatory capital under § 3.22; or (iv) Subject to a 150 percent risk weight under paragraph (d)(2)(iv) or Table 2 of paragraph (d)(2) of this section. (e) Exposures to public sector entities (PSEs) Exposures to U.S. PSEs. (ii) A national bank or Federal savings association must assign a 50 percent risk weight to a revenue obligation exposure to a PSE that is organized under the laws of the United States or any state or political subdivision thereof. (2) Exposures to foreign PSEs. (ii) Except as provided in paragraphs (e)(1) and (e)(3) of this section, a national bank or Federal savings association must assign a risk weight to a revenue obligation exposure to a PSE, in accordance with Table 4 to § 3.32, based on the CRC that corresponds to the PSE's home country; or the OECD membership status of the PSE's home country if there is no CRC applicable to the PSE's home country. (3) A national bank or Federal savings association may assign a lower risk weight than would otherwise apply under Tables 3 or 4 to § 3.32 to an exposure to a foreign PSE if: (i) The PSE's home country supervisor allows banks under its jurisdiction to assign a lower risk weight to such exposures; and (ii) The risk weight is not lower than the risk weight that corresponds to the PSE's home country in accordance with Table 1 to § 3.32. Table 3 to § 3.32—Risk Weights for Non-U.S. PSE General Obligations Risk weight CRC: 0-1 20 2 50 3 100 4-7 150 OECD Member with No CRC 20 Non-OECD Member with No CRC 100 Sovereign Default 150 Table 4 to § 3.32—Risk Weights for Non-U.S. PSE Revenue Obligations Risk weight CRC: 0-1 50 2-3 100 4-7 150 OECD Member with No CRC 50 Non-OECD Member with No CRC 100 Sovereign Default 150 (4) Exposures to PSEs from an OECD member sovereign with no CRC. (ii) A national bank or Federal savings association must assign a 50 percent risk weight to a revenue obligation exposure to a PSE whose home country is an OECD member sovereign with no CRC. (5) Exposures to PSEs whose home country is not an OECD member sovereign with no CRC. (6) A national bank or Federal savings association must assign a 150 percent risk weight to a PSE exposure immediately upon determining that an event of sovereign default has occurred in a PSE's home country or if an event of sovereign default has occurred in the PSE's home country during the previous five years. (f) Corporate exposures. (2) A national bank or Federal savings association must assign a 2 percent risk weight to an exposure to a QCCP arising from the national bank or Federal savings association posting cash collateral to the QCCP in connection with a cleared transaction that meets the requirements of § 3.35(b)(3)(i)(A) and a 4 percent risk weight to an exposure to a QCCP arising from the national bank or Federal savings association posting cash collateral to the QCCP in connection with a cleared transaction that meets the requirements of § 3.35(b)(3)(i)(B). (3) A national bank or Federal savings association must assign a 2 percent risk weight to an exposure to a QCCP arising from the national bank or Federal savings association posting cash collateral to the QCCP in connection with a cleared transaction that meets the requirements of § 3.35(c)(3)(i). (g) Residential mortgage exposures. (i) Is secured by a property that is either owner-occupied or rented; (ii) Is made in accordance with prudent underwriting standards, including standards relating to the loan amount as a percent of the appraised value of the property; (iii) Is not 90 days or more past due or carried in nonaccrual status; and (iv) Is not restructured or modified. (2) A national bank or Federal savings association must assign a 100 percent risk weight to a first-lien residential mortgage exposure that does not meet the criteria in paragraph (g)(1) of this section, and to junior-lien residential mortgage exposures. (3) For the purpose of this paragraph (g), if a national bank or Federal savings association holds the first-lien and junior-lien(s) residential mortgage exposures, and no other party holds an intervening lien, the national bank or Federal savings association must combine the exposures and treat them as a single first-lien residential mortgage exposure. (4) A loan modified or restructured solely pursuant to the U.S. Treasury's Home Affordable Mortgage Program is not modified or restructured for purposes of this section. (h) Pre-sold construction loans. (i) Statutory multifamily mortgages. (j) High-volatility commercial real estate (HVCRE) exposures. (k) Past due exposures. (1) A national bank or Federal savings association must assign a 150 percent risk weight to the portion of the exposure that is not guaranteed or that is unsecured; (2) A national bank or Federal savings association may assign a risk weight to the guaranteed portion of a past due exposure based on the risk weight that applies under § 3.36 if the guarantee or credit derivative meets the requirements of that section; and (3) A national bank or Federal savings association may assign a risk weight to the collateralized portion of a past due exposure based on the risk weight that applies under § 3.37 if the collateral meets the requirements of that section. (l) Other assets. (2) A national bank or Federal savings association must assign a 20 percent risk weight to cash items in the process of collection. (3) A national bank or Federal savings association must assign a 100 percent risk weight to DTAs arising from temporary differences that the national bank or Federal savings association could realize through net operating loss carrybacks. (4) A national bank or Federal savings association must assign a 250 percent risk weight to the portion of each of the following items to the extent it is not deducted from common equity tier 1 capital pursuant to § 3.22(d): (i) MSAs; and (ii) DTAs arising from temporary differences that the national bank or Federal savings association could not realize through net operating loss carrybacks. (5) A national bank or Federal savings association must assign a 100 percent risk weight to all assets not specifically assigned a different risk weight under this subpart and that are not deducted from tier 1 or tier 2 capital pursuant to § 3.22. (6) Notwithstanding the requirements of this section, a national bank or Federal savings association may assign an asset that is not included in one of the categories provided in this section to the risk weight category applicable under the capital rules applicable to bank holding companies and savings and loan holding companies at 12 CFR part 217, provided that all of the following conditions apply: (i) The national bank or Federal savings association is not authorized to hold the asset under applicable law other than debt previously contracted or similar authority; and (ii) The risks associated with the asset are substantially similar to the risks of assets that are otherwise assigned to a risk weight category of less than 100 percent under this subpart. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 35254, July 22, 2019; 85 FR 4402, Jan. 24, 2020; 85 FR 20393, Apr. 13, 2020; 85 FR 57959, Sept. 17, 2020] § 3.33 Off-balance sheet exposures. (a) General. (2) Where a national bank or Federal savings association commits to provide a commitment, the national bank or Federal savings association may apply the lower of the two applicable CCFs. (3) Where a national bank or Federal savings association provides a commitment structured as a syndication or participation, the national bank or Federal savings association is only required to calculate the exposure amount for its pro rata share of the commitment. (4) Where a national bank or Federal savings association provides a commitment, enters into a repurchase agreement, or provides a credit-enhancing representation and warranty, and such commitment, repurchase agreement, or credit-enhancing representation and warranty is not a securitization exposure, the exposure amount shall be no greater than the maximum contractual amount of the commitment, repurchase agreement, or credit-enhancing representation and warranty, as applicable. (b) Credit conversion factors Zero percent CCF. (2) 20 percent CCF. (i) Commitments with an original maturity of one year or less that are not unconditionally cancelable by the national bank or Federal savings association; and (ii) Self-liquidating, trade-related contingent items that arise from the movement of goods, with an original maturity of one year or less. (3) 50 percent CCF. (i) Commitments with an original maturity of more than one year that are not unconditionally cancelable by the national bank or Federal savings association; and (ii) Transaction-related contingent items, including performance bonds, bid bonds, warranties, and performance standby letters of credit. (4) 100 percent CCF. (i) Guarantees; (ii) Repurchase agreements (the off-balance sheet component of which equals the sum of the current fair values of all positions the national bank or Federal savings association has sold subject to repurchase); (iii) Credit-enhancing representations and warranties that are not securitization exposures; (iv) Off-balance sheet securities lending transactions (the off-balance sheet component of which equals the sum of the current fair values of all positions the national bank or Federal savings association has lent under the transaction); (v) Off-balance sheet securities borrowing transactions (the off-balance sheet component of which equals the sum of the current fair values of all non-cash positions the national bank or Federal savings association has posted as collateral under the transaction); (vi) Financial standby letters of credit; and (vii) Forward agreements. § 3.34 Derivative contracts. (a) Exposure amount for derivative contracts National bank or Federal savings association that is not an advanced approaches national bank or Federal savings association. (ii) A national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association may elect to calculate the exposure amount for all its OTC derivative contracts under the standardized approach for counterparty credit risk (SA-CCR) in § 3.132(c) by notifying the OCC, rather than calculating the exposure amount for all its derivative contracts using CEM. A national bank or Federal savings association that elects under this paragraph (a)(1)(ii) to calculate the exposure amount for its OTC derivative contracts under SA-CCR must apply the treatment of cleared transactions under § 3.133 to its derivative contracts that are cleared transactions and to all default fund contributions associated with such derivative contracts, rather than applying § 3.35. A national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association must use the same methodology to calculate the exposure amount for all its derivative contracts and, if a national bank or Federal savings association has elected to use SA-CCR under this paragraph (a)(1)(ii), the national bank or Federal savings association may change its election only with prior approval of the OCC. (2) Advanced approaches national bank or Federal savings association. (b) Current exposure methodology exposure amount Single OTC derivative contract. (i) Current credit exposure. (ii) PFE. (B) For purposes of calculating either the PFE under this paragraph (b)(1)(ii) or the gross PFE under paragraph (b)(2)(ii)(A) of this section for exchange rate contracts and other similar contracts in which the notional principal amount is equivalent to the cash flows, notional principal amount is the net receipts to each party falling due on each value date in each currency. (C) For an OTC derivative contract that does not fall within one of the specified categories in Table 1 to this section, the PFE must be calculated using the appropriate “other” conversion factor. (D) A national bank or Federal savings association must use an OTC derivative contract's effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the OTC derivative contract) rather than the apparent or stated notional principal amount in calculating PFE. (E) The PFE of the protection provider of a credit derivative is capped at the net present value of the amount of unpaid premiums. Table 1 to § 3.34—Conversion Factor Matrix for Derivative Contracts 1 Remaining maturity 2 Interest rate Foreign Credit 3 Credit Equity Precious Other One year or less 0.00 0.01 0.05 0.10 0.06 0.07 0.10 Greater than one year and less than or equal to five years 0.005 0.05 0.05 0.10 0.08 0.07 0.12 Greater than five years 0.015 0.075 0.05 0.10 0.10 0.08 0.15 1 2 3 (2) Multiple OTC derivative contracts subject to a qualifying master netting agreement. (i) Net current credit exposure. (ii) Adjusted sum of the PFE amounts. (A) Agross = the gross PFE (that is, the sum of the PFE amounts as determined under paragraph (b)(1)(ii) of this section for each individual derivative contract subject to the qualifying master netting agreement); and (B) Net-to-gross Ratio (NGR) = the ratio of the net current credit exposure to the gross current credit exposure. In calculating the NGR, the gross current credit exposure equals the sum of the positive current credit exposures (as determined under paragraph (b)(1)(i) of this section) of all individual derivative contracts subject to the qualifying master netting agreement. (c) Recognition of credit risk mitigation of collateralized OTC derivative contracts. (2) As an alternative to the simple approach, a national bank or Federal savings association using CEM under paragraph (b) of this section may recognize the credit risk mitigation benefits of financial collateral that secures such a contract or netting set if the financial collateral is marked-to-fair value on a daily basis and subject to a daily margin maintenance requirement by applying a risk weight to the uncollateralized portion of the exposure, after adjusting the exposure amount calculated under paragraph (b)(1) or (2) of this section using the collateral haircut approach in § 3.37(c). The national bank or Federal savings association must substitute the exposure amount calculated under paragraph (b)(1) or (2) of this section for ΣE in the equation in § 3.37(c)(2). (d) Counterparty credit risk for credit derivatives Protection purchasers. (2) Protection providers. (ii) The provisions of this paragraph (d)(2) apply to all relevant counterparties for risk-based capital purposes unless the national bank or Federal savings association is treating the credit derivative as a covered position under subpart F of this part, in which case the national bank or Federal savings association must compute a supplemental counterparty credit risk capital requirement under this section. (e) Counterparty credit risk for equity derivatives. (2) In addition, the national bank or Federal savings association must also calculate a risk-based capital requirement for the counterparty credit risk of an equity derivative contract under this section if the national bank or Federal savings association is treating the contract as a covered position under subpart F of this part. (3) If the national bank or Federal savings association risk weights the contract under the Simple Risk-Weight Approach (SRWA) in § 3.52, the national bank or Federal savings association may choose not to hold risk-based capital against the counterparty credit risk of the equity derivative contract, as long as it does so for all such contracts. Where the equity derivative contracts are subject to a qualified master netting agreement, a national bank or Federal savings association using the SRWA must either include all or exclude all of the contracts from any measure used to determine counterparty credit risk exposure. (f) Clearing member national bank's or Federal savings association's exposure amount. 1/2 Where H = the holding period greater than or equal to five days. Additionally, the OCC may require the national bank or Federal savings association to set a longer holding period if the OCC 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. [85 FR 4402, Jan. 24, 2020] § 3.35 Cleared transactions. (a) General requirements Clearing member clients. (2) Clearing members. (3) Alternate requirements. (b) Clearing member client national banks or Federal savings associations Risk-weighted assets for cleared transactions. (ii) A clearing member client national bank's or Federal savings association's total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all its cleared transactions. (2) Trade exposure amount. (A) The exposure amount for the derivative contract or netting set of derivative contracts, calculated using the methodology used to calculate exposure amount for OTC derivative contracts under § 3.34; plus (B) The fair value of the collateral posted by the clearing member client national bank or Federal savings association and held by the CCP, clearing member, or custodian in a manner that is not bankruptcy remote. (ii) For a cleared transaction that is a repo-style transaction or netting set of repo-style transactions, the trade exposure amount equals: (A) The exposure amount for the repo-style transaction calculated using the methodologies under § 3.37(c); plus (B) The fair value of the collateral posted by the clearing member client national bank or Federal savings association and held by the CCP, clearing member, or custodian in a manner that is not bankruptcy remote. (3) Cleared transaction risk weights. (A) 2 percent if the collateral posted by the national bank or Federal savings association to the QCCP or clearing member is subject to an arrangement that prevents any losses to the clearing member client national bank or Federal savings association due to the joint default or a concurrent insolvency, liquidation, or receivership proceeding of the clearing member and any other clearing member clients of the clearing member; and the clearing member client national bank or Federal savings association has conducted sufficient legal review to conclude with a well-founded basis (and maintains sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from an event of default or from liquidation, insolvency, or receivership proceedings) the relevant court and administrative authorities would find the arrangements to be legal, valid, binding and enforceable under the law of the relevant jurisdictions; or (B) 4 percent if the requirements of § 3.35(b)(3)(A) are not met. (ii) For a cleared transaction with a CCP that is not a QCCP, a clearing member client national bank or Federal savings association must apply the risk weight appropriate for the CCP according to this subpart D. (4) Collateral. (ii) A clearing member client national bank or Federal savings association must calculate a risk-weighted asset amount for any collateral provided to a CCP, clearing member, or custodian in connection with a cleared transaction in accordance with the requirements under this subpart D. (c) Clearing member national banks or Federal savings associations Risk-weighted assets for cleared transactions. (ii) A clearing member national bank's or Federal savings association's total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all of its cleared transactions. (2) Trade exposure amount. (i) For a cleared transaction that is either a derivative contract or a netting set of derivative contracts, the trade exposure amount equals: (A) The exposure amount for the derivative contract, calculated using the methodology to calculate exposure amount for OTC derivative contracts under § 3.34; plus (B) The fair value of the collateral posted by the clearing member national bank or Federal savings association and held by the CCP in a manner that is not bankruptcy remote. (ii) For a cleared transaction that is a repo-style transaction or netting set of repo-style transactions, trade exposure amount equals: (A) The exposure amount for repo-style transactions calculated using methodologies under § 3.37(c); plus (B) The fair value of the collateral posted by the clearing member national bank or Federal savings association and held by the CCP in a manner that is not bankruptcy remote. (3) Cleared transaction risk weight. (ii) For a cleared transaction with a CCP that is not a QCCP, a clearing member national bank or Federal savings association must apply the risk weight appropriate for the CCP according to this subpart D. (iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this section, a clearing member national bank or Federal savings association may apply a risk weight of zero percent to the trade exposure amount for a cleared transaction with a CCP where the clearing member national bank or Federal savings association is acting as a financial intermediary on behalf of a clearing member client, the transaction offsets another transaction that satisfies the requirements set forth in § 3.3(a), and the clearing member national bank or Federal savings association is not obligated to reimburse the clearing member client in the event of the CCP default. (4) Collateral. (ii) A clearing member national bank or Federal savings association must calculate a risk-weighted asset amount for any collateral provided to a CCP, clearing member, or a custodian in connection with a cleared transaction in accordance with requirements under this subpart D. (d) Default fund contributions General requirement. (2) Risk-weighted asset amount for default fund contributions to non-qualifying CCPs. (3) Risk-weighted asset amount for default fund contributions to QCCPs. CM (i) Method 1. CCP (A) EBRM i ( 1 ( 2 ( 3 (B) VM i (C) IM i (D) DF i (E) RW = 20 percent, except when the OCC has determined that a higher risk weight is more appropriate based on the specific characteristics of the QCCP and its clearing members; and (F) Where a QCCP has provided its K CCP CCP (ii) For a national bank or Federal savings association that is a clearing member of a QCCP with a default fund supported by funded commitments, K CM Subscripts 1 and 2 denote the clearing members with the two largest A Net Net Net (B) N = the number of clearing members in the QCCP; (C) DF CCP (D) DF CM (E) DF = DF CCP CM Where: ( 1 i ( 2 CM ( 3 K* CM (B) For a national bank or Federal savings association that is a clearing member of a QCCP with a default fund supported by unfunded commitments and is unable to calculate K CM CM Where: ( 1 i ( 2 CM ( 3 K* CM (iv) Method 2. DF RWA DF Where: (A) TE = the national bank's or Federal savings association's trade exposure amount to the QCCP, calculated according to section 35(c)(2); (B) DF = the funded portion of the national bank's or Federal savings association's default fund contribution to the QCCP. (4) Total risk-weighted assets for default fund contributions. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 35255, July 22, 2019; 85 FR 4404, Jan. 24, 2020] § 3.36 Guarantees and credit derivatives: substitution treatment. (a) Scope General. (2) This section applies to exposures for which: (i) Credit risk is fully covered by an eligible guarantee or eligible credit derivative; or (ii) Credit risk is covered on a pro rata basis (that is, on a basis in which the national bank or Federal savings association and the protection provider share losses proportionately) by an eligible guarantee or eligible credit derivative. (3) Exposures on which there is a tranching of credit risk (reflecting at least two different levels of seniority) generally are securitization exposures subject to §§ 3.41 through 3.45. (4) If multiple eligible guarantees or eligible credit derivatives cover a single exposure described in this section, a national bank or Federal savings association may treat the hedged exposure as multiple separate exposures each covered by a single eligible guarantee or eligible credit derivative and may calculate a separate risk-weighted asset amount for each separate exposure as described in paragraph (c) of this section. (5) If a single eligible guarantee or eligible credit derivative covers multiple hedged exposures described in paragraph (a)(2) of this section, a national bank or Federal savings association must treat each hedged exposure as covered by a separate eligible guarantee or eligible credit derivative and must calculate a separate risk-weighted asset amount for each exposure as described in paragraph (c) of this section. (b) Rules of recognition. (2) A national bank or Federal savings association may only recognize the credit risk mitigation benefits of an eligible credit derivative to hedge an exposure that is different from the credit derivative's reference exposure used for determining the derivative's cash settlement value, deliverable obligation, or occurrence of a credit event if: (i) The reference exposure ranks pari passu (ii) The reference exposure and the hedged exposure are to the same legal entity, and legally enforceable cross-default or cross-acceleration clauses are in place to ensure payments under the credit derivative are triggered when the obligated party of the hedged exposure fails to pay under the terms of the hedged exposure. (c) Substitution approach Full coverage. (2) Partial coverage. (i) The national bank or Federal savings association may calculate the risk-weighted asset amount for the protected exposure under this subpart D, where the applicable risk weight is the risk weight applicable to the guarantor or credit derivative protection provider. (ii) The national bank or Federal savings association must calculate the risk-weighted asset amount for the unprotected exposure under this subpart D, where the applicable risk weight is that of the unprotected portion of the hedged exposure. (iii) The treatment provided in this section is applicable when the credit risk of an exposure is covered on a partial pro rata basis and may be applicable when an adjustment is made to the effective notional amount of the guarantee or credit derivative under paragraphs (d), (e), or (f) of this section. (d) Maturity mismatch adjustment. (2) A maturity mismatch occurs when the residual maturity of a credit risk mitigant is less than that of the hedged exposure(s). (3) The residual maturity of a hedged exposure is the longest possible remaining time before the obligated party of the hedged exposure is scheduled to fulfil its obligation on the hedged exposure. If a credit risk mitigant has embedded options that may reduce its term, the national bank or Federal savings association (protection purchaser) must use the shortest possible residual maturity for the credit risk mitigant. If a call is at the discretion of the protection provider, the residual maturity of the credit risk mitigant is at the first call date. If the call is at the discretion of the national bank or Federal savings association (protection purchaser), but the terms of the arrangement at origination of the credit risk mitigant contain a positive incentive for the national bank or Federal savings association to call the transaction before contractual maturity, the remaining time to the first call date is the residual maturity of the credit risk mitigant. (4) A credit risk mitigant with a maturity mismatch may be recognized only if its original maturity is greater than or equal to one year and its residual maturity is greater than three months. (5) When a maturity mismatch exists, the national bank or Federal savings association must apply the following adjustment to reduce the effective notional amount of the credit risk mitigant: Pm = E × (t − 0.25) / (T − 0.25), where: (i) Pm = effective notional amount of the credit risk mitigant, adjusted for maturity mismatch; (ii) E = effective notional amount of the credit risk mitigant; (iii) t = the lesser of T or the residual maturity of the credit risk mitigant, expressed in years; and (iv) T = the lesser of five or the residual maturity of the hedged exposure, expressed in years. (e) Adjustment for credit derivatives without restructuring as a credit event. (1) Pr = effective notional amount of the credit risk mitigant, adjusted for lack of restructuring event (and maturity mismatch, if applicable); and (2) Pm = effective notional amount of the credit risk mitigant (adjusted for maturity mismatch, if applicable). (f) Currency mismatch adjustment. FX (i) Pc = effective notional amount of the credit risk mitigant, adjusted for currency mismatch (and maturity mismatch and lack of restructuring event, if applicable); (ii) Pr = effective notional amount of the credit risk mitigant (adjusted for maturity mismatch and lack of restructuring event, if applicable); and (iii) H FX (2) A national bank or Federal savings association must set H FX (3) A national bank or Federal savings association must adjust H FX [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 35255, July 22, 2019] § 3.37 Collateralized transactions. (a) General. (i) The simple approach in paragraph (b) of this section for any exposure; or (ii) The collateral haircut approach in paragraph (c) of this section for repo-style transactions, eligible margin loans, collateralized derivative contracts, and single-product netting sets of such transactions. (2) A national bank or Federal savings association may use any approach described in this section that is valid for a particular type of exposure or transaction; however, it must use the same approach for similar exposures or transactions. (b) The simple approach General requirements. (ii) To qualify for the simple approach, the financial collateral must meet the following requirements: (A) The collateral must be subject to a collateral agreement for at least the life of the exposure; (B) The collateral must be revalued at least every six months; and (C) The collateral (other than gold) and the exposure must be denominated in the same currency. (2) Risk weight substitution. (ii) A national bank or Federal savings association must apply a risk weight to the unsecured portion of the exposure based on the risk weight applicable to the exposure under this subpart. (3) Exceptions to the 20 percent risk-weight floor and other requirements. (i) A national bank or Federal savings association may assign a zero percent risk weight to an exposure to an OTC derivative contract that is marked-to-market on a daily basis and subject to a daily margin maintenance requirement, to the extent the contract is collateralized by cash on deposit. (ii) A national bank or Federal savings association may assign a 10 percent risk weight to an exposure to an OTC derivative contract that is marked-to-market daily and subject to a daily margin maintenance requirement, to the extent that the contract is collateralized by an exposure to a sovereign that qualifies for a zero percent risk weight under § 3.32. (iii) A national bank or Federal savings association may assign a zero percent risk weight to the collateralized portion of an exposure where: (A) The financial collateral is cash on deposit; or (B) The financial collateral is an exposure to a sovereign that qualifies for a zero percent risk weight under § 3.32, and the national bank or Federal savings association has discounted the fair value of the collateral by 20 percent. (c) Collateral haircut approach General. (2) Exposure amount equation. (i)(A) For eligible margin loans and repo-style transactions and netting sets thereof, ΣE equals the value of the exposure (the sum of the current fair values of all instruments, gold, and cash the national bank or Federal savings association has lent, sold subject to repurchase, or posted as collateral to the counterparty under the transaction (or netting set)); and (B) For collateralized derivative contracts and netting sets thereof, ΣE equals the exposure amount of the OTC derivative contract (or netting set) calculated under § 3.34(b)(1) or (2). (ii) ΣC equals the value of the collateral (the sum of the current fair values of all instruments, gold and cash the national bank or Federal savings association has borrowed, purchased subject to resale, or taken as collateral from the counterparty under the transaction (or netting set)); (iii) Es equals the absolute value of the net position in a given instrument or in gold (where the net position in the instrument or gold equals the sum of the current fair values of the instrument or gold the national bank or Federal savings association has lent, sold subject to repurchase, or posted as collateral to the counterparty minus the sum of the current fair values of that same instrument or gold the national bank or Federal savings association has borrowed, purchased subject to resale, or taken as collateral from the counterparty); (iv) Hs equals the market price volatility haircut appropriate to the instrument or gold referenced in Es; (v) Efx equals the absolute value of the net position of instruments and cash in a currency that is different from the settlement currency (where the net position in a given currency equals the sum of the current fair values of any instruments or cash in the currency the national bank or Federal savings association has lent, sold subject to repurchase, or posted as collateral to the counterparty minus the sum of the current fair values of any instruments or cash in the currency the national bank or Federal savings association has borrowed, purchased subject to resale, or taken as collateral from the counterparty); and (vi) Hfx equals the haircut appropriate to the mismatch between the currency referenced in Efx and the settlement currency. (3) Standard supervisory haircuts. Table 1 to § 3.37—Standard Supervisory Market Price Volatility Haircuts 1 Residual maturity Haircut (in percent) assigned based on: Investment grade securitization Sovereign issuers risk 2 Non-sovereign issuers risk Zero 20 or 50 100 20 50 100 Less than or equal to 1 year 0.5 1.0 15.0 1.0 2.0 4.0 4.0 Greater than 1 year and less than or equal to 5 years 2.0 3.0 15.0 4.0 6.0 8.0 12.0 Greater than 5 years 4.0 6.0 15.0 8.0 12.0 16.0 24.0 Main index equities (including convertible bonds) and gold 15.0 Other publicly traded equities (including convertible bonds) 25.0 Mutual funds Highest haircut applicable to any security in which the fund can invest. Cash collateral held Zero. Other exposure types 25.0 1 2 (ii) For currency mismatches, a national bank or Federal savings association must use a haircut for foreign exchange rate volatility (Hfx) of 8.0 percent, as adjusted in certain circumstances under paragraphs (c)(3)(iii) and (iv) of this section. (iii) For repo-style transactions and client-facing derivative transactions, a national bank or Federal savings association may multiply the standard supervisory haircuts provided in paragraphs (c)(3)(i) and (ii) of this section by the square root of 1/2 (iv) If the number of trades in a netting set exceeds 5,000 at any time during a quarter, a national bank or Federal savings association must adjust the supervisory haircuts provided in paragraphs (c)(3)(i) and (ii) of this section upward on the basis of a holding period of twenty business days for the following quarter except in the calculation of the exposure amount for purposes of § 3.35. If a netting set contains one or more trades involving illiquid collateral or an OTC derivative that cannot be easily replaced, a national bank or Federal savings association must adjust the supervisory haircuts upward on the basis of a holding period of twenty business days. If over the two previous quarters more than two margin disputes on a netting set have occurred that lasted more than the holding period, then the national bank or Federal savings association must adjust the supervisory haircuts upward for that netting set on the basis of a holding period that is at least two times the minimum holding period for that netting set. A national bank or Federal savings association must adjust the standard supervisory haircuts upward using the following formula: (A) T M (B) H S (C) T S (v) If the instrument a national bank or Federal savings association has lent, sold subject to repurchase, or posted as collateral does not meet the definition of financial collateral, the national bank or Federal savings association must use a 25.0 percent haircut for market price volatility (H s (4) Own internal estimates for haircuts. (i) To receive OCC approval to use its own internal estimates, a national bank or Federal savings association must satisfy the following minimum standards: (A) A national bank or Federal savings association must use a 99th percentile one-tailed confidence interval. (B) The minimum holding period for a repo-style transaction and client-facing derivative transaction is five business days and for an eligible margin loan and a derivative contract other than a client-facing derivative transaction is ten business days except for transactions or netting sets for which paragraph (c)(4)(i)(C) of this section applies. When a national bank or Federal savings association calculates an own-estimates haircut on a T N M ( 1 M ( 2 N N ( 3 N N (C) If the number of trades in a netting set exceeds 5,000 at any time during a quarter, a national bank or Federal savings association must calculate the haircut using a minimum holding period of twenty business days for the following quarter except in the calculation of the exposure amount for purposes of § 3.35. If a netting set contains one or more trades involving illiquid collateral or an OTC derivative that cannot be easily replaced, a national bank or Federal savings association must calculate the haircut using a minimum holding period of twenty business days. If over the two previous quarters more than two margin disputes on a netting set have occurred that lasted more than the holding period, then the national bank or Federal savings association must calculate the haircut for transactions in that netting set on the basis of a holding period that is at least two times the minimum holding period for that netting set. (D) A national bank or Federal savings association is required to calculate its own internal estimates with inputs calibrated to historical data from a continuous 12-month period that reflects a period of significant financial stress appropriate to the security or category of securities. (E) A national bank or Federal savings association must have policies and procedures that describe how it determines the period of significant financial stress used to calculate the national bank's or Federal savings association's own internal estimates for haircuts under this section and must be able to provide empirical support for the period used. The national bank or Federal savings association must obtain the prior approval of the OCC for, and notify the OCC if the national bank or Federal savings association makes any material changes to, these policies and procedures. (F) Nothing in this section prevents the OCC from requiring a national bank or Federal savings association to use a different period of significant financial stress in the calculation of own internal estimates for haircuts. (G) A national bank or Federal savings association must update its data sets and calculate haircuts no less frequently than quarterly and must also reassess data sets and haircuts whenever market prices change materially. (ii) With respect to debt securities that are investment grade, a national bank or Federal savings association may calculate haircuts for categories of securities. For a category of securities, the national bank or Federal savings association must calculate the haircut on the basis of internal volatility estimates for securities in that category that are representative of the securities in that category that the national bank or Federal savings association has lent, sold subject to repurchase, posted as collateral, borrowed, purchased subject to resale, or taken as collateral. In determining relevant categories, the national bank or Federal savings association must at a minimum take into account: (A) The type of issuer of the security; (B) The credit quality of the security; (C) The maturity of the security; and (D) The interest rate sensitivity of the security. (iii) With respect to debt securities that are not investment grade and equity securities, a national bank or Federal savings association must calculate a separate haircut for each individual security. (iv) Where an exposure or collateral (whether in the form of cash or securities) is denominated in a currency that differs from the settlement currency, the national bank or Federal savings association must calculate a separate currency mismatch haircut for its net position in each mismatched currency based on estimated volatilities of foreign exchange rates between the mismatched currency and the settlement currency. (v) A national bank's or Federal savings association's own estimates of market price and foreign exchange rate volatilities may not take into account the correlations among securities and foreign exchange rates on either the exposure or collateral side of a transaction (or netting set) or the correlations among securities and foreign exchange rates between the exposure and collateral sides of the transaction (or netting set). [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 35256, July 22, 2019; 85 FR 4404, Jan. 24, 2020; 85 FR 57959, Sept. 17, 2020] Risk-Weighted Assets for Unsettled Transactions § 3.38 Unsettled transactions. (a) Definitions. (1) Delivery-versus-payment (DvP) transaction means a securities or commodities transaction in which the buyer is obligated to make payment only if the seller has made delivery of the securities or commodities and the seller is obligated to deliver the securities or commodities only if the buyer has made payment. (2) Payment-versus-payment (PvP) transaction means a foreign exchange transaction in which each counterparty is obligated to make a final transfer of one or more currencies only if the other counterparty has made a final transfer of one or more currencies. (3) A transaction has a normal settlement period if the contractual settlement period for the transaction is equal to or less than the market standard for the instrument underlying the transaction and equal to or less than five business days. (4) Positive current exposure of a national bank or Federal savings association for a transaction is the difference between the transaction value at the agreed settlement price and the current market price of the transaction, if the difference results in a credit exposure of the national bank or Federal savings association to the counterparty. (b) Scope. (1) Cleared transactions that are marked-to-market daily and subject to daily receipt and payment of variation margin; (2) Repo-style transactions, including unsettled repo-style transactions; (3) One-way cash payments on OTC derivative contracts; or (4) Transactions with a contractual settlement period that is longer than the normal settlement period (which are treated as OTC derivative contracts as provided in § 3.34). (c) System-wide failures. (d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP) transactions. Table 1 to § 3.38—Risk Weights for Unsettled DvP and PvP Transactions Number of business Risk weight to From 5 to 15 100.0 From 16 to 30 625.0 From 31 to 45 937.5 46 or more 1,250.0 (e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-payment) transactions. (2) From the business day after the national bank or Federal savings association has made its delivery until five business days after the counterparty delivery is due, the national bank or Federal savings association must calculate the risk-weighted asset amount for the transaction by treating the current fair value of the deliverables owed to the national bank or Federal savings association as an exposure to the counterparty and using the applicable counterparty risk weight under this subpart D. (3) If the national bank or Federal savings association has not received its deliverables by the fifth business day after counterparty delivery was due, the national bank or Federal savings association must assign a 1,250 percent risk weight to the current fair value of the deliverables owed to the national bank or Federal savings association. (f) Total risk-weighted assets for unsettled transactions. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 35256, July 22, 2019] §§ 3.39-3.40 [Reserved] Risk-Weighted Assets for Securitization Exposures § 3.41 Operational requirements for securitization exposures. (a) Operational criteria for traditional securitizations. (1) The exposures are not reported on the national bank's or Federal savings association's consolidated balance sheet under GAAP; (2) The national bank or Federal savings association has transferred to one or more third parties credit risk associated with the underlying exposures; (3) Any clean-up calls relating to the securitization are eligible clean-up calls; and (4) The securitization does not: (i) Include one or more underlying exposures in which the borrower is permitted to vary the drawn amount within an agreed limit under a line of credit; and (ii) Contain an early amortization provision. (b) Operational criteria for synthetic securitizations. (1) The credit risk mitigant is: (i) Financial collateral; (ii) A guarantee that meets all criteria as set forth in the definition of “eligible guarantee” in § 3.2, except for the criteria in paragraph (3) of that definition; or (iii) A credit derivative that meets all criteria as set forth in the definition of “eligible credit derivative” in § 3.2, except for the criteria in paragraph (3) of the definition of “eligible guarantee” in § 3.2. (2) The national bank or Federal savings association transfers credit risk associated with the underlying exposures to one or more third parties, and the terms and conditions in the credit risk mitigants employed do not include provisions that: (i) Allow for the termination of the credit protection due to deterioration in the credit quality of the underlying exposures; (ii) Require the national bank or Federal savings association to alter or replace the underlying exposures to improve the credit quality of the underlying exposures; (iii) Increase the national bank's or Federal savings association's cost of credit protection in response to deterioration in the credit quality of the underlying exposures; (iv) Increase the yield payable to parties other than the national bank or Federal savings association in response to a deterioration in the credit quality of the underlying exposures; or (v) Provide for increases in a retained first loss position or credit enhancement provided by the national bank or Federal savings association after the inception of the securitization; (3) The national bank or Federal savings association obtains a well-reasoned opinion from legal counsel that confirms the enforceability of the credit risk mitigant in all relevant jurisdictions; and (4) Any clean-up calls relating to the securitization are eligible clean-up calls. (c) Due diligence requirements for securitization exposures. (2) A national bank or Federal savings association must demonstrate its comprehensive understanding of a securitization exposure under paragraph (c)(1) of this section, for each securitization exposure by: (i) Conducting an analysis of the risk characteristics of a securitization exposure prior to acquiring the exposure, and documenting such analysis within three business days after acquiring the exposure, considering: (A) Structural features of the securitization that would materially impact the performance of the exposure, for example, the contractual cash flow waterfall, waterfall-related triggers, credit enhancements, liquidity enhancements, fair value triggers, the performance of organizations that service the exposure, and deal-specific definitions of default; (B) Relevant information regarding the performance of the underlying credit exposure(s), for example, the percentage of loans 30, 60, and 90 days past due; default rates; prepayment rates; loans in foreclosure; property types; occupancy; average credit score or other measures of creditworthiness; average LTV ratio; and industry and geographic diversification data on the underlying exposure(s); (C) Relevant market data of the securitization, for example, bid-ask spread, most recent sales price and historic price volatility, trading volume, implied market rating, and size, depth and concentration level of the market for the securitization; and (D) For resecuritization exposures, performance information on the underlying securitization exposures, for example, the issuer name and credit quality, and the characteristics and performance of the exposures underlying the securitization exposures; and (ii) On an on-going basis (no less frequently than quarterly), evaluating, reviewing, and updating as appropriate the analysis required under paragraph (c)(1) of this section for each securitization exposure. § 3.42 Risk-weighted assets for securitization exposures. (a) Securitization risk weight approaches. (1) A national bank or Federal savings association must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from a securitization and apply a 1,250 percent risk weight to the portion of a CEIO that does not constitute after-tax gain-on-sale. (2) If a securitization exposure does not require deduction under paragraph (a)(1) of this section, a national bank or Federal savings association may assign a risk weight to the securitization exposure using the simplified supervisory formula approach (SSFA) in accordance with §§ 3.43(a) through 3.43(d) and subject to the limitation under paragraph (e) of this section. Alternatively, a national bank or Federal savings association that is not subject to subpart F of this part may assign a risk weight to the securitization exposure using the gross-up approach in accordance with § 3.43(e), provided, however, that such national bank or Federal savings association must apply either the SSFA or the gross-up approach consistently across all of its securitization exposures, except as provided in paragraphs (a)(1), (a)(3), and (a)(4) of this section. (3) If a securitization exposure does not require deduction under paragraph (a)(1) of this section and the national bank or Federal savings association cannot, or chooses not to apply the SSFA or the gross-up approach to the exposure, the national bank or Federal savings association must assign a risk weight to the exposure as described in § 3.44. (4) If a securitization exposure is a derivative contract (other than protection provided by a national bank or Federal savings association in the form of a credit derivative) that has a first priority claim on the cash flows from the underlying exposures (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments), a national bank or Federal savings association may choose to set the risk-weighted asset amount of the exposure equal to the amount of the exposure as determined in paragraph (c) of this section. (b) Total risk-weighted assets for securitization exposures. (c) Exposure amount of a securitization exposure On-balance sheet securitization exposures. (2) On-balance sheet securitization exposures held by a national bank or Federal savings association that has made an AOCI opt-out election. (3) Off-balance sheet securitization exposures. (ii) A national bank or Federal savings association must determine the exposure amount of an eligible ABCP liquidity facility for which the SSFA does not apply by multiplying the notional amount of the exposure by a CCF of 50 percent. (iii) A national bank or Federal savings association must determine the exposure amount of an eligible ABCP liquidity facility for which the SSFA applies by multiplying the notional amount of the exposure by a CCF of 100 percent. (4) Repo-style transactions, eligible margin loans, and derivative contracts. (d) Overlapping exposures. (e) Implicit support. (1) The national bank or Federal savings association must include in risk-weighted assets all of the underlying exposures associated with the securitization as if the exposures had not been securitized and must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the securitization; and (2) The national bank or Federal savings association must disclose publicly: (i) That it has provided implicit support to the securitization; and (ii) The risk-based capital impact to the national bank or Federal savings association of providing such implicit support. (f) Undrawn portion of a servicer cash advance facility. (2) For a national bank or Federal savings association that acts as a servicer, the exposure amount for a servicer cash advance facility that is not an eligible servicer cash advance facility is equal to the amount of all potential future cash advance payments that the national bank or Federal savings association may be contractually required to provide during the subsequent 12 month period under the contract governing the facility. (g) Interest-only mortgage-backed securities. (h) Small-business loans and leases on personal property transferred with retained contractual exposure. (i) The transaction must be treated as a sale under GAAP. (ii) The national bank or Federal savings association establishes and maintains, pursuant to GAAP, a non-capital reserve sufficient to meet the national bank's or Federal savings association's reasonably estimated liability under the contractual obligation. (iii) The small-business obligations are to businesses that meet the criteria for a small-business concern established by the Small Business Administration under section 3(a) of the Small Business Act (15 U.S.C. 632 et seq.). (iv) The national bank or Federal savings association is well capitalized, as defined in 12 CFR 6.4. For purposes of determining whether a national bank or Federal savings association is well capitalized for purposes of this paragraph (h), the national bank's or Federal savings association's capital ratios must be calculated without regard to the capital treatment for transfers of small-business obligations under this paragraph (h). (2) The total outstanding amount of contractual exposure retained by a national bank or Federal savings association on transfers of small-business obligations receiving the capital treatment specified in paragraph (h)(1) of this section cannot exceed 15 percent of the national bank's or Federal savings association's total capital. (3) If a national bank or Federal savings association ceases to be well capitalized under 12 CFR 6.4 or exceeds the 15 percent capital limitation provided in paragraph (h)(2) of this section, the capital treatment under paragraph (h)(1) of this section will continue to apply to any transfers of small-business obligations with retained contractual exposure that occurred during the time that the national bank or Federal savings association was well capitalized and did not exceed the capital limit. (4) The risk-based capital ratios of the national bank or Federal savings association must be calculated without regard to the capital treatment for transfers of small-business obligations specified in paragraph (h)(1) of this section for purposes of: (i) Determining whether a national bank or Federal savings association is adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized under the OCC's prompt corrective action regulations; and (ii) Reclassifying a well-capitalized national bank or Federal savings association to adequately capitalized and requiring an adequately capitalized national bank or Federal savings association to comply with certain mandatory or discretionary supervisory actions as if the national bank or Federal savings association were in the next lower prompt-corrective-action category. (i) N th -to-default credit derivatives Protection provider. th th (2) For purposes of determining the risk weight for an n th (i) The attachment point (parameter A) is the ratio of the sum of the notional amounts of all underlying exposures that are subordinated to the national bank's or Federal savings association's exposure to the total notional amount of all underlying exposures. The ratio is expressed as a decimal value between zero and one. In the case of a first-to-default credit derivative, there are no underlying exposures that are subordinated to the national bank's or Federal savings association's exposure. In the case of a second-or-subsequent-to-default credit derivative, the smallest (n-1) notional amounts of the underlying exposure(s) are subordinated to the national bank's or Federal savings association's exposure. (ii) The detachment point (parameter D) equals the sum of parameter A plus the ratio of the notional amount of the national bank's or Federal savings association's exposure in the n th (3) A national bank or Federal savings association that does not use the SSFA to determine a risk weight for its n th (4) Protection purchaser First-to-default credit derivatives. (ii) Second-or-subsequent-to-default credit derivatives. th ( 1 ( 2 (B) If a national bank or Federal savings association satisfies the requirements of paragraph (i)(4)(ii)(A) of this section, the national bank or Federal savings association must determine its risk-based capital requirement for the underlying exposures as if the national bank or Federal savings association had only synthetically securitized the underlying exposure with the n th (C) A national bank or Federal savings association must calculate a risk-based capital requirement for counterparty credit risk according to § 3.34 for a n th (j) Guarantees and credit derivatives other than n th -to-default credit derivatives Protection provider. th (2) Protection purchaser. th (ii) If a national bank or Federal savings association cannot, or chooses not to, recognize a purchased credit derivative as a credit risk mitigant under § 3.45, the national bank or Federal savings association must determine the exposure amount of the credit derivative under § 3.34. (A) If the national bank or Federal savings association purchases credit protection from a counterparty that is not a securitization SPE, the national bank or Federal savings association must determine the risk weight for the exposure according to this subpart D. (B) If the national bank or Federal savings association purchases the credit protection from a counterparty that is a securitization SPE, the national bank or Federal savings association must determine the risk weight for the exposure according to section § 3.42, including § 3.42(a)(4) for a credit derivative that has a first priority claim on the cash flows from the underlying exposures of the securitization SPE (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments). [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 35256, July 22, 2019] § 3.43 Simplified supervisory formula approach (SSFA) and the gross-up approach. (a) General requirements for the SSFA. (b) SSFA parameters. (1) K G G G (2) Parameter W is expressed as a decimal value between zero and one. Parameter W is the ratio of the sum of the dollar amounts of any underlying exposures of the securitization that meet any of the criteria as set forth in paragraphs (b)(2)(i) through (vi) of this section to the balance, measured in dollars, of underlying exposures: (i) Ninety days or more past due; (ii) Subject to a bankruptcy or insolvency proceeding; (iii) In the process of foreclosure; (iv) Held as real estate owned; (v) Has contractually deferred payments for 90 days or more, other than principal or interest payments deferred on: (A) Federally-guaranteed student loans, in accordance with the terms of those guarantee programs; or (B) Consumer loans, including non-federally-guaranteed student loans, provided that such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed that provide for period(s) of deferral that are not initiated based on changes in the creditworthiness of the borrower; or (vi) Is in default. (3) Parameter A is the attachment point for the exposure, which represents the threshold at which credit losses will first be allocated to the exposure. Except as provided in § 3.42(i) for n th (4) Parameter D is the detachment point for the exposure, which represents the threshold at which credit losses of principal allocated to the exposure would result in a total loss of principal. Except as provided in section 42(i) for n th pari passu (5) A supervisory calibration parameter, p, is equal to 0.5 for securitization exposures that are not resecuritization exposures and equal to 1.5 for resecuritization exposures. (c) Mechanics of the SSFA. G A G A A (1) When the detachment point, parameter D, for a securitization exposure is less than or equal to K A (2) When the attachment point, parameter A, for a securitization exposure is greater than or equal to K A (3) When A is less than K A A SSFA (e) Gross-up approach Applicability. (2) To use the gross-up approach, a national bank or Federal savings association must calculate the following four inputs: (i) Pro rata share, which is the par value of the national bank's or Federal savings association's securitization exposure as a percent of the par value of the tranche in which the securitization exposure resides; (ii) Enhanced amount, which is the par value of tranches that are more senior to the tranche in which the national bank's or Federal savings association's securitization resides; (iii) Exposure amount of the national bank's or Federal savings association's securitization exposure calculated under § 3.42(c); and (iv) Risk weight, which is the weighted-average risk weight of underlying exposures of the securitization as calculated under this subpart. (3) Credit equivalent amount. (i) The exposure amount of the national bank's or Federal savings association's securitization exposure; and (ii) The pro rata share multiplied by the enhanced amount, each calculated in accordance with paragraph (e)(2) of this section. (4) Risk-weighted assets. (f) Limitations. § 3.44 Securitization exposures to which the SSFA and gross-up approach do not apply. (a) General requirement. (b) Eligible ABCP liquidity facilities. (c) A securitization exposure in a second loss position or better to an ABCP program Risk weighting. (i) 100 percent; and (ii) The highest risk weight applicable to any of the individual underlying exposures of the ABCP program. (2) Requirements. (ii) The exposure must be economically in a second loss position or better, and the first loss position must provide significant credit protection to the second loss position; (iii) The exposure qualifies as investment grade; and (iv) The national bank or Federal savings association holding the exposure must not retain or provide protection to the first loss position. § 3.45 Recognition of credit risk mitigants for securitization exposures. (a) General. (2) An investing national bank or Federal savings association that has obtained a credit risk mitigant to hedge a securitization exposure may recognize the credit risk mitigant under § 3.36 or § 3.37, but only as provided in this section. (b) Mismatches. §§ 3.46-3.50 [Reserved] Risk-Weighted Assets for Equity Exposures § 3.51 Introduction and exposure measurement. (a) General. (2) A national bank or Federal savings association must treat an investment in a separate account (as defined in § 3.2) as if it were an equity exposure to an investment fund as provided in § 3.53. (3) Stable value protection. (A) The policy owner of a separate account an amount equal to the shortfall between the fair value and cost basis of the separate account when the policy owner of the separate account surrenders the policy; or (B) The beneficiary of the contract an amount equal to the shortfall between the fair value and book value of a specified portfolio of assets. (ii) A national bank or Federal savings association that purchases stable value protection on its investment in a separate account must treat the portion of the carrying value of its investment in the separate account attributable to the stable value protection as an exposure to the provider of the protection and the remaining portion of the carrying value of its separate account as an equity exposure to an investment fund. (iii) A national bank or Federal savings association that provides stable value protection must treat the exposure as an equity derivative with an adjusted carrying value determined as the sum of paragraphs (b)(1) and (3) of this section. (b) Adjusted carrying value. (1) For the on-balance sheet component of an equity exposure (other than an equity exposure that is classified as available-for-sale where the national bank or Federal savings association has made an AOCI opt-out election under § 3.22(b)(2)), the national bank's or Federal savings association's carrying value of the exposure; (2) For the on-balance sheet component of an equity exposure that is classified as available-for-sale where the national bank or Federal savings association has made an AOCI opt-out election under § 3.22(b)(2), the national bank's or Federal savings association's carrying value of the exposure less any net unrealized gains on the exposure that are reflected in such carrying value but excluded from the national bank's or Federal savings association's regulatory capital components; (3) For the off-balance sheet component of an equity exposure that is not an equity commitment, the effective notional principal amount of the exposure, the size of which is equivalent to a hypothetical on-balance sheet position in the underlying equity instrument that would evidence the same change in fair value (measured in dollars) given a small change in the price of the underlying equity instrument, minus the adjusted carrying value of the on-balance sheet component of the exposure as calculated in paragraph (b)(1) of this section; and (4) For a commitment to acquire an equity exposure (an equity commitment), the effective notional principal amount of the exposure is multiplied by the following conversion factors (CFs): (i) Conditional equity commitments with an original maturity of one year or less receive a CF of 20 percent. (ii) Conditional equity commitments with an original maturity of over one year receive a CF of 50 percent. (iii) Unconditional equity commitments receive a CF of 100 percent. § 3.52 Simple risk-weight approach (SRWA). (a) General. (b) SRWA computation for individual equity exposures. (1) Zero percent risk weight equity exposures. (2) 20 percent risk weight equity exposures. (3) 100 percent risk weight equity exposures. (i) Community development equity exposures. (ii) Effective portion of hedge pairs. (iii) Non-significant equity exposures. (A) To compute the aggregate adjusted carrying value of a national bank's or Federal savings association's equity exposures for purposes of this section, the national bank or Federal savings association may exclude equity exposures described in paragraphs (b)(1), (b)(2), (b)(3)(i), and (b)(3)(ii) of this section, the equity exposure in a hedge pair with the smaller adjusted carrying value, and a proportion of each equity exposure to an investment fund equal to the proportion of the assets of the investment fund that are not equity exposures or that meet the criterion of paragraph (b)(3)(i) of this section. If a national bank or Federal savings association does not know the actual holdings of the investment fund, the national bank or Federal savings association may calculate the proportion of the assets of the fund that are not equity exposures based on the terms of the prospectus, partnership agreement, or similar contract that defines the fund's permissible investments. If the sum of the investment limits for all exposure classes within the fund exceeds 100 percent, the national bank or Federal savings association must assume for purposes of this section that the investment fund invests to the maximum extent possible in equity exposures. (B) When determining which of a national bank's or Federal savings association's equity exposures qualify for a 100 percent risk weight under this paragraph (b), a national bank or Federal savings association first must include equity exposures to unconsolidated small business investment companies or held through consolidated small business investment companies described in section 302 of the Small Business Investment Act, then must include publicly traded equity exposures (including those held indirectly through investment funds), and then must include non-publicly traded equity exposures (including those held indirectly through investment funds). (4) 250 percent risk weight equity exposures. (5) 300 percent risk weight equity exposures. (6) 400 percent risk weight equity exposures. (7) 600 percent risk weight equity exposures. (i) Would meet the definition of a traditional securitization were it not for the application of paragraph (8) of that definition; and (ii) Has greater than immaterial leverage. (c) Hedge transactions Hedge pair. (2) Effective hedge. (i) Under the dollar-offset method of measuring effectiveness, the national bank or Federal savings association must determine the ratio of value change (RVC). The RVC is the ratio of the cumulative sum of the changes in value of one equity exposure to the cumulative sum of the changes in the value of the other equity exposure. If RVC is positive, the hedge is not effective and E equals 0. If RVC is negative and greater than or equal to −1 (that is, between zero and −1), then E equals the absolute value of RVC. If RVC is negative and less than −1, then E equals 2 plus RVC. (ii) Under the variability-reduction method of measuring effectiveness: (iii) Under the regression method of measuring effectiveness, E equals the coefficient of determination of a regression in which the change in value of one exposure in a hedge pair is the dependent variable and the change in value of the other exposure in a hedge pair is the independent variable. However, if the estimated regression coefficient is positive, then E equals zero. (3) The effective portion of a hedge pair is E multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair. (4) The ineffective portion of a hedge pair is (1-E) multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 35256, July 22, 2019] § 3.53 Equity exposures to investment funds. (a) Available approaches. (2) The risk-weighted asset amount of an equity exposure to an investment fund that meets the requirements for a community development equity exposure in § 3.52(b)(3)(i) is its adjusted carrying value. (3) If an equity exposure to an investment fund is part of a hedge pair and the national bank or Federal savings association does not use the full look-through approach, the national bank or Federal savings association must use the ineffective portion of the hedge pair as determined under § 3.52(c) as the adjusted carrying value for the equity exposure to the investment fund. The risk-weighted asset amount of the effective portion of the hedge pair is equal to its adjusted carrying value. (b) Full look-through approach. (1) The aggregate risk-weighted asset amounts of the exposures held by the fund as if they were held directly by the national bank or Federal savings association; and (2) The national bank's or Federal savings association's proportional ownership share of the fund. (c) Simple modified look-through approach. (d) Alternative modified look-through approach. §§ 3.54-3.60 [Reserved] Disclosures § 3.61 Purpose and scope. Sections 3.61 through 3.63 of this subpart establish public disclosure requirements related to the capital requirements described in subpart B of this part for a national bank or Federal savings association with total consolidated assets of $50 billion or more as reported on the national bank's or Federal savings association's most recent year-end Call Report that is not an advanced approaches national bank or Federal savings association making public disclosures pursuant to § 3.172. An advanced approaches national bank or Federal savings association that has not received approval from the OCC to exit parallel run pursuant to § 3.121(d) is subject to the disclosure requirements described in §§ 3.62 and 3.63. A national bank or Federal savings association with total consolidated assets of $50 billion or more as reported on the national bank's or Federal savings association's most recent year-end Call Report that is not an advanced approaches national bank or Federal savings association making public disclosures subject to § 3.172 must comply with § 3.62 unless it is a consolidated subsidiary of a bank holding company, savings and loan holding company, or depository institution that is subject to the disclosure requirements of § 3.62 or a subsidiary of a non-U.S. banking organization that is subject to comparable public disclosure requirements in its home jurisdiction. For purposes of this section, total consolidated assets are determined based on the average of the national bank's or Federal savings association's total consolidated assets in the four most recent quarters as reported on the Call Report or the average of the national bank or Federal savings association's total consolidated assets in the most recent consecutive quarters as reported quarterly on the national bank's or Federal savings association's Call Report if the national bank or Federal savings association has not filed such a report for each of the most recent four quarters. [84 FR 35256, July 22, 2019] § 3.62 Disclosure requirements. (a) A national bank or Federal savings association described in § 3.61 must provide timely public disclosures each calendar quarter of the information in the applicable tables in § 3.63. If a significant change occurs, such that the most recent reported amounts are no longer reflective of the national bank's or Federal savings association's capital adequacy and risk profile, then a brief discussion of this change and its likely impact must be disclosed as soon as practicable thereafter. Qualitative disclosures that typically do not change each quarter (for example, a general summary of the national bank's or Federal savings association's risk management objectives and policies, reporting system, and definitions) may be disclosed annually after the end of the fourth calendar quarter, provided that any significant changes are disclosed in the interim. The national bank's or Federal savings association's management may provide all of the disclosures required by §§ 3.61 through 3.63 in one place on the national bank's or Federal savings association's public Web site or may provide the disclosures in more than one public financial report or other regulatory reports, provided that the national bank or Federal savings association publicly provides a summary table specifically indicating the location(s) of all such disclosures. (b) A national bank or Federal savings association described in § 3.61 must have a formal disclosure policy approved by the board of directors that addresses its approach for determining the disclosures it makes. The policy must address the associated internal controls and disclosure controls and procedures. The board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over financial reporting, including the disclosures required by this subpart, and must ensure that appropriate review of the disclosures takes place. One or more senior officers of the national bank or Federal savings association must attest that the disclosures meet the requirements of this subpart. (c) If a national bank or Federal savings association described in § 3.61 concludes that specific commercial or financial information that it would otherwise be required to disclose under this section would be exempt from disclosure by the OCC under the Freedom of Information Act (5 U.S.C. 552), then the national bank or Federal savings association is not required to disclose that specific information pursuant to this section, but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed. § 3.63 Disclosures by national banks or Federal savings associations described in § 3.61. (a) Except as provided in § 3.62, a national bank or Federal savings association described in § 3.61 must make the disclosures described in Tables 1 through 10 of this section. The national bank or Federal savings association must make these disclosures publicly available for each of the last three years (that is, twelve quarters) or such shorter period beginning on January 1, 2015. (b) A national bank or Federal savings association must publicly disclose each quarter the following: (1) Common equity tier 1 capital, additional tier 1 capital, tier 2 capital, tier 1 and total capital ratios, including the regulatory capital elements and all the regulatory adjustments and deductions needed to calculate the numerator of such ratios; (2) Total risk-weighted assets, including the different regulatory adjustments and deductions needed to calculate total risk-weighted assets; (3) Regulatory capital ratios during any transition periods, including a description of all the regulatory capital elements and all regulatory adjustments and deductions needed to calculate the numerator and denominator of each capital ratio during any transition period; and (4) A reconciliation of regulatory capital elements as they relate to its balance sheet in any audited consolidated financial statements. Table 1 to § 3.63—Scope of Application Qualitative Disclosures (a) The name of the top corporate entity in the group to which subpart D of this part applies. (b) A brief description of the differences in the basis for consolidating entities 1 (1) That are fully consolidated; (2) That are deconsolidated and deducted from total capital; (3) For which the total capital requirement is deducted; and (4) That are neither consolidated nor deducted (for example, where the investment in the entity is assigned a risk weight in accordance with this subpart). (c) Any restrictions, or other major impediments, on transfer of funds or total capital within the group. (d) The aggregate amount of surplus capital of insurance subsidiaries included in the total capital of the consolidated group. (e) The aggregate amount by which actual total capital is less than the minimum total capital requirement in all subsidiaries, with total capital requirements and the name(s) of the subsidiaries with such deficiencies. 1 Table 2 to § 3.63—Capital Structure Qualitative Disclosures (a) Summary information on the terms and conditions of the main features of all regulatory capital instruments. Quantitative Disclosures (b) The amount of common equity tier 1 capital, with separate disclosure of: (1) Common stock and related surplus; (2) Retained earnings; (3) Common equity minority interest; (4) AOCI; and (5) Regulatory adjustments and deductions made to common equity tier 1 capital. (c) The amount of tier 1 capital, with separate disclosure of: (1) Additional tier 1 capital elements, including additional tier 1 capital instruments and tier 1 minority interest not included in common equity tier 1 capital; and (2) Regulatory adjustments and deductions made to tier 1 capital. (d) The amount of total capital, with separate disclosure of: (1) Tier 2 capital elements, including tier 2 capital instruments and total capital minority interest not included in tier 1 capital; and (2) Regulatory adjustments and deductions made to total capital. Table 3 to § 3.63—Capital Adequacy Qualitative disclosures (a) A summary discussion of the national bank's or Federal savings association's approach to assessing the adequacy of its capital to support current and future activities. Quantitative disclosures (b) Risk-weighted assets for: (1) Exposures to sovereign entities; (2) Exposures to certain supranational entities and MDBs; (3) Exposures to depository institutions, foreign banks, and credit unions; (4) Exposures to PSEs; (5) Corporate exposures; (6) Residential mortgage exposures; (7) Statutory multifamily mortgages and pre-sold construction loans; (8) HVCRE exposures; (9) Past due loans; (10) Other assets; (11) Cleared transactions; (12) Default fund contributions; (13) Unsettled transactions; (14) Securitization exposures; and (15) Equity exposures. (c) Standardized market risk-weighted assets as calculated under subpart F of this part. (d) Common equity tier 1, tier 1 and total risk-based capital ratios: (1) For the top consolidated group; and (2) For each depository institution subsidiary. (e) Total standardized risk-weighted assets. Table 4 to § 3.63—Capital Conservation Buffer Quantitative Disclosures (a) At least quarterly, the national bank or Federal savings association must calculate and publicly disclose the capital conservation buffer as described under § 3.11. (b) At least quarterly, the national bank or Federal savings association must calculate and publicly disclose the eligible retained income of the national bank or Federal savings association, as described under § 3.11. (c) At least quarterly, the national bank or Federal savings association must calculate and publicly disclose any limitations it has on distributions and discretionary bonus payments resulting from the capital conservation buffer framework described under § 3.11, including the maximum payout amount for the quarter. (c) General qualitative disclosure requirement. Table 5 to § 3.63 1 Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk disclosed in accordance with Table 6), including the: (1) Policy for determining past due or delinquency status; (2) Policy for placing loans on nonaccrual; (3) Policy for returning loans to accrual status; (4) Definition of and policy for identifying impaired loans (for financial accounting purposes); (5) Description of the methodology that the national bank or Federal savings association uses to estimate its allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, including statistical methods used where applicable; (6) Policy for charging-off uncollectible amounts; and (7) Discussion of the national bank's or Federal savings association's credit risk management policy. Quantitative Disclosures (b) Total credit risk exposures and average credit risk exposures, after accounting offsets in accordance with GAAP, without taking into account the effects of credit risk mitigation techniques (for example, collateral and netting not permitted under GAAP), over the period categorized by major types of credit exposure. For example, national banks or Federal savings associations could use categories similar to that used for financial statement purposes. Such categories might include, for instance (1) Loans, off-balance sheet commitments, and other non-derivative off-balance sheet exposures; (2) Debt securities; and (3) OTC derivatives. 2 (c) Geographic distribution of exposures, categorized in significant areas by major types of credit exposure. 3 (d) Industry or counterparty type distribution of exposures, categorized by major types of credit exposure. (e) By major industry or counterparty type: (1) Amount of impaired loans for which there was a related allowance under GAAP; (2) Amount of impaired loans for which there was no related allowance under GAAP; (3) Amount of loans past due 90 days and on nonaccrual; (4) Amount of loans past due 90 days and still accruing; 4 (5) The balance in the allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, at the end of each period, disaggregated on the basis of the national bank's or Federal savings association's impairment method. To disaggregate the information required on the basis of impairment methodology, an entity shall separately disclose the amounts based on the requirements in GAAP; and (6) Charge-offs during the period. (f) Amount of impaired loans and, if available, the amount of past due loans categorized by significant geographic areas including, if practical, the amounts of allowances related to each geographical area, 5 (g) Reconciliation of changes in ALLL or AACL, as applicable. 6 (h) Remaining contractual maturity delineation (for example, one year or less) of the whole portfolio, categorized by credit exposure. 1 2 See, 3 4 5 6 Table 6 to § 3.63—General Disclosure for Counterparty Credit Risk-Related Exposures Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to OTC derivatives, eligible margin loans, and repo-style transactions, including a discussion of: (1) The methodology used to assign credit limits for counterparty credit exposures; (2) Policies for securing collateral, valuing and managing collateral, and establishing credit reserves; (3) The primary types of collateral taken; and (4) The impact of the amount of collateral the national bank or Federal savings association would have to provide given a deterioration in the national bank's or Federal savings association's own creditworthiness. Quantitative Disclosures (b) Gross positive fair value of contracts, collateral held (including type, for example, cash, government securities), and net unsecured credit exposure. 1 2 (c) Notional amount of purchased and sold credit derivatives, segregated between use for the national bank's or Federal savings association's own credit portfolio and in its intermediation activities, including the distribution of the credit derivative products used, categorized further by protection bought and sold within each product group. 1 2 Table 7 to § 3.63—Credit Risk Mitigation 1 2 Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to credit risk mitigation, including: (1) Policies and processes for collateral valuation and management; (2) A description of the main types of collateral taken by the national bank or Federal savings association; (3) The main types of guarantors/credit derivative counterparties and their creditworthiness; and (4) Information about (market or credit) risk concentrations with respect to credit risk mitigation. Quantitative Disclosures (b) For each separately disclosed credit risk portfolio, the total exposure that is covered by eligible financial collateral, and after the application of haircuts. (c) For each separately disclosed portfolio, the total exposure that is covered by guarantees/credit derivatives and the risk-weighted asset amount associated with that exposure. 1 2 Table 8 to § 3.63—Securitization Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to a securitization (including synthetic securitizations), including a discussion of: (1) The national bank's or Federal savings association 's objectives for securitizing assets, including the extent to which these activities transfer credit risk of the underlying exposures away from the national bank or Federal savings association to other entities and including the type of risks assumed and retained with resecuritization activity; 1 (2) The nature of the risks ( e.g., (3) The roles played by the national bank or Federal savings association in the securitization process 2 (4) The processes in place to monitor changes in the credit and market risk of securitization exposures including how those processes differ for resecuritization exposures; (5) The national bank's or Federal savings association's policy for mitigating the credit risk retained through securitization and resecuritization exposures; and (6) The risk-based capital approaches that the national bank or Federal savings association follows for its securitization exposures including the type of securitization exposure to which each approach applies. (b) A list of: (1) The type of securitization SPEs that the national bank or Federal savings association, as sponsor, uses to securitize third-party exposures. The national bank or Federal savings association must indicate whether it has exposure to these SPEs, either on- or off-balance sheet; and (2) Affiliated entities: (i) That the national bank or Federal savings association manages or advises; and (ii) That invest either in the securitization exposures that the national bank or Federal savings association has securitized or in securitization SPEs that the national bank or Federal savings association sponsors. 3 (c) Summary of the national bank's or Federal savings association's accounting policies for securitization activities, including: (1) Whether the transactions are treated as sales or financings; (2) Recognition of gain-on-sale; (3) Methods and key assumptions applied in valuing retained or purchased interests; (4) Changes in methods and key assumptions from the previous period for valuing retained interests and impact of the changes; (5) Treatment of synthetic securitizations; (6) How exposures intended to be securitized are valued and whether they are recorded under subpart D of this part; and (7) Policies for recognizing liabilities on the balance sheet for arrangements that could require the national bank or Federal savings association to provide financial support for securitized assets. (d) An explanation of significant changes to any quantitative information since the last reporting period. Quantitative Disclosures (e) The total outstanding exposures securitized by the national bank or Federal savings association in securitizations that meet the operational criteria provided in § 3.41 (categorized into traditional and synthetic securitizations), by exposure type, separately for securitizations of third-party exposures for which the bank acts only as sponsor. 4 (f) For exposures securitized by the national bank or Federal savings association in securitizations that meet the operational criteria in § 3.41: (1) Amount of securitized assets that are impaired/past due categorized by exposure type; 5 (2) Losses recognized by the national bank or Federal savings association during the current period categorized by exposure type. 6 (g) The total amount of outstanding exposures intended to be securitized categorized by exposure type. (h) Aggregate amount of: (1) On-balance sheet securitization exposures retained or purchased categorized by exposure type; and (2) Off-balance sheet securitization exposures categorized by exposure type. (i)(1) Aggregate amount of securitization exposures retained or purchased and the associated capital requirements for these exposures, categorized between securitization and resecuritization exposures, further categorized into a meaningful number of risk weight bands and by risk-based capital approach ( e.g., (2) Aggregate amount disclosed separately by type of underlying exposure in the pool of any: (i) After-tax gain-on-sale on a securitization that has been deducted from common equity tier 1 capital; and (ii) Credit-enhancing interest-only strip that is assigned a 1,250 percent risk weight. (j) Summary of current year's securitization activity, including the amount of exposures securitized (by exposure type), and recognized gain or loss on sale by exposure type. (k) Aggregate amount of resecuritization exposures retained or purchased categorized according to: (1) Exposures to which credit risk mitigation is applied and those not applied; and (2) Exposures to guarantors categorized according to guarantor creditworthiness categories or guarantor name. 1 2 3 4 5 6 Table 9 to § 3.63—Equities Not Subject to Subpart F of This Part Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to equity risk for equities not subject to subpart F of this part, including: (1) Differentiation between holdings on which capital gains are expected and those taken under other objectives including for relationship and strategic reasons; and (2) Discussion of important policies covering the valuation of and accounting for equity holdings not subject to subpart F of this part. This includes the accounting techniques and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices. Quantitative Disclosures (b) Value disclosed on the balance sheet of investments, as well as the fair value of those investments; for securities that are publicly traded, a comparison to publicly-quoted share values where the share price is materially different from fair value. (c) The types and nature of investments, including the amount that is: (1) Publicly traded; and (d) The cumulative realized gains (losses) arising from sales and liquidations in the reporting period. (e) (1) Total unrealized gains (losses). 1 (2) Total latent revaluation gains (losses). 2 (3) Any amounts of the above included in tier 1 or tier 2 capital. (f) Capital requirements categorized by appropriate equity groupings, consistent with the national bank's or Federal savings association's methodology, as well as the aggregate amounts and the type of equity investments subject to any supervisory transition regarding regulatory capital requirements. 1 2 Table 10 to § 3.63—Interest Rate Risk for Non-Trading Activities Qualitative disclosures (a) The general qualitative disclosure requirement, including the nature of interest rate risk for non-trading activities and key assumptions, including assumptions regarding loan prepayments and behavior of non-maturity deposits, and frequency of measurement of interest rate risk for non-trading activities. Quantitative disclosures (b) The increase (decline) in earnings or economic value (or relevant measure used by management) for upward and downward rate shocks according to management's method for measuring interest rate risk for non-trading activities, categorized by currency (as appropriate). (d) A Category III national bank or Federal savings association that is required to publicly disclose its supplementary leverage ratio pursuant to § 3.172(d) is subject to the supplementary leverage ratio disclosure requirement at § 3.173(a)(2). (e) A Category III national bank or Federal savings association that is required to calculate a countercyclical capital buffer pursuant to § 3.11 is subject to the disclosure requirement at Table 4 to § 3.173, “Capital Conservation and Countercyclical Capital Buffers,” and not to the disclosure requirement at Table 4 to this section, “Capital Conservation Buffer.” [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 4238, Feb. 14, 2019; 84 FR 35256, July 22, 2019; 84 FR 59265, Nov. 1, 2019] §§ 3.64-3.99 [Reserved] Subpart E—Risk-Weighted Assets—Internal Ratings-Based and Advanced Measurement Approaches Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted. § 3.100 Purpose, applicability, and principle of conservatism. (a) Purpose. (1) Minimum qualifying criteria for national banks or Federal savings associations using institution-specific internal risk measurement and management processes for calculating risk-based capital requirements; and (2) Methodologies for such national banks or Federal savings associations to calculate their total risk-weighted assets. (b) Applicability. (i) Is a subsidiary of a global systemically important BHC, as identified pursuant to 12 CFR 217.402; (ii) Is a Category II national bank or Federal savings association; (iii) Is a subsidiary of a depository institution that uses the advanced approaches pursuant to this subpart (OCC), 12 CFR part 217, subpart E (Board), or 12 CFR part 324 (FDIC), to calculate its risk-based capital requirements; (iv) Is a subsidiary of a bank holding company or savings and loan holding company that uses the advanced approaches pursuant to subpart E of 12 CFR part 217 to calculate its risk-based capital requirements; or (v) Elects to use this subpart to calculate its risk-based capital requirements. (2) A market risk national bank or Federal savings association must exclude from its calculation of risk-weighted assets under this subpart the risk-weighted asset amounts of all covered positions, as defined in subpart F of this part (except foreign exchange positions that are not trading positions, over-the-counter derivative positions, cleared transactions, and unsettled transactions). (c) Principle of conservatism. (1) The national bank or Federal savings association can demonstrate on an ongoing basis to the satisfaction of the OCC that not applying the provision would, in all circumstances, unambiguously generate a risk-based capital requirement for each such exposure greater than that which would otherwise be required under this subpart; (2) The national bank or Federal savings association appropriately manages the risk of each such exposure; (3) The national bank or Federal savings association notifies the OCC in writing prior to applying this principle to each such exposure; and (4) The exposures to which the national bank or Federal savings association applies this principle are not, in the aggregate, material to the national bank or Federal savings association. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 80 FR 41415, July 15, 2015; 84 FR 59265, Nov. 1, 2019] § 3.101 Definitions. (a) Terms that are set forth in § 3.2 and used in this subpart have the definitions assigned thereto in § 3.2. (b) For the purposes of this subpart, the following terms are defined as follows: Advanced internal ratings-based (IRB) systems Advanced systems Backtesting Benchmarking Bond option contract Business environment and internal control factors Credit default swap Credit valuation adjustment Default (1) Retail. (A) The exposure is 180 days past due, in the case of a residential mortgage exposure or revolving exposure; (B) The exposure is 120 days past due, in the case of retail exposures that are not residential mortgage exposures or revolving exposures; or (C) The national bank or Federal savings association has taken a full or partial charge-off, write-down of principal, or material negative fair value adjustment of principal on the exposure for credit-related reasons. (ii) Notwithstanding paragraph (1)(i) of this definition, for a retail exposure held by a non-U.S. subsidiary of the national bank or Federal savings association that is subject to an internal ratings-based approach to capital adequacy consistent with the Basel Committee on Banking Supervision's “International Convergence of Capital Measurement and Capital Standards: A Revised Framework” in a non-U.S. jurisdiction, the national bank or Federal savings association may elect to use the definition of default that is used in that jurisdiction, provided that the national bank or Federal savings association has obtained prior approval from the OCC to use the definition of default in that jurisdiction. (iii) A retail exposure in default remains in default until the national bank or Federal savings association has reasonable assurance of repayment and performance for all contractual principal and interest payments on the exposure. (2) Wholesale. (A) The national bank or Federal savings association determines that the obligor is unlikely to pay its credit obligations to the national bank or Federal savings association in full, without recourse by the national bank or Federal savings association to actions such as realizing collateral (if held); or (B) The obligor is past due more than 90 days on any material credit obligation(s) to the national bank or Federal savings association. 29 29 (ii) An obligor in default remains in default until the national bank or Federal savings association has reasonable assurance of repayment and performance for all contractual principal and interest payments on all exposures of the national bank or Federal savings association to the obligor (other than exposures that have been fully written-down or charged-off). Dependence Economic downturn conditions Effective maturity (M) (1) For wholesale exposures other than repo-style transactions, eligible margin loans, and OTC derivative contracts described in paragraph (2) or (3) of this definition: (i) The weighted-average remaining maturity (measured in years, whole or fractional) of the expected contractual cash flows from the exposure, using the undiscounted amounts of the cash flows as weights; or (ii) The nominal remaining maturity (measured in years, whole or fractional) of the exposure. (2) For repo-style transactions, eligible margin loans, and OTC derivative contracts subject to a qualifying master netting agreement for which the national bank or Federal savings association does not apply the internal models approach in section 132(d), the weighted-average remaining maturity (measured in years, whole or fractional) of the individual transactions subject to the qualifying master netting agreement, with the weight of each individual transaction set equal to the notional amount of the transaction. (3) For repo-style transactions, eligible margin loans, and OTC derivative contracts for which the national bank or Federal savings association applies the internal models approach in § 3.132(d), the value determined in § 3.132(d)(4). Eligible double default guarantor, (1) U.S.-based entities. (2) Non-U.S.-based entities. Eligible operational risk offsets (1) Are generated by internal business practices to absorb highly predictable and reasonably stable operational losses, including reserves calculated consistent with GAAP; and (2) Are available to cover expected operational losses with a high degree of certainty over a one-year horizon. Eligible purchased wholesale exposure (1) The national bank or Federal savings association or securitization SPE purchased from an unaffiliated seller and did not directly or indirectly originate; (2) Was generated on an arm's-length basis between the seller and the obligor (intercompany accounts receivable and receivables subject to contra-accounts between firms that buy and sell to each other do not satisfy this criterion); (3) Provides the national bank or Federal savings association or securitization SPE with a claim on all proceeds from the exposure or a pro rata interest in the proceeds from the exposure; (4) Has an M of less than one year; and (5) When consolidated by obligor, does not represent a concentrated exposure relative to the portfolio of purchased wholesale exposures. Expected exposure (EE) Expected operational loss (EOL) Expected positive exposure (EPE) Exposure at default (EAD) (1) For the on-balance sheet component of a wholesale exposure or segment of retail exposures (other than an OTC derivative contract, a repo-style transaction or eligible margin loan for which the national bank or Federal savings association determines EAD under § 3.132, a cleared transaction, or default fund contribution), EAD means the national bank's or Federal savings association's carrying value (including net accrued but unpaid interest and fees) for the exposure or segment less any allocated transfer risk reserve for the exposure or segment. (2) For the off-balance sheet component of a wholesale exposure or segment of retail exposures (other than an OTC derivative contract, a repo-style transaction or eligible margin loan for which the national bank or Federal savings association determines EAD under § 3.132, cleared transaction, or default fund contribution) in the form of a loan commitment, line of credit, trade-related letter of credit, or transaction-related contingency, EAD means the national bank's or Federal savings association's best estimate of net additions to the outstanding amount owed the national bank or Federal savings association, including estimated future additional draws of principal and accrued but unpaid interest and fees, that are likely to occur over a one-year horizon assuming the wholesale exposure or the retail exposures in the segment were to go into default. This estimate of net additions must reflect what would be expected during economic downturn conditions. For the purposes of this definition: (i) Trade-related letters of credit are short-term, self-liquidating instruments that are used to finance the movement of goods and are collateralized by the underlying goods. (ii) Transaction-related contingencies relate to a particular transaction and include, among other things, performance bonds and performance-based letters of credit. (3) For the off-balance sheet component of a wholesale exposure or segment of retail exposures (other than an OTC derivative contract, a repo-style transaction, or eligible margin loan for which the national bank or Federal savings association determines EAD under § 3.132, cleared transaction, or default fund contribution) in the form of anything other than a loan commitment, line of credit, trade-related letter of credit, or transaction-related contingency, EAD means the notional amount of the exposure or segment. (4) EAD for OTC derivative contracts is calculated as described in § 3.132. A national bank or Federal savings association also may determine EAD for repo-style transactions and eligible margin loans as described in § 3.132. Exposure category External operational loss event data IMM exposure Internal operational loss event data Loss given default (LGD) (1) For a wholesale exposure, the greatest of: (i) Zero; (ii) The national bank's or Federal savings association's empirically based best estimate of the long-run default-weighted average economic loss, per dollar of EAD, the national bank or Federal savings association would expect to incur if the obligor (or a typical obligor in the loss severity grade assigned by the national bank or Federal savings association to the exposure) were to default within a one-year horizon over a mix of economic conditions, including economic downturn conditions; or (iii) The national bank's or Federal savings association's empirically based best estimate of the economic loss, per dollar of EAD, the national bank or Federal savings association would expect to incur if the obligor (or a typical obligor in the loss severity grade assigned by the national bank or Federal savings association to the exposure) were to default within a one-year horizon during economic downturn conditions. (2) For a segment of retail exposures, the greatest of: (i) Zero; (ii) The national bank's or Federal savings association's empirically based best estimate of the long-run default-weighted average economic loss, per dollar of EAD, the national bank or Federal savings association would expect to incur if the exposures in the segment were to default within a one-year horizon over a mix of economic conditions, including economic downturn conditions; or (iii) The national bank's or Federal savings association's empirically based best estimate of the economic loss, per dollar of EAD, the national bank or Federal savings association would expect to incur if the exposures in the segment were to default within a one-year horizon during economic downturn conditions. (3) The economic loss on an exposure in the event of default is all material credit-related losses on the exposure (including accrued but unpaid interest or fees, losses on the sale of collateral, direct workout costs, and an appropriate allocation of indirect workout costs). Where positive or negative cash flows on a wholesale exposure to a defaulted obligor or a defaulted retail exposure (including proceeds from the sale of collateral, workout costs, additional extensions of credit to facilitate repayment of the exposure, and draw-downs of unused credit lines) occur after the date of default, the economic loss must reflect the net present value of cash flows as of the default date using a discount rate appropriate to the risk of the defaulted exposure. Obligor (1) Exposures to the same legal entity or natural person denominated in different currencies; (2)(i) An income-producing real estate exposure for which all or substantially all of the repayment of the exposure is reliant on the cash flows of the real estate serving as collateral for the exposure; the national bank or Federal savings association, in economic substance, does not have recourse to the borrower beyond the real estate collateral; and no cross-default or cross-acceleration clauses are in place other than clauses obtained solely out of an abundance of caution; and (ii) Other credit exposures to the same legal entity or natural person; and (3)(i) A wholesale exposure authorized under section 364 of the U.S. Bankruptcy Code (11 U.S.C. 364) to a legal entity or natural person who is a debtor-in-possession for purposes of Chapter 11 of the Bankruptcy Code; and (ii) Other credit exposures to the same legal entity or natural person. Operational loss Operational loss event (1) Internal fraud, which means the operational loss event type category that comprises operational losses resulting from an act involving at least one internal party of a type intended to defraud, misappropriate property, or circumvent regulations, the law, or company policy excluding diversity- and discrimination-type events. (2) External fraud, which means the operational loss event type category that comprises operational losses resulting from an act by a third party of a type intended to defraud, misappropriate property, or circumvent the law. Retail credit card losses arising from non-contractual, third-party-initiated fraud (for example, identity theft) are external fraud operational losses. All other third-party-initiated credit losses are to be treated as credit risk losses. (3) Employment practices and workplace safety, which means the operational loss event type category that comprises operational losses resulting from an act inconsistent with employment, health, or safety laws or agreements, payment of personal injury claims, or payment arising from diversity- and discrimination-type events. (4) Clients, products, and business practices, which means the operational loss event type category that comprises operational losses resulting from the nature or design of a product or from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements). (5) Damage to physical assets, which means the operational loss event type category that comprises operational losses resulting from the loss of or damage to physical assets from natural disaster or other events. (6) Business disruption and system failures, which means the operational loss event type category that comprises operational losses resulting from disruption of business or system failures. (7) Execution, delivery, and process management, which means the operational loss event type category that comprises operational losses resulting from failed transaction processing or process management or losses arising from relations with trade counterparties and vendors. Operational risk Operational risk exposure Other retail exposure (1) An exposure to an individual for non-business purposes; or (2) An exposure to an individual or company for business purposes if the national bank's or Federal savings association's consolidated business credit exposure to the individual or company is $1 million or less. Probability of default (PD) (1) For a wholesale exposure to a non-defaulted obligor, the national bank's or Federal savings association's empirically based best estimate of the long-run average one-year default rate for the rating grade assigned by the national bank or Federal savings association to the obligor, capturing the average default experience for obligors in the rating grade over a mix of economic conditions (including economic downturn conditions) sufficient to provide a reasonable estimate of the average one-year default rate over the economic cycle for the rating grade. (2) For a segment of non-defaulted retail exposures, the national bank's or Federal savings association's empirically based best estimate of the long-run average one-year default rate for the exposures in the segment, capturing the average default experience for exposures in the segment over a mix of economic conditions (including economic downturn conditions) sufficient to provide a reasonable estimate of the average one-year default rate over the economic cycle for the segment. (3) For a wholesale exposure to a defaulted obligor or segment of defaulted retail exposures, 100 percent. Qualifying cross-product master netting agreement Qualifying revolving exposure (QRE) (1) Is revolving (that is, the amount outstanding fluctuates, determined largely by a borrower's decision to borrow and repay up to a pre-established maximum amount, except for an outstanding amount that the borrower is required to pay in full every month); (2) Is unsecured and unconditionally cancelable by the national bank or Federal savings association to the fullest extent permitted by Federal law; and (3)(i) Has a maximum contractual exposure amount (drawn plus undrawn) of up to $100,000; or (ii) With respect to a product with an outstanding amount that the borrower is required to pay in full every month, the total outstanding amount does not in practice exceed $100,000. (4) A segment of exposures that contains one or more exposures that fails to meet paragraph (3)(ii) of this definition must be treated as a segment of other retail exposures for the 24 month period following the month in which the total outstanding amount of one or more exposures individually exceeds $100,000. Retail exposure Retail exposure subcategory Risk parameter Scenario analysis Total wholesale and retail risk-weighted assets (1) Risk-weighted assets for wholesale exposures that are not IMM exposures, cleared transactions, or default fund contributions to non-defaulted obligors and segments of non-defaulted retail exposures; (2) Risk-weighted assets for wholesale exposures to defaulted obligors and segments of defaulted retail exposures; (3) Risk-weighted assets for assets not defined by an exposure category; (4) Risk-weighted assets for non-material portfolios of exposures; (5) Risk-weighted assets for IMM exposures (as determined in § 3.132(d)); (6) Risk-weighted assets for cleared transactions and risk-weighted assets for default fund contributions (as determined in § 3.133); and (7) Risk-weighted assets for unsettled transactions (as determined in § 3.136). Unexpected operational loss (UOL) Unit of measure Wholesale exposure Wholesale exposure subcategory Qualification § 3.121 Qualification process. (a) Timing. (2) A national bank or Federal savings association that elects to be subject to this appendix under § 3.100(b)(1)(v) must adopt a written implementation plan. (b) Implementation plan. (i) Comprehensively address the qualification requirements in § 3.122 for the national bank or Federal savings association and each consolidated subsidiary (U.S. and foreign-based) of the national bank or Federal savings association with respect to all portfolios and exposures of the national bank or Federal savings association and each of its consolidated subsidiaries; (ii) Justify and support any proposed temporary or permanent exclusion of business lines, portfolios, or exposures from the application of the advanced approaches in this subpart (which business lines, portfolios, and exposures must be, in the aggregate, immaterial to the national bank or Federal savings association); (iii) Include the national bank's or Federal savings association's self-assessment of: (A) The national bank's or Federal savings association's current status in meeting the qualification requirements in § 3.122; and (B) The consistency of the national bank's or Federal savings association's current practices with the OCC's supervisory guidance on the qualification requirements; (iv) Based on the national bank's or Federal savings association's self-assessment, identify and describe the areas in which the national bank or Federal savings association proposes to undertake additional work to comply with the qualification requirements in § 3.122 or to improve the consistency of the national bank's or Federal savings association's current practices with the OCC's supervisory guidance on the qualification requirements (gap analysis); (v) Describe what specific actions the national bank or Federal savings association will take to address the areas identified in the gap analysis required by paragraph (b)(1)(iv) of this section; (vi) Identify objective, measurable milestones, including delivery dates and a date when the national bank's or Federal savings association's implementation of the methodologies described in this subpart will be fully operational; (vii) Describe resources that have been budgeted and are available to implement the plan; and (viii) Receive approval of the national bank's or Federal savings association's board of directors. (2) The national bank or Federal savings association must submit the implementation plan, together with a copy of the minutes of the board of directors' approval, to the OCC at least 60 days before the national bank or Federal savings association proposes to begin its parallel run, unless the OCC waives prior notice. (c) Parallel run. (d) Approval to calculate risk-based capital requirements under this subpart. (1) The national bank or Federal savings association fully complies with all the qualification requirements in § 3.122; (2) The national bank or Federal savings association has conducted a satisfactory parallel run under paragraph (c) of this section; and (3) The national bank or Federal savings association has an adequate process to ensure ongoing compliance with the qualification requirements in § 3.122. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 86 FR 731, Jan. 6, 2021] § 3.122 Qualification requirements. (a) Process and systems requirements. (2) The systems and processes used by a national bank or Federal savings association for risk-based capital purposes under this subpart must be consistent with the national bank's or Federal savings association's internal risk management processes and management information reporting systems. (3) Each national bank or Federal savings association must have an appropriate infrastructure with risk measurement and management processes that meet the qualification requirements of this section and are appropriate given the national bank's or Federal savings association's size and level of complexity. Regardless of whether the systems and models that generate the risk parameters necessary for calculating a national bank's or Federal savings association's risk-based capital requirements are located at any affiliate of the national bank or Federal savings association, the national bank or Federal savings association itself must ensure that the risk parameters and reference data used to determine its risk-based capital requirements are representative of long run experience with respect to its own credit risk and operational risk exposures. (b) Risk rating and segmentation systems for wholesale and retail exposures. (ii) If a national bank or Federal savings association uses multiple rating or segmentation systems, the national bank's or Federal savings association's rationale for assigning an obligor or exposure to a particular system must be documented and applied in a manner that best reflects the obligor's or exposure's level of risk. A national bank or Federal savings association must not inappropriately allocate obligors or exposures across systems to minimize regulatory capital requirements. (iii) In assigning ratings to wholesale obligors and exposures, including loss severity ratings grades to wholesale exposures, and assigning retail exposures to retail segments, a national bank or Federal savings association must use all relevant and material information and ensure that the information is current. (iv) When assigning an obligor to a PD rating or retail exposure to a PD segment, a national bank or Federal savings association must assess the obligor or retail borrower's ability and willingness to contractually perform, taking a conservative view of projected information. (2) For wholesale exposures: (i) A national bank or Federal savings association must have an internal risk rating system that accurately and reliably assigns each obligor to a single rating grade (reflecting the obligor's likelihood of default). A national bank or Federal savings association may elect, however, not to assign to a rating grade an obligor to whom the national bank or Federal savings association extends credit based solely on the financial strength of a guarantor, provided that all of the national bank's or Federal savings association's exposures to the obligor are fully covered by eligible guarantees, the national bank or Federal savings association applies the PD substitution approach in § 3.134(c)(1) to all exposures to that obligor, and the national bank or Federal savings association immediately assigns the obligor to a rating grade if a guarantee can no longer be recognized under this part. The national bank's or Federal savings association's wholesale obligor rating system must have at least seven discrete rating grades for non-defaulted obligors and at least one rating grade for defaulted obligors. (ii) Unless the national bank or Federal savings association has chosen to directly assign LGD estimates to each wholesale exposure, the national bank or Federal savings association must have an internal risk rating system that accurately and reliably assigns each wholesale exposure to a loss severity rating grade (reflecting the national bank's or Federal savings association's estimate of the LGD of the exposure). A national bank or Federal savings association employing loss severity rating grades must have a sufficiently granular loss severity grading system to avoid grouping together exposures with widely ranging LGDs. (iii) A national bank or Federal savings association must have an effective process to obtain and update in a timely manner relevant and material information on obligor and exposure characteristics that affect PD, LGD and EAD. (3) For retail exposures: (i) A national bank or Federal savings association must have an internal system that groups retail exposures into the appropriate retail exposure subcategory and groups the retail exposures in each retail exposure subcategory into separate segments with homogeneous risk characteristics that provide a meaningful differentiation of risk. The national bank's or Federal savings association's system must identify and group in separate segments by subcategories exposures identified in § 3.131(c)(2)(ii) and (iii). (ii) A national bank or Federal savings association must have an internal system that captures all relevant exposure risk characteristics, including borrower credit score, product and collateral types, as well as exposure delinquencies, and must consider cross-collateral provisions, where present. (iii) The national bank or Federal savings association must review and, if appropriate, update assignments of individual retail exposures to segments and the loss characteristics and delinquency status of each identified risk segment. These reviews must occur whenever the national bank or Federal savings association receives new material information, but generally no less frequently than quarterly, and, in all cases, at least annually. (4) The national bank's or Federal savings association's internal risk rating policy for wholesale exposures must describe the national bank's or Federal savings association's rating philosophy (that is, must describe how wholesale obligor rating assignments are affected by the national bank's or Federal savings association's choice of the range of economic, business, and industry conditions that are considered in the obligor rating process). (5) The national bank's or Federal savings association's internal risk rating system for wholesale exposures must provide for the review and update (as appropriate) of each obligor rating and (if applicable) each loss severity rating whenever the national bank or Federal savings association obtains relevant and material information on the obligor or exposure that affects PD, LGD and EAD, but no less frequently than annually. (c) Quantification of risk parameters for wholesale and retail exposures. (2) A national bank's or Federal savings association's estimates of PD, LGD, and EAD must incorporate all relevant, material, and available data that is reflective of the national bank's or Federal savings association's actual wholesale and retail exposures and of sufficient quality to support the determination of risk-based capital requirements for the exposures. In particular, the population of exposures in the data used for estimation purposes, the lending standards in use when the data were generated, and other relevant characteristics, should closely match or be comparable to the national bank's or Federal savings association's exposures and standards. In addition, a national bank or Federal savings association must: (i) Demonstrate that its estimates are representative of long run experience, including periods of economic downturn conditions, whether internal or external data are used; (ii) Take into account any changes in lending practice or the process for pursuing recoveries over the observation period; (iii) Promptly reflect technical advances, new data, and other information as they become available; (iv) Demonstrate that the data used to estimate risk parameters support the accuracy and robustness of those estimates; and (v) Demonstrate that its estimation technique performs well in out-of-sample tests whenever possible. (3) The national bank's or Federal savings association's risk parameter quantification process must produce appropriately conservative risk parameter estimates where the national bank or Federal savings association has limited relevant data, and any adjustments that are part of the quantification process must not result in a pattern of bias toward lower risk parameter estimates. (4) The national bank's or Federal savings association's risk parameter estimation process should not rely on the possibility of U.S. government financial assistance, except for the financial assistance that the U.S. government has a legally binding commitment to provide. (5) The national bank or Federal savings association must be able to demonstrate which variables have been found to be statistically significant with regard to EAD. The national bank's or Federal savings association's EAD estimates must reflect its specific policies and strategies with regard to account management, including account monitoring and payment processing, and its ability and willingness to prevent further drawdowns in circumstances short of payment default. The national bank or Federal savings association must have adequate systems and procedures in place to monitor current outstanding amounts against committed lines, and changes in outstanding amounts per obligor and obligor rating grade and per retail segment. The national bank or Federal savings association must be able to monitor outstanding amounts on a daily basis. (6) At a minimum, PD estimates for wholesale obligors and retail segments must be based on at least five years of default data. LGD estimates for wholesale exposures must be based on at least seven years of loss severity data, and LGD estimates for retail segments must be based on at least five years of loss severity data. EAD estimates for wholesale exposures must be based on at least seven years of exposure amount data, and EAD estimates for retail segments must be based on at least five years of exposure amount data. If the national bank or Federal savings association has relevant and material reference data that span a longer period of time than the minimum time periods specified above, the national bank or Federal savings association must incorporate such data in its estimates, provided that it does not place undue weight on periods of favorable or benign economic conditions relative to periods of economic downturn conditions. (7) Default, loss severity, and exposure amount data must include periods of economic downturn conditions, or the national bank or Federal savings association must adjust its estimates of risk parameters to compensate for the lack of data from periods of economic downturn conditions. (8) The national bank's or Federal savings association's PD, LGD, and EAD estimates must be based on the definition of default in § 3.101. (9) If a national bank or Federal savings association uses internal data obtained prior to becoming subject to this subpart E or external data to arrive at PD, LGD, or EAD estimates, the national bank or Federal savings association must demonstrate to the OCC that the national bank or Federal savings association has made appropriate adjustments if necessary to be consistent with the definition of default in § 3.101. Internal data obtained after the national bank or Federal savings association becomes subject to this subpart E must be consistent with the definition of default in § 3.101. (10) The national bank or Federal savings association must review and update (as appropriate) its risk parameters and its risk parameter quantification process at least annually. (11) The national bank or Federal savings association must, at least annually, conduct a comprehensive review and analysis of reference data to determine relevance of the reference data to the national bank's or Federal savings association's exposures, quality of reference data to support PD, LGD, and EAD estimates, and consistency of reference data to the definition of default in § 3.101. (d) Counterparty credit risk model. (e) Double default treatment. (f) Equity exposures model. (g) Operational risk. (i) Have an operational risk management function that: (A) Is independent of business line management; and (B) Is responsible for designing, implementing, and overseeing the national bank's or Federal savings association's operational risk data and assessment systems, operational risk quantification systems, and related processes; (ii) Have and document a process (which must capture business environment and internal control factors affecting the national bank's or Federal savings association's operational risk profile) to identify, measure, monitor, and control operational risk in the national bank's or Federal savings association's products, activities, processes, and systems; and (iii) Report operational risk exposures, operational loss events, and other relevant operational risk information to business unit management, senior management, and the board of directors (or a designated committee of the board). (2) Operational risk data and assessment systems. (i) Be structured in a manner consistent with the national bank's or Federal savings association's current business activities, risk profile, technological processes, and risk management processes; and (ii) Include credible, transparent, systematic, and verifiable processes that incorporate the following elements on an ongoing basis: (A) Internal operational loss event data. ( 1 ( 2 ( 3 (B) External operational loss event data. (C) Scenario analysis. (D) Business environment and internal control factors. (3) Operational risk quantification systems. (A) Must generate estimates of the national bank's or Federal savings association's operational risk exposure using its operational risk data and assessment systems; (B) Must employ a unit of measure that is appropriate for the national bank's or Federal savings association's range of business activities and the variety of operational loss events to which it is exposed, and that does not combine business activities or operational loss events with demonstrably different risk profiles within the same loss distribution; (C) Must include a credible, transparent, systematic, and verifiable approach for weighting each of the four elements, described in paragraph (g)(2)(ii) of this section, that a national bank or Federal savings association is required to incorporate into its operational risk data and assessment systems; (D) May use internal estimates of dependence among operational losses across and within units of measure if the national bank or Federal savings association can demonstrate to the satisfaction of the OCC that its process for estimating dependence is sound, robust to a variety of scenarios, and implemented with integrity, and allows for uncertainty surrounding the estimates. If the national bank or Federal savings association has not made such a demonstration, it must sum operational risk exposure estimates across units of measure to calculate its total operational risk exposure; and (E) Must be reviewed and updated (as appropriate) whenever the national bank or Federal savings association becomes aware of information that may have a material effect on the national bank's or Federal savings association's estimate of operational risk exposure, but the review and update must occur no less frequently than annually. (ii) With the prior written approval of the OCC, a national bank or Federal savings association may generate an estimate of its operational risk exposure using an alternative approach to that specified in paragraph (g)(3)(i) of this section. A national bank or Federal savings association proposing to use such an alternative operational risk quantification system must submit a proposal to the OCC. In determining whether to approve a national bank's or Federal savings association's proposal to use an alternative operational risk quantification system, the OCC will consider the following principles: (A) Use of the alternative operational risk quantification system will be allowed only on an exception basis, considering the size, complexity, and risk profile of the national bank or Federal savings association; (B) The national bank or Federal savings association must demonstrate that its estimate of its operational risk exposure generated under the alternative operational risk quantification system is appropriate and can be supported empirically; and (C) A national bank or Federal savings association must not use an allocation of operational risk capital requirements that includes entities other than depository institutions or the benefits of diversification across entities. (h) Data management and maintenance. (2) A national bank or Federal savings association must retain data using an electronic format that allows timely retrieval of data for analysis, validation, reporting, and disclosure purposes. (3) A national bank or Federal savings association must retain sufficient data elements related to key risk drivers to permit adequate monitoring, validation, and refinement of its advanced systems. (i) Control, oversight, and validation mechanisms. (2) The national bank's or Federal savings association's board of directors (or a designated committee of the board) must at least annually review the effectiveness of, and approve, the national bank's or Federal savings association's advanced systems. (3) A national bank or Federal savings association must have an effective system of controls and oversight that: (i) Ensures ongoing compliance with the qualification requirements in this section; (ii) Maintains the integrity, reliability, and accuracy of the national bank's or Federal savings association's advanced systems; and (iii) Includes adequate governance and project management processes. (4) The national bank or Federal savings association must validate, on an ongoing basis, its advanced systems. The national bank's or Federal savings association's validation process must be independent of the advanced systems' development, implementation, and operation, or the validation process must be subjected to an independent review of its adequacy and effectiveness. Validation must include: (i) An evaluation of the conceptual soundness of (including developmental evidence supporting) the advanced systems; (ii) An ongoing monitoring process that includes verification of processes and benchmarking; and (iii) An outcomes analysis process that includes backtesting. (5) The national bank or Federal savings association must have an internal audit function or equivalent function that is independent of business-line management that at least annually: (i) Reviews the national bank's or Federal savings association's advanced systems and associated operations, including the operations of its credit function and estimations of PD, LGD, and EAD; (ii) Assesses the effectiveness of the controls supporting the national bank's or Federal savings association's advanced systems; and (iii) Documents and reports its findings to the national bank's or Federal savings association's board of directors (or a committee thereof). (6) The national bank or Federal savings association must periodically stress test its advanced systems. The stress testing must include a consideration of how economic cycles, especially downturns, affect risk-based capital requirements (including migration across rating grades and segments and the credit risk mitigation benefits of double default treatment). (j) Documentation. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 80 FR 41415, July 15, 2015] § 3.123 Ongoing qualification. (a) Changes to advanced systems. (b) Failure to comply with qualification requirements. (2) The national bank or Federal savings association must establish and submit a plan satisfactory to the OCC to return to compliance with the qualification requirements. (3) In addition, if the OCC determines that the national bank's or Federal savings association's advanced approaches total risk-weighted assets are not commensurate with the national bank's or Federal savings association's credit, market, operational, or other risks, the OCC may require such a national bank or Federal savings association to calculate its advanced approaches total risk-weighted assets with any modifications provided by the OCC. § 3.124 Merger and acquisition transitional arrangements. (a) Mergers and acquisitions of companies without advanced systems. (b) Mergers and acquisitions of companies with advanced systems. (2) If the acquiring national bank or Federal savings association is not subject to the advanced approaches in this subpart at the time of acquisition or merger, during the period when subpart D of this part applies to the acquiring national bank or Federal savings association, the ALLL or AACL, as applicable associated with the exposures of the merged or acquired company may not be directly included in tier 2 capital. Rather, any excess eligible credit reserves associated with the merged or acquired company's exposures may be included in the national bank's or Federal savings association's tier 2 capital up to 0.6 percent of the credit-risk-weighted assets associated with those exposures. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 4238, Feb. 14, 2019] §§ 3.125-3.130 [Reserved] Risk-Weighted Assets for General Credit Risk § 3.131 Mechanics for calculating total wholesale and retail risk-weighted assets. (a) Overview. (1) Phase 1—categorization of exposures; (2) Phase 2—assignment of wholesale obligors and exposures to rating grades and segmentation of retail exposures; (3) Phase 3—assignment of risk parameters to wholesale exposures and segments of retail exposures; and (4) Phase 4—calculation of risk-weighted asset amounts. (b) Phase 1—Categorization. (c) Phase 2—Assignment of wholesale obligors and exposures to rating grades and retail exposures to segments Assignment of wholesale obligors and exposures to rating grades. (ii) The national bank or Federal savings association must identify which of its wholesale obligors are in default. (2) Segmentation of retail exposures. (ii) The national bank or Federal savings association must identify which of its retail exposures are in default. The national bank or Federal savings association must segment defaulted retail exposures separately from non-defaulted retail exposures. (iii) If the national bank or Federal savings association determines the EAD for eligible margin loans using the approach in § 3.132(b), the national bank or Federal savings association must identify which of its retail exposures are eligible margin loans for which the national bank or Federal savings association uses this EAD approach and must segment such eligible margin loans separately from other retail exposures. (3) Eligible purchased wholesale exposures. (d) Phase 3—Assignment of risk parameters to wholesale exposures and segments of retail exposures Quantification process. (i) Associate a PD with each wholesale obligor rating grade; (ii) Associate an LGD with each wholesale loss severity rating grade or assign an LGD to each wholesale exposure; (iii) Assign an EAD and M to each wholesale exposure; and (iv) Assign a PD, LGD, and EAD to each segment of retail exposures. (2) Floor on PD assignment. (3) Floor on LGD estimation. (i) Directly and unconditionally guaranteed by the full faith and credit of a sovereign entity; or (ii) Guaranteed by a contingent obligation of the U.S. government or its agencies, the enforceability of which is dependent upon some affirmative action on the part of the beneficiary of the guarantee or a third party (for example, meeting servicing requirements). (4) Eligible purchased wholesale exposures. (5) Credit risk mitigation: credit derivatives, guarantees, and collateral. (ii) A national bank or Federal savings association may take into account the risk reducing effects of guarantees and credit derivatives in support of retail exposures in a segment when quantifying the PD and LGD of the segment. In doing so, a national bank or Federal savings association must consider all relevant available information. (iii) Except as provided in paragraph (d)(6) of this section, a national bank or Federal savings association may take into account the risk reducing effects of collateral in support of a wholesale exposure when quantifying the LGD of the exposure, and may take into account the risk reducing effects of collateral in support of retail exposures when quantifying the PD and LGD of the segment. In order to do so, a national bank or Federal savings association must have established internal requirements for collateral management, legal certainty, and risk management processes. (6) EAD for OTC derivative contracts, repo-style transactions, and eligible margin loans. (7) Effective maturity. (i) Has a legal and practical ability not to renew or roll over the exposure in the event of credit deterioration of the obligor; (ii) Makes an independent credit decision at the inception of the exposure and at every renewal or roll over; and (iii) Has no substantial commercial incentive to continue its credit relationship with the obligor in the event of credit deterioration of the obligor. (8) EAD for exposures to certain central counterparties. (e) Phase 4—Calculation of risk-weighted assets Non-defaulted exposures. (ii) The sum of all the dollar risk-based capital requirements for each wholesale exposure to a non-defaulted obligor and segment of non-defaulted retail exposures calculated in paragraph (e)(1)(i) of this section and in § 3.135(e) equals the total dollar risk-based capital requirement for those exposures and segments. (iii) The aggregate risk-weighted asset amount for wholesale exposures to non-defaulted obligors and segments of non-defaulted retail exposures equals the total dollar risk-based capital requirement in paragraph (e)(1)(ii) of this section multiplied by 12.5. (2) Wholesale exposures to defaulted obligors and segments of defaulted retail exposures Not covered by an eligible U.S. government guarantee: (ii) Covered by an eligible U.S. government guarantee: (A) The sum of the EAD of the portion of each wholesale exposure to a defaulted obligor covered by an eligible guarantee from the U.S. government plus the EAD of the portion of each segment of defaulted retail exposures that is covered by an eligible guarantee from the U.S. government and the resulting sum is multiplied by 0.016, and (B) The sum of the EAD of the portion of each wholesale exposure to a defaulted obligor not covered by an eligible guarantee from the U.S. government plus the EAD of the portion of each segment of defaulted retail exposures that is not covered by an eligible guarantee from the U.S. government and the resulting sum is multiplied by 0.08. (iii) The sum of all the dollar risk-based capital requirements for each wholesale exposure to a defaulted obligor and each segment of defaulted retail exposures calculated in paragraph (e)(2)(i) of this section plus the dollar risk-based capital requirements each wholesale exposure to a defaulted obligor and for each segment of defaulted retail exposures calculated in paragraph (e)(2)(ii) of this section equals the total dollar risk-based capital requirement for those exposures and segments. (iv) The aggregate risk-weighted asset amount for wholesale exposures to defaulted obligors and segments of defaulted retail exposures equals the total dollar risk-based capital requirement calculated in paragraph (e)(2)(iii) of this section multiplied by 12.5. (3) Assets not included in a defined exposure category. (ii) A national bank or Federal savings association must assign a risk-weighted asset amount equal to 20 percent of the carrying value of cash items in the process of collection. (iii) A national bank or Federal savings association must assign a risk-weighted asset amount equal to 50 percent of the carrying value to a pre-sold construction loan unless the purchase contract is cancelled, in which case a national bank or Federal savings association must assign a risk-weighted asset amount equal to a 100 percent of the carrying value of the pre-sold construction loan. (iv) The risk-weighted asset amount for the residual value of a retail lease exposure equals such residual value. (v) The risk-weighted asset amount for DTAs arising from temporary differences that the national bank or Federal savings association could realize through net operating loss carrybacks equals the carrying value, netted in accordance with § 3.22. (vi) The risk-weighted asset amount for MSAs, DTAs arising from temporary timing differences that the national bank or Federal savings association could not realize through net operating loss carrybacks, and significant investments in the capital of unconsolidated financial institutions in the form of common stock that are not deducted pursuant to § 3.22(d) equals the amount not subject to deduction multiplied by 250 percent. (vii) The risk-weighted asset amount for any other on-balance-sheet asset that does not meet the definition of a wholesale, retail, securitization, IMM, or equity exposure, cleared transaction, or default fund contribution and is not subject to deduction under § 3.22(a), (c), or (d) equals the carrying value of the asset. (viii) The risk-weighted asset amount for a Paycheck Protection Program covered loan as defined in section 7(a)(36) of the Small Business Act (15 U.S.C. 636(a)(36)) equals zero. (4) Non-material portfolios of exposures. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 80 FR 41416, July 15, 2015; 84 FR 35258, July 22, 2019; 85 FR 20393, Apr. 13, 2020] § 3.132 Counterparty credit risk of repo-style transactions, eligible margin loans, and OTC derivative contracts. (a) Methodologies for collateral recognition. (i) The collateral haircut approach set forth in paragraph (b)(2) of this section; (ii) The internal models methodology set forth in paragraph (d) of this section; and (iii) For single product netting sets of repo-style transactions and eligible margin loans, the simple VaR methodology set forth in paragraph (b)(3) of this section. (2) A national bank or Federal savings association may use any combination of the three methodologies for collateral recognition; however, it must use the same methodology for transactions in the same category. (3) A national bank or Federal savings association must use the methodology in paragraph (c) of this section, or with prior written approval of the OCC, the internal model methodology in paragraph (d) of this section, to calculate EAD for an OTC derivative contract or a set of OTC derivative contracts subject to a qualifying master netting agreement. To estimate EAD for qualifying cross-product master netting agreements, a national bank or Federal savings association may only use the internal models methodology in paragraph (d) of this section. (4) A national bank or Federal savings association must also use the methodology in paragraph (e) of this section to calculate the risk-weighted asset amounts for CVA for OTC derivatives. (b) EAD for eligible margin loans and repo-style transactions General. (i) The collateral haircut approach described in paragraph (b)(2) of this section; (ii) For netting sets only, the simple VaR methodology described in paragraph (b)(3) of this section; or (iii) The internal models methodology described in paragraph (d) of this section. (2) Collateral haircut approach EAD equation. {0, [(ΣE − ΣC) + Σ(E s s fx fx where: (A) ΣE equals the value of the exposure (the sum of the current fair values of all instruments, gold, and cash the national bank or Federal savings association has lent, sold subject to repurchase, or posted as collateral to the counterparty under the transaction (or netting set)); (B) ΣC equals the value of the collateral (the sum of the current fair values of all instruments, gold, and cash the national bank or Federal savings association has borrowed, purchased subject to resale, or taken as collateral from the counterparty under the transaction (or netting set)); (C) E s (D) H s s (E) E fx (F) H fx fx (ii) Standard supervisory haircuts. ( 1 s 3 4 Table 1 to § 3.132—Standard Supervisory Market Price Volatility Haircuts 1 Residual maturity Haircut (in percent) assigned based on: Investment grade securitization exposures Sovereign issuers risk 2 Non-sovereign issuers risk Zero 20 or 50 100 20 50 100 Less than or equal to 1 year 0.5 1.0 15.0 1.0 2.0 4.0 4.0 Greater than 1 year and less than or equal to 5 years 2.0 3.0 15.0 4.0 6.0 8.0 12.0 Greater than 5 years 4.0 6.0 15.0 8.0 12.0 16.0 24.0 Main index equities (including convertible bonds) and gold 15.0 Other publicly traded equities (including convertible bonds) 25.0 Mutual funds Highest haircut applicable to any security in which the fund can invest. Cash collateral held Zero Other exposure types 25.0 1 2 ( 2 fx 3 4 ( 3 1 2 1/2 6 ( 4 6 4 ( 5 i 6 5 i ( ii 1 3 5 i 1 3 5 i ( 6 3 5 Where: T M H S T S ( 7 S (iii) Own internal estimates for haircuts. s fx (A) To receive OCC approval to use its own internal estimates, a national bank or Federal savings association must satisfy the following minimum quantitative standards: ( 1 ( 2 3 N M ( i M ( ii N N ( iii N N ( 3 ( 4 ( 5 ( 6 ( 7 (B) With respect to debt securities that are investment grade, a national bank or Federal savings association may calculate haircuts for categories of securities. For a category of securities, the national bank or Federal savings association must calculate the haircut on the basis of internal volatility estimates for securities in that category that are representative of the securities in that category that the national bank or Federal savings association has lent, sold subject to repurchase, posted as collateral, borrowed, purchased subject to resale, or taken as collateral. In determining relevant categories, the national bank or Federal savings association must at a minimum take into account: ( 1 ( 2 ( 3 ( 4 (C) With respect to debt securities that are not investment grade and equity securities, a national bank or Federal savings association must calculate a separate haircut for each individual security. (D) Where an exposure or collateral (whether in the form of cash or securities) is denominated in a currency that differs from the settlement currency, the national bank or Federal savings association must calculate a separate currency mismatch haircut for its net position in each mismatched currency based on estimated volatilities of foreign exchange rates between the mismatched currency and the settlement currency. (E) A national bank's or Federal savings association's own estimates of market price and foreign exchange rate volatilities may not take into account the correlations among securities and foreign exchange rates on either the exposure or collateral side of a transaction (or netting set) or the correlations among securities and foreign exchange rates between the exposure and collateral sides of the transaction (or netting set). (3) Simple VaR methodology. (i) ΣE equals the value of the exposure (the sum of the current fair values of all instruments, gold, and cash the national bank or Federal savings association has lent, sold subject to repurchase, or posted as collateral to the counterparty under the netting set); (ii) ΣC equals the value of the collateral (the sum of the current fair values of all instruments, gold, and cash the national bank or Federal savings association has borrowed, purchased subject to resale, or taken as collateral from the counterparty under the netting set); and (iii) PFE (potential future exposure) equals the national bank's or Federal savings association's empirically based best estimate of the 99th percentile, one-tailed confidence interval for an increase in the value of (ΣE − ΣC) over a five-business-day holding period for repo-style transactions, or over a ten-business-day holding period for eligible margin loans except for netting sets for which paragraph (b)(3)(iv) of this section applies using a minimum one-year historical observation period of price data representing the instruments that the national bank or Federal savings association has lent, sold subject to repurchase, posted as collateral, borrowed, purchased subject to resale, or taken as collateral. The national bank or Federal savings association must validate its VaR model by establishing and maintaining a rigorous and regular backtesting regime. (iv) If the number of trades in a netting set exceeds 5,000 at any time during a quarter, a national bank or Federal savings association must use a twenty-business-day holding period for the following quarter (except when a national bank or Federal savings association is calculating EAD for a cleared transaction under § 3.133). If a netting set contains one or more trades involving illiquid collateral, a national bank or Federal savings association must use a twenty-business-day holding period. If over the two previous quarters more than two margin disputes on a netting set have occurred that lasted more than the holding period, then the national bank or Federal savings association must set its PFE for that netting set equal to an estimate over a holding period that is at least two times the minimum holding period for that netting set. (c) EAD for derivative contracts Options for determining EAD. (2) Definitions. (i) End date (ii) Start date (iii) Hedging set (A) With respect to interest rate derivative contracts, all such contracts within a netting set that reference the same reference currency; (B) With respect to exchange rate derivative contracts, all such contracts within a netting set that reference the same currency pair; (C) With respect to credit derivative contract, all such contracts within a netting set; (D) With respect to equity derivative contracts, all such contracts within a netting set; (E) With respect to a commodity derivative contract, all such contracts within a netting set that reference one of the following commodity categories: Energy, metal, agricultural, or other commodities; (F) With respect to basis derivative contracts, all such contracts within a netting set that reference the same pair of risk factors and are denominated in the same currency; or (G) With respect to volatility derivative contracts, all such contracts within a netting set that reference one of interest rate, exchange rate, credit, equity, or commodity risk factors, separated according to the requirements under paragraphs (c)(2)(iii)(A) through (E) of this section. (H) If the risk of a derivative contract materially depends on more than one of interest rate, exchange rate, credit, equity, or commodity risk factors, the OCC may require a national bank or Federal savings association to include the derivative contract in each appropriate hedging set under paragraphs (c)(2)(iii)(A) through (E) of this section. (3) Credit derivatives. (i) A national bank or Federal savings association that purchases a credit derivative that is recognized under § 3.134 or § 3.135 as a credit risk mitigant for an exposure that is not a covered position under subpart F of this part is not required to calculate a separate counterparty credit risk capital requirement under this section so long as the national bank or Federal savings association does so consistently for all such credit derivatives and either includes or excludes all such credit derivatives that are subject to a master netting agreement from any measure used to determine counterparty credit risk exposure to all relevant counterparties for risk-based capital purposes. (ii) A national bank or Federal savings association that is the protection provider in a credit derivative must treat the credit derivative as a wholesale exposure to the reference obligor and is not required to calculate a counterparty credit risk capital requirement for the credit derivative under this section, so long as it does so consistently for all such credit derivatives and either includes all or excludes all such credit derivatives that are subject to a master netting agreement from any measure used to determine counterparty credit risk exposure to all relevant counterparties for risk-based capital purposes (unless the national bank or Federal savings association is treating the credit derivative as a covered position under subpart F of this part, in which case the national bank or Federal savings association must calculate a supplemental counterparty credit risk capital requirement under this section). (4) Equity derivatives. (5) Exposure amount. (ii) Notwithstanding the requirements of paragraph (c)(5)(i) of this section, the exposure amount of a netting set subject to a variation margin agreement, excluding a netting set that is subject to a variation margin agreement under which the counterparty to the variation margin agreement is not required to post variation margin, is equal to the lesser of the exposure amount of the netting set calculated under paragraph (c)(5)(i) of this section and the exposure amount of the netting set calculated as if the netting set were not subject to a variation margin agreement. (iii) Notwithstanding the requirements of paragraph (c)(5)(i) of this section, the exposure amount of a netting set that consists of only sold options in which the premiums have been fully paid by the counterparty to the options and where the options are not subject to a variation margin agreement is zero. (iv) Notwithstanding the requirements of paragraph (c)(5)(i) of this section, the exposure amount of a netting set in which the counterparty is a commercial end-user is equal to the sum of replacement cost, as calculated under paragraph (c)(6) of this section, and the potential future exposure of the netting set, as calculated under paragraph (c)(7) of this section. (v) For purposes of the exposure amount calculated under paragraph (c)(5)(i) of this section and all calculations that are part of that exposure amount, a national bank or Federal savings association may elect, at the netting set level, to treat a derivative contract that is a cleared transaction that is not subject to a variation margin agreement as one that is subject to a variation margin agreement, if the derivative contract is subject to a requirement that the counterparties make daily cash payments to each other to account for changes in the fair value of the derivative contract and to reduce the net position of the contract to zero. If a national bank or Federal savings association makes an election under this paragraph (c)(5)(v) for one derivative contract, it must treat all other derivative contracts within the same netting set that are eligible for an election under this paragraph (c)(5)(v) as derivative contracts that are subject to a variation margin agreement. (vi) For purposes of the exposure amount calculated under paragraph (c)(5)(i) of this section and all calculations that are part of that exposure amount, a national bank or Federal savings association may elect to treat a credit derivative contract, equity derivative contract, or commodity derivative contract that references an index as if it were multiple derivative contracts each referencing one component of the index. (6) Replacement cost of a netting set Netting set subject to a variation margin agreement under which the counterparty must post variation margin. (A) The sum of the fair values (after excluding any valuation adjustments) of the derivative contracts within the netting set less the sum of the net independent collateral amount and the variation margin amount applicable to such derivative contracts; (B) The sum of the variation margin threshold and the minimum transfer amount applicable to the derivative contracts within the netting set less the net independent collateral amount applicable to such derivative contracts; or (C) Zero. (ii) Netting sets not subject to a variation margin agreement under which the counterparty must post variation margin. (A) The sum of the fair values (after excluding any valuation adjustments) of the derivative contracts within the netting set less the sum of the net independent collateral amount and variation margin amount applicable to such derivative contracts; or (B) Zero. (iii) Multiple netting sets subject to a single variation margin agreement. (iv) Netting set subject to multiple variation margin agreements or a hybrid netting set. (7) Potential future exposure of a netting set. (i) PFE multiplier. Where: V C A (ii) Aggregated amount. (iii) Multiple netting sets subject to a single variation margin agreement. (iv) Netting set subject to multiple variation margin agreements or a hybrid netting set. (8) Hedging set amount Interest rate derivative contracts. (A) Formula 1 is as follows: (B) Formula 2 is as follows: Hedging set amount AddOn TB 1 IR AddOn TB 2 IR AddOn TB 3 IR Where in paragraphs (c)(8)(i)(A) and (B) of this section: AddOn TB 1 IR ; AddOn TB 2 IR AddOn TB 3 IR (ii) Exchange rate derivative contracts. (iii) Credit derivative contracts and equity derivative contracts. Where: k K AddOn Ref k k ρ k (iv) Commodity derivative contracts. Where: k K AddOn Type k k ρ (v) Basis derivative contracts and volatility derivative contracts. (9) Adjusted derivative contract amount Summary. (ii) Adjusted notional amount. 1 Where: S is the number of business days from the present day until the start date of the derivative contract, or zero if the start date has already passed; and E is the number of business days from the present day until the end date of the derivative contract. ( 2 1 ( i ( ii (B)( 1 ( 2 1 (C)( 1 ( 2 1 (iii) Supervisory delta adjustments. (B)( 1 ( 2 ( i ( ii ( iii ( iv ( v max L ( vi (C)( 1 ( 2 1 ( i 30 30 ( ii ( iii (iv) Maturity factor. 1 Where MPOR refers to the period from the most recent exchange of collateral covering a netting set of derivative contracts with a defaulting counterparty until the derivative contracts are closed out and the resulting market risk is re-hedged. ( 2 1 ( i ( ii ( iii ( 3 1 2 1 2 (B) The maturity factor of a derivative contract that is not subject to a variation margin agreement, or derivative contracts under which the counterparty is not required to post variation margin, is determined by the following formula: Where M equals the greater of 10 business days and the remaining maturity of the contract, as measured in business days. (C) For purposes of paragraph (c)(9)(iv) of this section, if a national bank or Federal savings association has elected pursuant to paragraph (c)(5)(v) of this section to treat a derivative contract that is a cleared transaction that is not subject to a variation margin agreement as one that is subject to a variation margin agreement, the national bank or Federal savings association must treat the derivative contract as subject to a variation margin agreement with maturity factor as determined according to (c)(9)(iv)(A) of this section, and daily settlement does not change the end date of the period referenced by the derivative contract. (v) Derivative contract as multiple effective derivative contracts. (A) For an option where the counterparty pays a predetermined amount if the value of the underlying asset is above or below the strike price and nothing otherwise (binary option), the option must be treated as two separate options. For purposes of paragraph (c)(9)(iii)(B) of this section, a binary option with strike K must be represented as the combination of one bought European option and one sold European option of the same type as the original option (put or call) with the strikes set equal to 0.95 * K and 1.05 * K so that the payoff of the binary option is reproduced exactly outside the region between the two strikes. The absolute value of the sum of the adjusted derivative contract amounts of the bought and sold options is capped at the payoff amount of the binary option. (B) For a derivative contract that can be represented as a combination of standard option payoffs (such as collar, butterfly spread, calendar spread, straddle, and strangle), a national bank or Federal savings association must treat each standard option component as a separate derivative contract. (C) For a derivative contract that includes multiple-payment options, (such as interest rate caps and floors), a national bank or Federal savings association may represent each payment option as a combination of effective single-payment options (such as interest rate caplets and floorlets). (D) A national bank or Federal savings association may not decompose linear derivative contracts (such as swaps) into components. (10) Multiple netting sets subject to a single variation margin agreement Calculating replacement cost. Replacement Cost = max NS max V NS max C MA max NS min V NS min C MA Where: NS MA V NS NS C MA (ii) Calculating potential future exposure. (11) Netting set subject to multiple variation margin agreements or a hybrid netting set Calculating replacement cost. (ii) Calculating potential future exposure. (B) For purposes of paragraph (c)(11)(ii)(A) of this section, the netting set must be divided into sub-netting sets as follows: ( 1 ( 2 Table 3 to § 3.132—Supervisory Option Volatility, Supervisory Correlation Parameters, and Supervisory Factors for Derivative Contracts Asset class Category Type Supervisory Supervisory Supervisory 1 Interest rate N/A N/A 50 N/A 0.50 Exchange rate N/A N/A 15 N/A 4.0 Credit, single name Investment grade N/A 100 50 0.46 Speculative grade N/A 100 50 1.3 Sub-speculative grade N/A 100 50 6.0 Credit, index Investment Grade N/A 80 80 0.38 Speculative Grade N/A 80 80 1.06 Equity, single name N/A N/A 120 50 32 Equity, index N/A N/A 75 80 20 Commodity Energy Electricity 150 40 40 Other 70 40 18 Metals N/A 70 40 18 Agricultural N/A 70 40 18 Other N/A 70 40 18 1 (d) Internal models methodology. (ii) A national bank or Federal savings association that uses the internal models methodology for a particular transaction type (derivative contracts, eligible margin loans, or repo-style transactions) must use the internal models methodology for all transactions of that transaction type. A national bank or Federal savings association may choose to use the internal models methodology for one or two of these three types of exposures and not the other types. (iii) A national bank or Federal savings association may also use the internal models methodology for derivative contracts, eligible margin loans, and repo-style transactions subject to a qualifying cross-product netting agreement if: (A) The national bank or Federal savings association effectively integrates the risk mitigating effects of cross-product netting into its risk management and other information technology systems; and (B) The national bank or Federal savings association obtains the prior written approval of the OCC. (iv) A national bank or Federal savings association that uses the internal models methodology for a transaction type must receive approval from the OCC to cease using the methodology for that transaction type or to make a material change to its internal model. (2) Risk-weighted assets using IMM. (i) EAD unstressed (ii) EAD stressed (iii) The national bank or Federal savings association must use its internal model's probability distribution for changes in the fair value of a netting set that are attributable to changes in market variables to determine EE; and (iv) Under the internal models methodology, EAD = Max (0, α × effective EPE − CVA), or, subject to the prior written approval of OCC as provided in paragraph (d)(10) of this section, a more conservative measure of EAD. (A) CVA equals the credit valuation adjustment that the national bank or Federal savings association has recognized in its balance sheet valuation of any OTC derivative contracts in the netting set. For purposes of this paragraph (d), CVA does not include any adjustments to common equity tier 1 capital attributable to changes in the fair value of the national bank's or Federal savings association's liabilities that are due to changes in its own credit risk since the inception of the transaction with the counterparty. (C) α = 1.4 except as provided in paragraph (d)(6) of this section, or when the OCC has determined that the national bank or Federal savings association must set α higher based on the national bank's or Federal savings association's specific characteristics of counterparty credit risk or model performance. (v) A national bank or Federal savings association may include financial collateral currently posted by the counterparty as collateral (but may not include other forms of collateral) when calculating EE. (vi) If a national bank or Federal savings association hedges some or all of the counterparty credit risk associated with a netting set using an eligible credit derivative, the national bank or Federal savings association may take the reduction in exposure to the counterparty into account when estimating EE. If the national bank or Federal savings association recognizes this reduction in exposure to the counterparty in its estimate of EE, it must also use its internal model to estimate a separate EAD for the national bank's or Federal savings association's exposure to the protection provider of the credit derivative. (3) Prior approval relating to EAD calculation. (i) The model must have the systems capability to estimate the expected exposure to the counterparty on a daily basis (but is not expected to estimate or report expected exposure on a daily basis); (ii) The model must estimate expected exposure at enough future dates to reflect accurately all the future cash flows of contracts in the netting set; (iii) The model must account for the possible non-normality of the exposure distribution, where appropriate; (iv) The national bank or Federal savings association must measure, monitor, and control current counterparty exposure and the exposure to the counterparty over the whole life of all contracts in the netting set; (v) The national bank or Federal savings association must be able to measure and manage current exposures gross and net of collateral held, where appropriate. The national bank or Federal savings association must estimate expected exposures for OTC derivative contracts both with and without the effect of collateral agreements; (vi) The national bank or Federal savings association must have procedures to identify, monitor, and control wrong-way risk throughout the life of an exposure. The procedures must include stress testing and scenario analysis; (vii) The model must use current market data to compute current exposures. The national bank or Federal savings association must estimate model parameters using historical data from the most recent three-year period and update the data quarterly or more frequently if market conditions warrant. The national bank or Federal savings association should consider using model parameters based on forward-looking measures, where appropriate; (viii) When estimating model parameters based on a stress period, the national bank or Federal savings association must use at least three years of historical data that include a period of stress to the credit default spreads of the national bank's or Federal savings association's counterparties. The national bank or Federal savings association must review the data set and update the data as necessary, particularly for any material changes in its counterparties. The national bank or Federal savings association must demonstrate, at least quarterly, and maintain documentation of such demonstration, that the stress period coincides with increased CDS or other credit spreads of the national bank's or Federal savings association's counterparties. The national bank or Federal savings association must have procedures to evaluate the effectiveness of its stress calibration that include a process for using benchmark portfolios that are vulnerable to the same risk factors as the national bank's or Federal savings association's portfolio. The OCC may require the national bank or Federal savings association to modify its stress calibration to better reflect actual historic losses of the portfolio; (ix) A national bank or Federal savings association must subject its internal model to an initial validation and annual model review process. The model review should consider whether the inputs and risk factors, as well as the model outputs, are appropriate. As part of the model review process, the national bank or Federal savings association must have a backtesting program for its model that includes a process by which unacceptable model performance will be determined and remedied; (x) A national bank or Federal savings association must have policies for the measurement, management and control of collateral and margin amounts; and (xi) A national bank or Federal savings association must have a comprehensive stress testing program that captures all credit exposures to counterparties, and incorporates stress testing of principal market risk factors and creditworthiness of counterparties. (4) Calculating the maturity of exposures. (ii) If the remaining maturity of the exposure or the longest-dated contract in the netting set is one year or less, the national bank or Federal savings association must set M for the exposure or netting set equal to one year, except as provided in § 3.131(d)(7). (iii) Alternatively, a national bank or Federal savings association that uses an internal model to calculate a one-sided credit valuation adjustment may use the effective credit duration estimated by the model as M(EPE) in place of the formula in paragraph (d)(4)(i) of this section. (5) Effects of collateral agreements on EAD. (i) With prior written approval from the OCC, a national bank or Federal savings association may include the effect of a collateral agreement within its internal model used to calculate EAD. The national bank or Federal savings association may set EAD equal to the expected exposure at the end of the margin period of risk. The margin period of risk means, with respect to a netting set subject to a collateral agreement, the time period from the most recent exchange of collateral with a counterparty until the next required exchange of collateral, plus the period of time required to sell and realize the proceeds of the least liquid collateral that can be delivered under the terms of the collateral agreement and, where applicable, the period of time required to re-hedge the resulting market risk upon the default of the counterparty. The minimum margin period of risk is set according to paragraph (d)(5)(iii) of this section; or (ii) As an alternative to paragraph (d)(5)(i) of this section, a national bank or Federal savings association that can model EPE without collateral agreements but cannot achieve the higher level of modeling sophistication to model EPE with collateral agreements can set effective EPE for a collateralized netting set equal to the lesser of: (A) An add-on that reflects the potential increase in exposure of the netting set over the margin period of risk, plus the larger of: ( 1 ( 2 (B) Effective EPE without a collateral agreement plus any collateral the national bank or Federal savings association posts to the counterparty that exceeds the required margin amount. (iii) For purposes of this part, including paragraphs (d)(5)(i) and (ii) of this section, the margin period of risk for a netting set subject to a collateral agreement is: (A) Five business days for repo-style transactions subject to daily remargining and daily marking-to-market, and ten business days for other transactions when liquid financial collateral is posted under a daily margin maintenance requirement, or (B) Twenty business days if the number of trades in a netting set exceeds 5,000 at any time during the previous quarter (except if the national bank or Federal savings association is calculating EAD for a cleared transaction under § 3.133) or contains one or more trades involving illiquid collateral or any derivative contract that cannot be easily replaced. If over the two previous quarters more than two margin disputes on a netting set have occurred that lasted more than the margin period of risk, then the national bank or Federal savings association must use a margin period of risk for that netting set that is at least two times the minimum margin period of risk for that netting set. If the periodicity of the receipt of collateral is N-days, the minimum margin period of risk is the minimum margin period of risk under this paragraph (d) plus N minus 1. This period should be extended to cover any impediments to prompt re-hedging of any market risk. (C) Five business days for an OTC derivative contract or netting set of OTC derivative contracts where the national bank or Federal savings association is either acting as a financial intermediary and enters into an offsetting transaction with a CCP or where the national bank or Federal savings association provides a guarantee to the CCP on the performance of the client. A national bank or Federal savings association must use a longer holding period if the national bank or Federal savings association determines that a longer period is appropriate. Additionally, the OCC may require the national bank or Federal savings association to set a longer holding period if the OCC 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. (6) Own estimate of alpha. (i) The national bank's or Federal savings association's own estimate of alpha must capture in the numerator the effects of: (A) The material sources of stochastic dependency of distributions of fair values of transactions or portfolios of transactions across counterparties; (B) Volatilities and correlations of market risk factors used in the joint simulation, which must be related to the credit risk factor used in the simulation to reflect potential increases in volatility or correlation in an economic downturn, where appropriate; and (C) The granularity of exposures (that is, the effect of a concentration in the proportion of each counterparty's exposure that is driven by a particular risk factor). (ii) The national bank or Federal savings association must assess the potential model uncertainty in its estimates of alpha. (iii) The national bank or Federal savings association must calculate the numerator and denominator of alpha in a consistent fashion with respect to modeling methodology, parameter specifications, and portfolio composition. (iv) The national bank or Federal savings association must review and adjust as appropriate its estimates of the numerator and denominator of alpha on at least a quarterly basis and more frequently when the composition of the portfolio varies over time. (7) Risk-based capital requirements for transactions with specific wrong-way risk. (i) For an equity derivative contract, by multiplying: (A) K, calculated using the appropriate risk-based capital formula specified in Table 1 of § 3.131 using the PD of the counterparty and LGD equal to 100 percent, by (B) The maximum amount the national bank or Federal savings association could lose on the equity derivative. (ii) For a purchased credit derivative by multiplying: (A) K, calculated using the appropriate risk-based capital formula specified in Table 1 of § 3.131 using the PD of the counterparty and LGD equal to 100 percent, by (B) The fair value of the reference asset of the credit derivative. (iii) For a bond option, by multiplying: (A) K, calculated using the appropriate risk-based capital formula specified in Table 1 of § 3.131 using the PD of the counterparty and LGD equal to 100 percent, by (B) The smaller of the notional amount of the underlying reference asset and the maximum potential loss under the bond option contract. (iv) For a repo-style transaction or eligible margin loan by multiplying: (A) K, calculated using the appropriate risk-based capital formula specified in Table 1 of § 3.131 using the PD of the counterparty and LGD equal to 100 percent, by (B) The EAD of the transaction determined according to the EAD equation in § 3.132(b)(2), substituting the estimated value of the collateral assuming a default of the counterparty for the value of the collateral in Σ c (8) Risk-weighted asset amount for IMM exposures with specific wrong-way risk. (9) Risk-weighted assets for IMM exposures. unstressed unstressed (ii) The national bank or Federal savings association must insert the assigned risk parameters for each wholesale obligor and netting set into the appropriate formula specified in Table 1 of § 3.131 and multiply the output of the formula by the EAD stressed stressed (iii) The national bank's or Federal savings association's dollar risk-based capital requirement under the internal models methodology equals the larger of K unstressed stressed (10) Other measures of counterparty exposure. unstressed stressed (A) For material portfolios of new OTC derivative products, the national bank or Federal savings association may assume that the standardized approach for counterparty credit risk pursuant to paragraph (c) of this section meets the conservatism requirement of this section for a period not to exceed 180 days. (B) For immaterial portfolios of OTC derivative contracts, the national bank or Federal savings association generally may assume that the standardized approach for counterparty credit risk pursuant to paragraph (c) of this section meets the conservatism requirement of this section. (ii) To calculate risk-weighted assets for purposes of the approach in paragraph (d)(10)(i) of this section, the national bank or Federal savings association must insert the assigned risk parameters for each counterparty and netting set into the appropriate formula specified in Table 1 of § 3.131, multiply the output of the formula by the EAD for the exposure as specified above, and multiply by 12.5. (e) Credit valuation adjustment (CVA) risk-weighted assets In general. (2) Market risk national banks or Federal savings associations. (i) Determine EAD for OTC derivative contracts using the internal models methodology described in paragraph (d) of this section; and (ii) Determine its specific risk add-on for debt positions issued by the counterparty using a specific risk model described in § 3.207(b). (3) Recognition of hedges. ind (ii) A national bank or Federal savings association shall not recognize as a CVA hedge any tranched or n th (4) Total CVA risk-weighted assets. CVA (5) Simple CVA approach. CVA (A) w i i (B) M i i (C) EAD i total i EAD i total M i M i EAD i total EAD unstressed (D) M i hedge (E) B i i i M i hedge M i hedge (F) M ind ind ind i. (G) B ind ind i M ind M ind (H) w ind ind (ii) The national bank or Federal savings association may treat the notional amount of the index attributable to a counterparty as a single name hedge of counterparty i B i CVA B i ind. ind B i Table 4 to § 3.132—Assignment of Counterparty Weight Internal PD Weight w i 0.00-0.07 0.70 >0.070-0.15 0.80 >0.15-0.40 1.00 >0.40-2.00 2.00 >2.00-6.00 3.00 >6.00 10.00 (6) Advanced CVA approach. (A) The VaR model must incorporate only changes in the counterparties' credit spreads, not changes in other risk factors. The VaR model does not need to capture jump-to-default risk; (B) A national bank or Federal savings association that qualifies to use the advanced CVA approach must include in that approach any immaterial OTC derivative portfolios for which it uses the standardized approach for counterparty credit risk methodology in paragraph (c) of this section according to paragraph (e)(6)(viii) of this section; and (C) A national bank or Federal savings association must have the systems capability to calculate the CVA capital requirement for a counterparty on a daily basis (but is not required to calculate the CVA capital requirement on a daily basis). (ii) Under the advanced CVA approach, the CVA capital requirement, K CVA Where (A) t i i t 0 (B) t T (C) s i t i (D) LGD MKT MKT MKT (E) EE i t i (F) D i t i D 0 (G) Exp is the exponential function. (H) The subscript j refers either to a stressed or an unstressed calibration as described in paragraphs (e)(6)(iv) and (v) of this section. (iii) Notwithstanding paragraphs (e)(6)(i) and (e)(6)(ii) of this section, a national bank or Federal savings association must use the formulas in paragraphs (e)(6)(iii)(A) or (e)(6)(iii)(B) of this section to calculate credit spread sensitivities if its VaR model is not based on full repricing. (A) If the VaR model is based on credit spread sensitivities for specific tenors, the national bank or Federal savings association must calculate each credit spread sensitivity according to the following formula: (iv) To calculate the CVA Unstressed (A) Use the EE i (B) Use the historical observation period required under § 3.205(b)(2). (v) To calculate the CVA Stressed (A) Use the EE i (B) Calibrate VaR model inputs to historical data from the most severe twelve-month stress period contained within the three-year stress period used to calculate EE i CVA Stressed (vi) If a national bank or Federal savings association captures the effect of a collateral agreement on EAD using the method described in paragraph (d)(5)(ii) of this section, for purposes of paragraph (e)(6)(ii) of this section, the national bank or Federal savings association must calculate EE i (A) Half of the longest maturity of a transaction in the netting set, and (B) The notional weighted average maturity of all transactions in the netting set. (vii) For purposes of paragraph (e)(6) of this section, the national bank's or Federal savings association's VaR model must capture the basis between the spreads of any CDS ind ind (viii) If a national bank or Federal savings association uses the standardized approach for counterparty credit risk pursuant to paragraph (c) of this section to calculate the EAD for any immaterial portfolios of OTC derivative contracts, the national bank or Federal savings association must use that EAD as a constant EE in the formula for the calculation of CVA with the maturity equal to the maximum of: (A) Half of the longest maturity of a transaction in the netting set; and (B) The notional weighted average maturity of all transactions in the netting set. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 80 FR 41417, July 15, 2015; 85 FR 4405, Jan. 24, 2020; 85 FR 57959, Sept. 17, 2020; 86 FR 731, Jan. 6, 2021] § 3.133 Cleared transactions. (a) General requirements Clearing member clients. (2) Clearing members. (b) Clearing member client national banks or Federal savings associations Risk-weighted assets for cleared transactions. (ii) A clearing member client national bank's or Federal savings association's total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all of its cleared transactions. (2) Trade exposure amount. unstressed (ii) For a cleared transaction that is a repo-style transaction or netting set of repo-style transactions, trade exposure amount equals the EAD for the repo-style transaction calculated using the methodology set forth in § 3.132(b)(2) or (3) or (d), plus the fair value of the collateral posted by the clearing member client national bank or Federal savings association and held by the CCP or a clearing member in a manner that is not bankruptcy remote. When the national bank or Federal savings association calculates EAD for the cleared transaction under § 3.132(d), EAD equals EAD unstressed (3) Cleared transaction risk weights. (A) 2 percent if the collateral posted by the national bank or Federal savings association to the QCCP or clearing member is subject to an arrangement that prevents any loss to the clearing member client national bank or Federal savings association due to the joint default or a concurrent insolvency, liquidation, or receivership proceeding of the clearing member and any other clearing member clients of the clearing member; and the clearing member client national bank or Federal savings association has conducted sufficient legal review to conclude with a well-founded basis (and maintains sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from an event of default or from liquidation, insolvency, or receivership proceedings) the relevant court and administrative authorities would find the arrangements to be legal, valid, binding, and enforceable under the law of the relevant jurisdictions. (B) 4 percent, if the requirements of paragraph (b)(3)(i)(A) of this section are not met. (ii) For a cleared transaction with a CCP that is not a QCCP, a clearing member client national bank or Federal savings association must apply the risk weight applicable to the CCP under subpart D of this part. (4) Collateral. (ii) A clearing member client national bank or Federal savings association must calculate a risk-weighted asset amount for any collateral provided to a CCP, clearing member or a custodian in connection with a cleared transaction in accordance with requirements under subparts E or F of this part, as applicable. (c) Clearing member national bank or Federal savings association Risk-weighted assets for cleared transactions. (ii) A clearing member national bank's or Federal savings association's total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all of its cleared transactions. (2) Trade exposure amount. (i) For a cleared transaction that is a derivative contract or a netting set of derivative contracts, trade exposure amount equals the EAD calculated using the methodology used to calculate EAD for derivative contracts set forth in § 3.132(c) or (d), plus the fair value of the collateral posted by the clearing member national bank or Federal savings association and held by the CCP in a manner that is not bankruptcy remote. When the clearing member national bank or Federal savings association calculates EAD for the cleared transaction using the methodology in § 3.132(d), EAD equals EAD unstressed (ii) For a cleared transaction that is a repo-style transaction or netting set of repo-style transactions, trade exposure amount equals the EAD calculated under § 3.132(b)(2) or (3) or (d), plus the fair value of the collateral posted by the clearing member national bank or Federal savings association and held by the CCP in a manner that is not bankruptcy remote. When the clearing member national bank or Federal savings association calculates EAD for the cleared transaction under § 3.132(d), EAD equals EAD unstressed (3) Cleared transaction risk weights. (ii) For a cleared transaction with a CCP that is not a QCCP, a clearing member national bank or Federal savings association must apply the risk weight applicable to the CCP according to subpart D of this part. (iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this section, a clearing member national bank or Federal savings association may apply a risk weight of zero percent to the trade exposure amount for a cleared transaction with a QCCP where the clearing member national bank or Federal savings association is acting as a financial intermediary on behalf of a clearing member client, the transaction offsets another transaction that satisfies the requirements set forth in § 3.3(a), and the clearing member national bank or Federal savings association is not obligated to reimburse the clearing member client in the event of the QCCP default. (4) Collateral. (ii) A clearing member national bank or Federal savings association must calculate a risk-weighted asset amount for any collateral provided to a CCP, clearing member or a custodian in connection with a cleared transaction in accordance with requirements under subparts E or F of this part, as applicable (d) Default fund contributions General requirement. (2) Risk-weighted asset amount for default fund contributions to nonqualifying CCPs. (3) Risk-weighted asset amount for default fund contributions to QCCPs. CM (4) Capital requirement for default fund contributions to a QCCP. K CM (5) Hypothetical capital requirement of a QCCP. CCP CCP K CCP K CCP CM i EAD i percent Where: CM i EAD i (6) EAD of a QCCP to a clearing member. (ii) With respect to any derivative contracts between the QCCP and the clearing member that are cleared transactions and any guarantees that the clearing member has provided to the QCCP with respect to performance of a clearing member client on a derivative contract, the EAD is equal to the exposure amount of the QCCP to the clearing member for all such derivative contracts and guarantees of derivative contracts calculated under SA-CCR in § 3.132(c) (or, with respect to a QCCP located outside the United States, under a substantially identical methodology in effect in the jurisdiction) using a value of 10 business days for purposes of § 3.132(c)(9)(iv); less the value of all collateral held by the QCCP posted by the clearing member or a client of the clearing member in connection with a derivative contract for which the clearing member has provided a guarantee to the QCCP and the amount of the prefunded default fund contribution of the clearing member to the QCCP. (iii) With respect to any repo-style transactions between the QCCP and a clearing member that are cleared transactions, EAD is equal to: EAD i EBRM i IM i DF i Where: EBRM i IM i DF i (iv) EAD must be calculated separately for each clearing member's sub-client accounts and sub-house account ( i.e., (v) If any account or sub-account contains both derivative contracts and repo-style transactions, the EAD of that account is the sum of the EAD for the derivative contracts within the account and the EAD of the repo-style transactions within the account. If independent collateral is held for an account containing both derivative contracts and repo-style transactions, then such collateral must be allocated to the derivative contracts and repo-style transactions in proportion to the respective product specific exposure amounts, calculated, excluding the effects of collateral, according to § 3.132(b) for repo-style transactions and to § 3.132(c)(5) for derivative contracts. (vi) Notwithstanding any other provision of paragraph (d) of this section, with the prior approval of the OCC, a national bank or Federal savings association may determine the risk-weighted asset amount for a default fund contribution to a QCCP according to § 3.35(d)(3)(ii). [78 FR 62157, 62273, Oct. 11, 2013, as amended at 80 FR 41417, July 15, 2015; 84 FR 35258, July 22, 2019; 85 FR 4411, Jan. 24, 2020; 85 FR 57960, Sept. 17, 2020] § 3.134 Guarantees and credit derivatives: PD substitution and LGD adjustment approaches. (a) Scope. (i) Credit risk is fully covered by an eligible guarantee or eligible credit derivative; or (ii) Credit risk is covered on a pro rata basis (that is, on a basis in which the national bank or Federal savings association and the protection provider share losses proportionately) by an eligible guarantee or eligible credit derivative. (2) Wholesale exposures on which there is a tranching of credit risk (reflecting at least two different levels of seniority) are securitization exposures subject to §§ 3.141 through 3.145. (3) A national bank or Federal savings association may elect to recognize the credit risk mitigation benefits of an eligible guarantee or eligible credit derivative covering an exposure described in paragraph (a)(1) of this section by using the PD substitution approach or the LGD adjustment approach in paragraph (c) of this section or, if the transaction qualifies, using the double default treatment in § 3.135. A national bank's or Federal savings association's PD and LGD for the hedged exposure may not be lower than the PD and LGD floors described in § 3.131(d)(2) and (d)(3). (4) If multiple eligible guarantees or eligible credit derivatives cover a single exposure described in paragraph (a)(1) of this section, a national bank or Federal savings association may treat the hedged exposure as multiple separate exposures each covered by a single eligible guarantee or eligible credit derivative and may calculate a separate risk-based capital requirement for each separate exposure as described in paragraph (a)(3) of this section. (5) If a single eligible guarantee or eligible credit derivative covers multiple hedged wholesale exposures described in paragraph (a)(1) of this section, a national bank or Federal savings association must treat each hedged exposure as covered by a separate eligible guarantee or eligible credit derivative and must calculate a separate risk-based capital requirement for each exposure as described in paragraph (a)(3) of this section. (6) A national bank or Federal savings association must use the same risk parameters for calculating ECL as it uses for calculating the risk-based capital requirement for the exposure. (b) Rules of recognition. (2) A national bank or Federal savings association may only recognize the credit risk mitigation benefits of an eligible credit derivative to hedge an exposure that is different from the credit derivative's reference exposure used for determining the derivative's cash settlement value, deliverable obligation, or occurrence of a credit event if: (i) The reference exposure ranks pari passu (ii) The reference exposure and the hedged exposure are exposures to the same legal entity, and legally enforceable cross-default or cross-acceleration clauses are in place to assure payments under the credit derivative are triggered when the obligor fails to pay under the terms of the hedged exposure. (c) Risk parameters for hedged exposures PD substitution approach Full coverage. (ii) Partial coverage. (A) The national bank or Federal savings association must calculate its risk-based capital requirement for the protected exposure under § 3.131, where PD is the protection provider's PD, LGD is determined under paragraph (c)(1)(iii) of this section, and EAD is P. If the national bank or Federal savings association determines that full substitution leads to an inappropriate degree of risk mitigation, the national bank or Federal savings association may use a higher PD than that of the protection provider. (B) The national bank or Federal savings association must calculate its risk-based capital requirement for the unprotected exposure under § 3.131, where PD is the obligor's PD, LGD is the hedged exposure's LGD (not adjusted to reflect the guarantee or credit derivative), and EAD is the EAD of the original hedged exposure minus P. (C) The treatment in paragraph (c)(1)(ii) of this section is applicable when the credit risk of a wholesale exposure is covered on a partial pro rata basis or when an adjustment is made to the effective notional amount of the guarantee or credit derivative under paragraphs (d), (e), or (f) of this section. (iii) LGD of hedged exposures. (A) The lower of the LGD of the hedged exposure (not adjusted to reflect the guarantee or credit derivative) and the LGD of the guarantee or credit derivative, if the guarantee or credit derivative provides the national bank or Federal savings association with the option to receive immediate payout upon triggering the protection; or (B) The LGD of the guarantee or credit derivative, if the guarantee or credit derivative does not provide the national bank or Federal savings association with the option to receive immediate payout upon triggering the protection. (2) LGD adjustment approach Full coverage. (A) The risk-based capital requirement for the exposure as calculated under § 3.131, with the LGD of the exposure adjusted to reflect the guarantee or credit derivative; or (B) The risk-based capital requirement for a direct exposure to the protection provider as calculated under § 3.131, using the PD for the protection provider, the LGD for the guarantee or credit derivative, and an EAD equal to the EAD of the hedged exposure. (ii) Partial coverage. (A) The national bank's or Federal savings association's risk-based capital requirement for the protected exposure would be the greater of: ( 1 ( 2 (B) The national bank or Federal savings association must calculate its risk-based capital requirement for the unprotected exposure under § 3.131, where PD is the obligor's PD, LGD is the hedged exposure's LGD (not adjusted to reflect the guarantee or credit derivative), and EAD is the EAD of the original hedged exposure minus P. (3) M of hedged exposures. (d) Maturity mismatch. (2) A maturity mismatch occurs when the residual maturity of a credit risk mitigant is less than that of the hedged exposure(s). (3) The residual maturity of a hedged exposure is the longest possible remaining time before the obligor is scheduled to fulfil its obligation on the exposure. If a credit risk mitigant has embedded options that may reduce its term, the national bank or Federal savings association (protection purchaser) must use the shortest possible residual maturity for the credit risk mitigant. If a call is at the discretion of the protection provider, the residual maturity of the credit risk mitigant is at the first call date. If the call is at the discretion of the national bank or Federal savings association (protection purchaser), but the terms of the arrangement at origination of the credit risk mitigant contain a positive incentive for the national bank or Federal savings association to call the transaction before contractual maturity, the remaining time to the first call date is the residual maturity of the credit risk mitigant. 31 31 (4) A credit risk mitigant with a maturity mismatch may be recognized only if its original maturity is greater than or equal to one year and its residual maturity is greater than three months. (5) When a maturity mismatch exists, the national bank or Federal savings association must apply the following adjustment to the effective notional amount of the credit risk mitigant: P m where: (i) P m (ii) E = effective notional amount of the credit risk mitigant; (iii) t = the lesser of T or the residual maturity of the credit risk mitigant, expressed in years; and (iv) T = the lesser of five or the residual maturity of the hedged exposure, expressed in years. (e) Credit derivatives without restructuring as a credit event. P r m where: (1) P r (2) P m (f) Currency mismatch. P c r x FX where: (i) P c (ii) P r (iii) H FX (2) A national bank or Federal savings association must set H FX (i) The own-estimates haircuts in § 3.132(b)(2)(iii); (ii) The simple VaR methodology in § 3.132(b)(3); or (iii) The internal models methodology in § 3.132(d). (3) A national bank or Federal savings association must adjust H FX 2 [78 FR 62157, 62273, Oct. 11, 2013, as amended at 85 FR 4405, Jan. 24, 2020] § 3.135 Guarantees and credit derivatives: double default treatment. (a) Eligibility and operational criteria for double default treatment. (1) The hedged exposure is fully covered or covered on a pro rata basis by: (i) An eligible guarantee issued by an eligible double default guarantor; or (ii) An eligible credit derivative that meets the requirements of § 3.134(b)(2) and that is issued by an eligible double default guarantor. (2) The guarantee or credit derivative is: (i) An uncollateralized guarantee or uncollateralized credit derivative (for example, a credit default swap) that provides protection with respect to a single reference obligor; or (ii) An n th (3) The hedged exposure is a wholesale exposure (other than a sovereign exposure). (4) The obligor of the hedged exposure is not: (i) An eligible double default guarantor or an affiliate of an eligible double default guarantor; or (ii) An affiliate of the guarantor. (5) The national bank or Federal savings association does not recognize any credit risk mitigation benefits of the guarantee or credit derivative for the hedged exposure other than through application of the double default treatment as provided in this section. (6) The national bank or Federal savings association has implemented a process (which has received the prior, written approval of the OCC) to detect excessive correlation between the creditworthiness of the obligor of the hedged exposure and the protection provider. If excessive correlation is present, the national bank or Federal savings association may not use the double default treatment for the hedged exposure. (b) Full coverage. (c) Partial coverage. (1) For the protected exposure, the national bank or Federal savings association must set EAD equal to P and calculate its risk-weighted asset amount as provided in paragraph (e) of this section; and (2) For the unprotected exposure, the national bank or Federal savings association must set EAD equal to the EAD of the original exposure minus P and then calculate its risk-weighted asset amount as provided in § 3.131. (d) Mismatches. (e) The double default dollar risk-based capital requirement. DD DD K DD o g Where: (1) (2) PD g (3) PD o (4) LGD g (i) The lower of the LGD of the hedged exposure (not adjusted to reflect the guarantee or credit derivative) and the LGD of the guarantee or credit derivative, if the guarantee or credit derivative provides the national bank or Federal savings association with the option to receive immediate payout on triggering the protection; or (ii) The LGD of the guarantee or credit derivative, if the guarantee or credit derivative does not provide the national bank or Federal savings association with the option to receive immediate payout on triggering the protection; and (5) ρ os o (6) b (maturity adjustment coefficient) is calculated according to the formula for b provided in Table 1 in § 3.131, with PD equal to the lesser of PD o g (7) M (maturity) is the effective maturity of the guarantee or credit derivative, which may not be less than one year or greater than five years. § 3.136 Unsettled transactions. (a) Definitions. (1) Delivery-versus-payment (DvP) transaction means a securities or commodities transaction in which the buyer is obligated to make payment only if the seller has made delivery of the securities or commodities and the seller is obligated to deliver the securities or commodities only if the buyer has made payment. (2) Payment-versus-payment (PvP) transaction means a foreign exchange transaction in which each counterparty is obligated to make a final transfer of one or more currencies only if the other counterparty has made a final transfer of one or more currencies. (3) A transaction has a normal settlement period if the contractual settlement period for the transaction is equal to or less than the market standard for the instrument underlying the transaction and equal to or less than five business days. (4) The positive current exposure of a national bank or Federal savings association for a transaction is the difference between the transaction value at the agreed settlement price and the current market price of the transaction, if the difference results in a credit exposure of the national bank or Federal savings association to the counterparty. (b) Scope. (1) Cleared transactions that are subject to daily marking-to-market and daily receipt and payment of variation margin; (2) Repo-style transactions, including unsettled repo-style transactions (which are addressed in §§ 3.131 and 132); (3) One-way cash payments on OTC derivative contracts (which are addressed in §§ 3. 131 and 132); or (4) Transactions with a contractual settlement period that is longer than the normal settlement period (which are treated as OTC derivative contracts and addressed in §§ 3.131 and 132). (c) System-wide failures. (d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP) transactions. Table 1 to § 3.136—Risk Weights for Unsettled DvP and PvP Transactions Number of business days after contractual settlement date Risk weight to be applied to positive From 5 to 15 100 From 16 to 30 625 From 31 to 45 937.5 46 or more 1,250 (e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-payment) transactions. (2) From the business day after the national bank or Federal savings association has made its delivery until five business days after the counterparty delivery is due, the national bank or Federal savings association must calculate its risk-based capital requirement for the transaction by treating the current fair value of the deliverables owed to the national bank or Federal savings association as a wholesale exposure. (i) A national bank or Federal savings association may use a 45 percent LGD for the transaction rather than estimating LGD for the transaction provided the national bank or Federal savings association uses the 45 percent LGD for all transactions described in paragraphs (e)(1) and (2) of this section. (ii) A national bank or Federal savings association may use a 100 percent risk weight for the transaction provided the national bank or Federal savings association uses this risk weight for all transactions described in paragraphs (e)(1) and (2) of this section. (3) If the national bank or Federal savings association has not received its deliverables by the fifth business day after the counterparty delivery was due, the national bank or Federal savings association must apply a 1,250 percent risk weight to the current fair value of the deliverables owed to the national bank or Federal savings association. (f) Total risk-weighted assets for unsettled transactions. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 80 FR 41417, July 15, 2015] §§ 3.137-3.140 [Reserved] Risk-Weighted Assets for Securitization Exposures § 3.141 Operational criteria for recognizing the transfer of risk. (a) Operational criteria for traditional securitizations. (1) The exposures are not reported on the national bank's or Federal savings association's consolidated balance sheet under GAAP; (2) The national bank or Federal savings association has transferred to one or more third parties credit risk associated with the underlying exposures; (3) Any clean-up calls relating to the securitization are eligible clean-up calls; and (4) The securitization does not: (i) Include one or more underlying exposures in which the borrower is permitted to vary the drawn amount within an agreed limit under a line of credit; and (ii) Contain an early amortization provision. (b) Operational criteria for synthetic securitizations. (1) The credit risk mitigant is: (i) Financial collateral; or (ii) A guarantee that meets all of the requirements of an eligible guarantee in § 3.2 except for paragraph (3) of the definition; or (iii) A credit derivative that meets all of the requirements of an eligible credit derivative except for paragraph (3) of the definition of eligible guarantee in § 3.2. (2) The national bank or Federal savings association transfers credit risk associated with the underlying exposures to third parties, and the terms and conditions in the credit risk mitigants employed do not include provisions that: (i) Allow for the termination of the credit protection due to deterioration in the credit quality of the underlying exposures; (ii) Require the national bank or Federal savings association to alter or replace the underlying exposures to improve the credit quality of the underlying exposures; (iii) Increase the national bank's or Federal savings association's cost of credit protection in response to deterioration in the credit quality of the underlying exposures; (iv) Increase the yield payable to parties other than the national bank or Federal savings association in response to a deterioration in the credit quality of the underlying exposures; or (v) Provide for increases in a retained first loss position or credit enhancement provided by the national bank or Federal savings association after the inception of the securitization; (3) The national bank or Federal savings association obtains a well-reasoned opinion from legal counsel that confirms the enforceability of the credit risk mitigant in all relevant jurisdictions; and (4) Any clean-up calls relating to the securitization are eligible clean-up calls. (c) Due diligence requirements for securitization exposures. (2) A national bank or Federal savings association must demonstrate its comprehensive understanding of a securitization exposure under paragraph (c)(1) of this section, for each securitization exposure by: (i) Conducting an analysis of the risk characteristics of a securitization exposure prior to acquiring the exposure and document such analysis within three business days after acquiring the exposure, considering: (A) Structural features of the securitization that would materially impact the performance of the exposure, for example, the contractual cash flow waterfall, waterfall-related triggers, credit enhancements, liquidity enhancements, fair value triggers, the performance of organizations that service the position, and deal-specific definitions of default; (B) Relevant information regarding the performance of the underlying credit exposure(s), for example, the percentage of loans 30, 60, and 90 days past due; default rates; prepayment rates; loans in foreclosure; property types; occupancy; average credit score or other measures of creditworthiness; average loan-to-value ratio; and industry and geographic diversification data on the underlying exposure(s); (C) Relevant market data of the securitization, for example, bid-ask spreads, most recent sales price and historical price volatility, trading volume, implied market rating, and size, depth and concentration level of the market for the securitization; and (D) For resecuritization exposures, performance information on the underlying securitization exposures, for example, the issuer name and credit quality, and the characteristics and performance of the exposures underlying the securitization exposures; and (ii) On an on-going basis (no less frequently than quarterly), evaluating, reviewing, and updating as appropriate the analysis required under this section for each securitization exposure. § 3.142 Risk-weighted assets for securitization exposures. (a) Hierarchy of approaches. (1) A national bank or Federal savings association must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from a securitization and must apply a 1,250 percent risk weight to the portion of any CEIO that does not constitute after tax gain-on-sale; (2) If a securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (a)(1) of this section, the national bank or Federal savings association must apply the supervisory formula approach in § 3.143 to the exposure if the national bank or Federal savings association and the exposure qualify for the supervisory formula approach according to § 3.143(a); (3) If a securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (a)(1) of this section and does not qualify for the supervisory formula approach, the national bank or Federal savings association may apply the simplified supervisory formula approach under § 3.144; (4) If a securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (a)(1) of this section, does not qualify for the supervisory formula approach in § 3.143, and the national bank or Federal savings association does not apply the simplified supervisory formula approach in § 3.144, the national bank or Federal savings association must apply a 1,250 percent risk weight to the exposure; and (5) If a securitization exposure is a derivative contract (other than protection provided by a national bank or Federal savings association in the form of a credit derivative) that has a first priority claim on the cash flows from the underlying exposures (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments), a national bank or Federal savings association may choose to set the risk-weighted asset amount of the exposure equal to the amount of the exposure as determined in paragraph (e) of this section rather than apply the hierarchy of approaches described in paragraphs (a)(1) through (4) of this section. (b) Total risk-weighted assets for securitization exposures. (c) Deductions. (d) Maximum risk-based capital requirement. (1) The national bank's or Federal savings association's total risk-based capital requirement for the underlying exposures calculated under this subpart as if the national bank or Federal savings association directly held the underlying exposures; and (2) The total ECL of the underlying exposures calculated under this subpart. (e) Exposure amount of a securitization exposure. (2) Except as provided in paragraph (m) of this section, the exposure amount of an off-balance sheet securitization exposure that is not an OTC derivative contract (other than a credit derivative), repo-style transaction, eligible margin loan, or cleared transaction (other than a credit derivative) is the notional amount of the exposure. For an off-balance-sheet securitization exposure to an ABCP program, such as an eligible ABCP liquidity facility, the notional amount may be reduced to the maximum potential amount that the national bank or Federal savings association could be required to fund given the ABCP program's current underlying assets (calculated without regard to the current credit quality of those assets). (3) The exposure amount of a securitization exposure that is a repo-style transaction, eligible margin loan, or OTC derivative contract (other than a credit derivative) or cleared transaction (other than a credit derivative) is the EAD of the exposure as calculated in § 3.132 or § 3.133. (f) Overlapping exposures. (g) Securitizations of non-IRB exposures. (1) Must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the securitization and apply a 1,250 percent risk weight to the portion of any CEIO that does not constitute gain-on-sale, if the national bank or Federal savings association is an originating national bank or Federal savings association; (2) May apply the simplified supervisory formula approach in § 3.144 to the exposure, if the securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (g)(1) of this section; (3) Must assign a 1,250 percent risk weight to the exposure if the securitization exposure does not require deduction or a 1,250 percent risk weight under paragraph (g)(1) of this section, does not qualify for the supervisory formula approach in § 3.143, and the national bank or Federal savings association does not apply the simplified supervisory formula approach in § 3.144 to the exposure. (h) Implicit support. (1) The national bank or Federal savings association must calculate a risk-weighted asset amount for underlying exposures associated with the securitization as if the exposures had not been securitized and must deduct from common equity tier 1 capital any after-tax gain-on-sale resulting from the securitization; and (2) The national bank or Federal savings association must disclose publicly: (i) That it has provided implicit support to the securitization; and (ii) The regulatory capital impact to the national bank or Federal savings association of providing such implicit support. (i) Undrawn portion of a servicer cash advance facility. (2) For a national bank or Federal savings association that acts as a servicer, the exposure amount for a servicer cash advance facility that is not an eligible servicer cash advance facility is equal to the amount of all potential future cash advance payments that the national bank or Federal savings association may be contractually required to provide during the subsequent 12 month period under the contract governing the facility. (j) Interest-only mortgage-backed securities. (k) Small-business loans and leases on personal property transferred with recourse. (i) The transaction is a sale under GAAP. (ii) The national bank or Federal savings association establishes and maintains, pursuant to GAAP, a non-capital reserve sufficient to meet the national bank's or Federal savings association's reasonably estimated liability under the recourse arrangement. (iii) The loans and leases are to businesses that meet the criteria for a small-business concern established by the Small Business Administration under section 3(a) of the Small Business Act (15 U.S.C. 632 et seq. (iv) The national bank or Federal savings association is well-capitalized, as defined in 12 CFR 6.4. For purposes of determining whether a national bank or Federal savings association is well capitalized for purposes of this paragraph (k), the national bank's or Federal savings association's capital ratios must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in paragraph (k)(1) of this section. (2) The total outstanding amount of recourse retained by a national bank or Federal savings association on transfers of small-business obligations subject to paragraph (k)(1) of this section cannot exceed 15 percent of the national bank's or Federal savings association's total capital. (3) If a national bank or Federal savings association ceases to be well capitalized or exceeds the 15 percent capital limitation in paragraph (k)(2) of this section, the preferential capital treatment specified in paragraph (k)(1) of this section will continue to apply to any transfers of small-business obligations with recourse that occurred during the time that the national bank or Federal savings association was well capitalized and did not exceed the capital limit. (4) The risk-based capital ratios of a national bank or Federal savings association must be calculated without regard to the capital treatment for transfers of small-business obligations with recourse specified in paragraph (k)(1) of this section. (l) N th -to-default credit derivatives Protection provider. th th (2) For purposes of determining the risk weight for an n th (i) The attachment point (parameter A) is the ratio of the sum of the notional amounts of all underlying exposures that are subordinated to the national bank's or Federal savings association's exposure to the total notional amount of all underlying exposures. For purposes of the SSFA, parameter A is expressed as a decimal value between zero and one. For purposes of using the SFA to calculate the risk weight for its exposure in an n th (ii) The detachment point (parameter D) equals the sum of parameter A plus the ratio of the notional amount of the national bank's or Federal savings association's exposure in the n th (3) A national bank or Federal savings association that does not use the SFA or the SSFA to determine a risk weight for its exposure in an n th (4) Protection purchaser First-to-default credit derivatives. (ii) Second-or-subsequent-to-default credit derivatives. th ( 1 ( 2 (B) If a national bank or Federal savings association satisfies the requirements of paragraph (l)(3)(ii)(A) of this section, the national bank or Federal savings association must determine its risk-based capital requirement for the underlying exposures as if the bank had only synthetically securitized the underlying exposure with the n th (C) A national bank or Federal savings association must calculate a risk-based capital requirement for counterparty credit risk according to § 3.132 for a n th (m) Guarantees and credit derivatives other than n th -to-default credit derivatives Protection provider. th (2) Protection purchaser. th (ii) If a national bank or Federal savings association cannot, or chooses not to, recognize a purchased credit derivative as a credit risk mitigant under § 3.145, the national bank or Federal savings association must determine the exposure amount of the credit derivative under § 3.132(c). (A) If the national bank or Federal savings association purchases credit protection from a counterparty that is not a securitization SPE, the national bank or Federal savings association must determine the risk weight for the exposure according § 3.131. (B) If the national bank or Federal savings association purchases the credit protection from a counterparty that is a securitization SPE, the national bank or Federal savings association must determine the risk weight for the exposure according to this section, including paragraph (a)(5) of this section for a credit derivative that has a first priority claim on the cash flows from the underlying exposures of the securitization SPE (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments. § 3.143 Supervisory formula approach (SFA). (a) Eligibility requirements. (b) Mechanics. (c) The SFA risk-based capital requirement. IRB (2) If K IRB (i) F · T (where F is 0.016 for all securitization exposures); or (ii) S[L + T]−S[L]. (3) If K IRB IRB (i) F · (T−(K IRB (ii) S[L + T]−S[K IRB (d) The supervisory formula: (e) SFA parameters. (1) Amount of the underlying exposures (UE). (2) Tranche percentage (TP (3) Capital requirement on underlying exposures (K IRB ). IRB (A) The sum of the risk-based capital requirements for the underlying exposures plus the expected credit losses of the underlying exposures (as determined under this subpart E as if the underlying exposures were directly held by the national bank or Federal savings association); to (B) UE. (ii) The calculation of K IRB (iii) All assets related to the securitization are treated as underlying exposures, including assets in a reserve account (such as a cash collateral account). (4) Credit enhancement level (L). (A) The amount of all securitization exposures subordinated to the tranche that contains the national bank's or Federal savings association's securitization exposure; to (B) UE. (ii) A national bank or Federal savings association must determine L before considering the effects of any tranche-specific credit enhancements. (iii) Any gain-on-sale or CEIO associated with the securitization may not be included in L. (iv) Any reserve account funded by accumulated cash flows from the underlying exposures that is subordinated to the tranche that contains the national bank's or Federal savings association's securitization exposure may be included in the numerator and denominator of L to the extent cash has accumulated in the account. Unfunded reserve accounts (that is, reserve accounts that are to be funded from future cash flows from the underlying exposures) may not be included in the calculation of L. (v) In some cases, the purchase price of receivables will reflect a discount that provides credit enhancement (for example, first loss protection) for all or certain tranches of the securitization. When this arises, L should be calculated inclusive of this discount if the discount provides credit enhancement for the securitization exposure. (5) Thickness of tranche (T). (i) The amount of the tranche that contains the national bank's or Federal savings association's securitization exposure; to (ii) UE. (6) Effective number of exposures (N). where EAD i (ii) Multiple exposures to one obligor must be treated as a single underlying exposure. (iii) In the case of a resecuritization, the national bank or Federal savings association must treat each underlying exposure as a single underlying exposure and must not look through to the originally securitized underlying exposures. (7) Exposure-weighted average loss given default (EWALGD). where LGD i (f) Simplified method for computing N and EWALGD. (i) h = 0; and (ii) v = 0. (2) Under the conditions in §§ 3.143(f)(3) and (f)(4), a national bank or Federal savings association may employ a simplified method for calculating N and EWALGD. (3) If C 1 where: (i) C m (ii) The level of m is to be selected by the national bank or Federal savings association. (4) Alternatively, if only C 1 1 1 § 3.144 Simplified supervisory formula approach (SSFA). (a) General requirements for the SSFA. (b) SSFA parameters. (1) K G G G (2) Parameter W is expressed as a decimal value between zero and one. Parameter W is the ratio of the sum of the dollar amounts of any underlying exposures of the securitization that meet any of the criteria as set forth in paragraphs (b)(2)(i) through (vi) of this section to the balance, measured in dollars, of underlying exposures: (i) Ninety days or more past due; (ii) Subject to a bankruptcy or insolvency proceeding; (iii) In the process of foreclosure; (iv) Held as real estate owned; (v) Has contractually deferred payments for 90 days or more, other than principal or interest payments deferred on: (A) Federally-guaranteed student loans, in accordance with the terms of those guarantee programs; or (B) Consumer loans, including non-federally-guaranteed student loans, provided that such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed that provide for period(s) of deferral that are not initiated based on changes in the creditworthiness of the borrower; or (vi) Is in default. (3) Parameter A is the attachment point for the exposure, which represents the threshold at which credit losses will first be allocated to the exposure. Except as provided in section 142(l) for n th (4) Parameter D is the detachment point for the exposure, which represents the threshold at which credit losses of principal allocated to the exposure would result in a total loss of principal. Except as provided in section 142(l) for n th pari passu (5) A supervisory calibration parameter, p, is equal to 0.5 for securitization exposures that are not resecuritization exposures and equal to 1.5 for resecuritization exposures. (c) Mechanics of the SSFA. G A G A A (1) When the detachment point, parameter D, for a securitization exposure is less than or equal to K A (2) When the attachment point, parameter A, for a securitization exposure is greater than or equal to K A (3) When A is less than K A A SSFA § 3.145 Recognition of credit risk mitigants for securitization exposures. (a) General. (b) Collateral Rules of recognition. Where: (i) SE* = max {0, [SE−C × (1−H s fx (ii) SE = the amount of the securitization exposure calculated under § 3.142(e); (iii) C = the current fair value of the collateral; (iv) H s (v) H fx (3) Standard supervisory haircuts. (i) A national bank or Federal savings association must use the collateral type haircuts (H s (ii) A national bank or Federal savings association must use a currency mismatch haircut (H fx (iii) A national bank or Federal savings association must multiply the supervisory haircuts obtained in paragraphs (b)(3)(i) and (ii) of this section by the square root of 6.5 (which equals 2.549510); and (iv) A national bank or Federal savings association must adjust the supervisory haircuts upward on the basis of a holding period longer than 65 business days where and as appropriate to take into account the illiquidity of the collateral. (4) Own estimates for haircuts. M (c) Guarantees and credit derivatives Limitations on recognition. (2) ECL for securitization exposures. (i) Calculate ECL for the protected portion of the exposure using the same risk parameters that it uses for calculating the risk-weighted asset amount of the exposure as described in paragraph (c)(3) of this section; and (ii) Add the exposure's ECL to the national bank's or Federal savings association's total ECL. (3) Rules of recognition. (i) Full coverage. (ii) Partial coverage. (A) Covered portion. (B) Uncovered portion. 1 ( 2 (4) Mismatches. §§ 3.146-3.150 [Reserved] Risk-Weighted Assets for Equity Exposures § 3.151 Introduction and exposure measurement. (a) General. (2) A national bank or Federal savings association must treat an investment in a separate account (as defined in § 3.2), as if it were an equity exposure to an investment fund as provided in § 3.154. (3) Stable value protection. (A) The policy owner of a separate account an amount equal to the shortfall between the fair value and cost basis of the separate account when the policy owner of the separate account surrenders the policy, or (B) The beneficiary of the contract an amount equal to the shortfall between the fair value and book value of a specified portfolio of assets. (ii) A national bank or Federal savings association that purchases stable value protection on its investment in a separate account must treat the portion of the carrying value of its investment in the separate account attributable to the stable value protection as an exposure to the provider of the protection and the remaining portion of the carrying value of its separate account as an equity exposure to an investment fund. (iii) A national bank or Federal savings association that provides stable value protection must treat the exposure as an equity derivative with an adjusted carrying value determined as the sum of § 3.151(b)(1) and (2). (b) Adjusted carrying value. (1) For the on-balance sheet component of an equity exposure, the national bank's or Federal savings association's carrying value of the exposure; (2) For the off-balance sheet component of an equity exposure, the effective notional principal amount of the exposure, the size of which is equivalent to a hypothetical on-balance sheet position in the underlying equity instrument that would evidence the same change in fair value (measured in dollars) for a given small change in the price of the underlying equity instrument, minus the adjusted carrying value of the on-balance sheet component of the exposure as calculated in paragraph (b)(1) of this section. (3) For unfunded equity commitments that are unconditional, the effective notional principal amount is the notional amount of the commitment. For unfunded equity commitments that are conditional, the effective notional principal amount is the national bank's or Federal savings association's best estimate of the amount that would be funded under economic downturn conditions. § 3.152 Simple risk weight approach (SRWA). (a) General. (b) SRWA computation for individual equity exposures. (1) Zero percent risk weight equity exposures. (2) 20 percent risk weight equity exposures. (3) 100 percent risk weight equity exposures. (i) Community development equity exposures. (ii) Effective portion of hedge pairs. (iii) Non-significant equity exposures. (A) To compute the aggregate adjusted carrying value of a national bank's or Federal savings association's equity exposures for purposes of this section, the national bank or Federal savings association may exclude equity exposures described in paragraphs (b)(1), (b)(2), (b)(3)(i), and (b)(3)(ii) of this section, the equity exposure in a hedge pair with the smaller adjusted carrying value, and a proportion of each equity exposure to an investment fund equal to the proportion of the assets of the investment fund that are not equity exposures or that meet the criterion of paragraph (b)(3)(i) of this section. If a national bank or Federal savings association does not know the actual holdings of the investment fund, the national bank or Federal savings association may calculate the proportion of the assets of the fund that are not equity exposures based on the terms of the prospectus, partnership agreement, or similar contract that defines the fund's permissible investments. If the sum of the investment limits for all exposure classes within the fund exceeds 100 percent, the national bank or Federal savings association must assume for purposes of this section that the investment fund invests to the maximum extent possible in equity exposures. (B) When determining which of a national bank's or Federal savings association's equity exposures qualifies for a 100 percent risk weight under this section, a national bank or Federal savings association first must include equity exposures to unconsolidated small business investment companies or held through consolidated small business investment companies described in section 302 of the Small Business Investment Act, then must include publicly traded equity exposures (including those held indirectly through investment funds), and then must include non-publicly traded equity exposures (including those held indirectly through investment funds). (4) 250 percent risk weight equity exposures. (5) 300 percent risk weight equity exposures. (6) 400 percent risk weight equity exposures. (7) 600 percent risk weight equity exposures. (i) Would meet the definition of a traditional securitization were it not for the OCC's application of paragraph (8) of that definition in § 3.2; and (ii) Has greater than immaterial leverage is assigned a 600 percent risk weight. (c) Hedge transactions Hedge pair. (2) Effective hedge. (i) Under the dollar-offset method of measuring effectiveness, the national bank or Federal savings association must determine the ratio of value change (RVC). The RVC is the ratio of the cumulative sum of the periodic changes in value of one equity exposure to the cumulative sum of the periodic changes in the value of the other equity exposure. If RVC is positive, the hedge is not effective and E equals zero. If RVC is negative and greater than or equal to −1 (that is, between zero and −1), then E equals the absolute value of RVC. If RVC is negative and less than −1, then E equals 2 plus RVC. (ii) Under the variability-reduction method of measuring effectiveness: (iii) Under the regression method of measuring effectiveness, E equals the coefficient of determination of a regression in which the change in value of one exposure in a hedge pair is the dependent variable and the change in value of the other exposure in a hedge pair is the independent variable. However, if the estimated regression coefficient is positive, then the value of E is zero. (3) The effective portion of a hedge pair is E multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair. (4) The ineffective portion of a hedge pair is (1-E) multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 35258, July 22, 2019] § 3.153 Internal models approach (IMA). (a) General. (b) Qualifying criteria. (1) The national bank or Federal savings association must have one or more models that: (i) Assess the potential decline in value of its modeled equity exposures; (ii) Are commensurate with the size, complexity, and composition of the national bank's or Federal savings association's modeled equity exposures; and (iii) Adequately capture both general market risk and idiosyncratic risk. (2) The national bank's or Federal savings association's model must produce an estimate of potential losses for its modeled equity exposures that is no less than the estimate of potential losses produced by a VaR methodology employing a 99th percentile one-tailed confidence interval of the distribution of quarterly returns for a benchmark portfolio of equity exposures comparable to the national bank's or Federal savings association's modeled equity exposures using a long-term sample period. (3) The number of risk factors and exposures in the sample and the data period used for quantification in the national bank's or Federal savings association's model and benchmarking exercise must be sufficient to provide confidence in the accuracy and robustness of the national bank's or Federal savings association's estimates. (4) The national bank's or Federal savings association's model and benchmarking process must incorporate data that are relevant in representing the risk profile of the national bank's or Federal savings association's modeled equity exposures, and must include data from at least one equity market cycle containing adverse market movements relevant to the risk profile of the national bank's or Federal savings association's modeled equity exposures. In addition, the national bank's or Federal savings association's benchmarking exercise must be based on daily market prices for the benchmark portfolio. If the national bank's or Federal savings association's model uses a scenario methodology, the national bank or Federal savings association must demonstrate that the model produces a conservative estimate of potential losses on the national bank's or Federal savings association's modeled equity exposures over a relevant long-term market cycle. If the national bank or Federal savings association employs risk factor models, the national bank or Federal savings association must demonstrate through empirical analysis the appropriateness of the risk factors used. (5) The national bank or Federal savings association must be able to demonstrate, using theoretical arguments and empirical evidence, that any proxies used in the modeling process are comparable to the national bank's or Federal savings association's modeled equity exposures and that the national bank or Federal savings association has made appropriate adjustments for differences. The national bank or Federal savings association must derive any proxies for its modeled equity exposures and benchmark portfolio using historical market data that are relevant to the national bank's or Federal savings association's modeled equity exposures and benchmark portfolio (or, where not, must use appropriately adjusted data), and such proxies must be robust estimates of the risk of the national bank's or Federal savings association's modeled equity exposures. (c) Risk-weighted assets calculation for a national bank or Federal savings association using the IMA for publicly traded and non-publicly traded equity exposures. (1) The risk-weighted asset amount of each equity exposure that qualifies for a 0 percent, 20 percent, or 100 percent risk weight under § 3.152(b)(1) through (b)(3)(i) (as determined under § 3.152) and each equity exposure to an investment fund (as determined under § 3.154); and (2) The greater of: (i) The estimate of potential losses on the national bank's or Federal savings association's equity exposures (other than equity exposures referenced in paragraph (c)(1) of this section) generated by the national bank's or Federal savings association's internal equity exposure model multiplied by 12.5; or (ii) The sum of: (A) 200 percent multiplied by the aggregate adjusted carrying value of the national bank's or Federal savings association's publicly traded equity exposures that do not belong to a hedge pair, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under § 3.152(b)(1) through (b)(3)(i), and are not equity exposures to an investment fund; (B) 200 percent multiplied by the aggregate ineffective portion of all hedge pairs; and (C) 300 percent multiplied by the aggregate adjusted carrying value of the national bank's or Federal savings association's equity exposures that are not publicly traded, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under § 3.152(b)(1) through (b)(3)(i), and are not equity exposures to an investment fund. (d) Risk-weighted assets calculation for a national bank or Federal savings association using the IMA only for publicly traded equity exposures. (1) The risk-weighted asset amount of each equity exposure that qualifies for a 0 percent, 20 percent, or 100 percent risk weight under §§ 3.152(b)(1) through (b)(3)(i) (as determined under § 3.152), each equity exposure that qualifies for a 400 percent risk weight under § 3.152(b)(5) or a 600 percent risk weight under § 3.152(b)(6) (as determined under § 3.152), and each equity exposure to an investment fund (as determined under § 3.154); and (2) The greater of: (i) The estimate of potential losses on the national bank's or Federal savings association's equity exposures (other than equity exposures referenced in paragraph (d)(1) of this section) generated by the national bank's or Federal savings association's internal equity exposure model multiplied by 12.5; or (ii) The sum of: (A) 200 percent multiplied by the aggregate adjusted carrying value of the national bank's or Federal savings association's publicly traded equity exposures that do not belong to a hedge pair, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under § 3.152(b)(1) through (b)(3)(i), and are not equity exposures to an investment fund; and (B) 200 percent multiplied by the aggregate ineffective portion of all hedge pairs. § 3.154 Equity exposures to investment funds. (a) Available approaches. (2) The risk-weighted asset amount of an equity exposure to an investment fund that meets the requirements for a community development equity exposure in § 3.152(b)(3)(i) is its adjusted carrying value. (3) If an equity exposure to an investment fund is part of a hedge pair and the national bank or Federal savings association does not use the full look-through approach, the national bank or Federal savings association may use the ineffective portion of the hedge pair as determined under § 3.152(c) as the adjusted carrying value for the equity exposure to the investment fund. The risk-weighted asset amount of the effective portion of the hedge pair is equal to its adjusted carrying value. (b) Full look-through approach. (1) Set the risk-weighted asset amount of the national bank's or Federal savings association's exposure to the fund equal to the product of: (i) The aggregate risk-weighted asset amounts of the exposures held by the fund as if they were held directly by the national bank or Federal savings association; and (ii) The national bank's or Federal savings association's proportional ownership share of the fund; or (2) Include the national bank's or Federal savings association's proportional ownership share of each exposure held by the fund in the national bank's or Federal savings association's IMA. (c) Simple modified look-through approach. (d) Alternative modified look-through approach. § 3.155 Equity derivative contracts. (a) Under the IMA, in addition to holding risk-based capital against an equity derivative contract under this part, a national bank or Federal savings association must hold risk-based capital against the counterparty credit risk in the equity derivative contract by also treating the equity derivative contract as a wholesale exposure and computing a supplemental risk-weighted asset amount for the contract under § 3.132. (b) Under the SRWA, a national bank or Federal savings association may choose not to hold risk-based capital against the counterparty credit risk of equity derivative contracts, as long as it does so for all such contracts. Where the equity derivative contracts are subject to a qualified master netting agreement, a national bank or Federal savings association using the SRWA must either include all or exclude all of the contracts from any measure used to determine counterparty credit risk exposure. §§ 3.156-3.160 [Reserved] Risk-Weighted Assets for Operational Risk § 3.161 Qualification requirements for incorporation of operational risk mitigants. (a) Qualification to use operational risk mitigants. (1) The national bank's or Federal savings association's operational risk quantification system is able to generate an estimate of the national bank's or Federal savings association's operational risk exposure (which does not incorporate qualifying operational risk mitigants) and an estimate of the national bank's or Federal savings association's operational risk exposure adjusted to incorporate qualifying operational risk mitigants; and (2) The national bank's or Federal savings association's methodology for incorporating the effects of insurance, if the national bank or Federal savings association uses insurance as an operational risk mitigant, captures through appropriate discounts to the amount of risk mitigation: (i) The residual term of the policy, where less than one year; (ii) The cancellation terms of the policy, where less than one year; (iii) The policy's timeliness of payment; (iv) The uncertainty of payment by the provider of the policy; and (v) Mismatches in coverage between the policy and the hedged operational loss event. (b) Qualifying operational risk mitigants. (1) Insurance that: (i) Is provided by an unaffiliated company that the national bank or Federal savings association deems to have strong capacity to meet its claims payment obligations and the obligor rating category to which the national bank or Federal savings association assigns the company is assigned a PD equal to or less than 10 basis points; (ii) Has an initial term of at least one year and a residual term of more than 90 days; (iii) Has a minimum notice period for cancellation by the provider of 90 days; (iv) Has no exclusions or limitations based upon regulatory action or for the receiver or liquidator of a failed depository institution; and (v) Is explicitly mapped to a potential operational loss event; (2) Operational risk mitigants other than insurance for which the OCC has given prior written approval. In evaluating an operational risk mitigant other than insurance, the OCC will consider whether the operational risk mitigant covers potential operational losses in a manner equivalent to holding total capital. § 3.162 Mechanics of risk-weighted asset calculation. (a) If a national bank or Federal savings association does not qualify to use or does not have qualifying operational risk mitigants, the national bank's or Federal savings association's dollar risk-based capital requirement for operational risk is its operational risk exposure minus eligible operational risk offsets (if any). (b) If a national bank or Federal savings association qualifies to use operational risk mitigants and has qualifying operational risk mitigants, the national bank's or Federal savings association's dollar risk-based capital requirement for operational risk is the greater of: (1) The national bank's or Federal savings association's operational risk exposure adjusted for qualifying operational risk mitigants minus eligible operational risk offsets (if any); or (2) 0.8 multiplied by the difference between: (i) The national bank's or Federal savings association's operational risk exposure; and (ii) Eligible operational risk offsets (if any). (c) The national bank's or Federal savings association's risk-weighted asset amount for operational risk equals the national bank's or Federal savings association's dollar risk-based capital requirement for operational risk determined under sections 162(a) or (b) multiplied by 12.5. §§ 3.163-3.170 [Reserved] Disclosures § 3.171 Purpose and scope. §§ 3.171 through 3.173 establish public disclosure requirements related to the capital requirements of a national bank or Federal savings association that is an advanced approaches national bank or Federal savings association. § 3.172 Disclosure requirements. (a) A national bank or Federal savings association that is an advanced approaches national bank or Federal savings association that has completed the parallel run process and that has received notification from the OCC pursuant to section 121(d) of subpart E of this part must publicly disclose each quarter its total and tier 1 risk-based capital ratios and their components as calculated under this subpart (that is, common equity tier 1 capital, additional tier 1 capital, tier 2 capital, total qualifying capital, and total risk-weighted assets). (b) A national bank or Federal savings association that is an advanced approaches national bank or Federal savings association that has completed the parallel run process and that has received notification from the OCC pursuant to section 121(d) of subpart E of this part must comply with paragraph (c) of this section unless it is a consolidated subsidiary of a bank holding company, savings and loan holding company, or depository institution that is subject to these disclosure requirements or a subsidiary of a non-U.S. banking organization that is subject to comparable public disclosure requirements in its home jurisdiction. (c)(1) A national bank or Federal savings association described in paragraph (b) of this section must provide timely public disclosures each calendar quarter of the information in the applicable tables in § 3.173. If a significant change occurs, such that the most recent reported amounts are no longer reflective of the national bank's or Federal savings association's capital adequacy and risk profile, then a brief discussion of this change and its likely impact must be disclosed as soon as practicable thereafter. Qualitative disclosures that typically do not change each quarter (for example, a general summary of the national bank's or Federal savings association's risk management objectives and policies, reporting system, and definitions) may be disclosed annually after the end of the fourth calendar quarter, provided that any significant changes to these are disclosed in the interim. Management may provide all of the disclosures required by this subpart in one place on the national bank's or Federal savings association's public Web site or may provide the disclosures in more than one public financial report or other regulatory reports, provided that the national bank or Federal savings association publicly provides a summary table specifically indicating the location(s) of all such disclosures. (2) A national bank or Federal savings association described in paragraph (b) of this section must have a formal disclosure policy approved by the board of directors that addresses its approach for determining the disclosures it makes. The policy must address the associated internal controls and disclosure controls and procedures. The board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over financial reporting, including the disclosures required by this subpart, and must ensure that appropriate review of the disclosures takes place. One or more senior officers of the national bank or Federal savings association must attest that the disclosures meet the requirements of this subpart. (3) If a national bank or Federal savings association described in paragraph (b) of this section believes that disclosure of specific commercial or financial information would prejudice seriously its position by making public information that is either proprietary or confidential in nature, the national bank or Federal savings association is not required to disclose those specific items, but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed. (d)(1) A national bank or Federal savings association that meets any of the criteria in § 3.100(b)(1) before January 1, 2015, must publicly disclose each quarter its supplementary leverage ratio and the components thereof (that is, tier 1 capital and total leverage exposure) as calculated under subpart B of this part, beginning with the first quarter in 2015. This disclosure requirement applies without regard to whether the national bank or Federal savings association has completed the parallel run process and received notification from the OCC pursuant to § 3.121(d). (2) A national bank or Federal savings association that meets any of the criteria in § 3.100(b)(1) on or after January 1, 2015, or a Category III national bank or Federal savings association must publicly disclose each quarter its supplementary leverage ratio and the components thereof (that is, tier 1 capital and total leverage exposure) as calculated under subpart B of this part beginning with the calendar quarter immediately following the quarter in which the national bank or Federal savings association becomes an advanced approaches national bank or Federal savings association or a Category III national bank or Federal savings association. This disclosure requirement applies without regard to whether the national bank or Federal savings association has completed the parallel run process and has received notification from the OCC pursuant to § 3.121(d). [78 FR 62157, 62273, Oct. 11, 2013, as amended at 79 FR 57743, Sept. 26, 2014; 80 FR 41417, July 15, 2015; 84 FR 59265, Nov. 1, 2019] § 3.173 Disclosures by certain advanced approaches national banks or Federal savings associations and Category III national banks or Federal savings associations. (a)(1) An advanced approaches national bank or Federal savings association described in § 3.172(b) must make the disclosures described in Tables 1 through 12 to § 3.173. (2) An advanced approaches national bank or Federal savings association and a Category III national bank or Federal savings association that is required to publicly disclose its supplementary leverage ratio pursuant to § 3.172(d) must make the disclosures required under Table 13 to this section unless the national bank or Federal savings association is a consolidated subsidiary of a bank holding company, savings and loan holding company, or depository institution that is subject to these disclosure requirements or a subsidiary of a non-U.S. banking organization that is subject to comparable public disclosure requirements in its home jurisdiction. (3) The disclosures described in Tables 1 through 12 to § 3.173 must be made publicly available for twelve consecutive quarters beginning on January 1, 2014, or a shorter period, as applicable, for the quarters after the national bank or Federal savings association has completed the parallel run process and received notification from the OCC pursuant to § 3.121(d). The disclosures described in Table 13 to § 3.173 must be made publicly available for twelve consecutive quarters beginning on January 1, 2015, or a shorter period, as applicable, for the quarters after the national bank or Federal savings association becomes subject to the disclosure of the supplementary leverage ratio pursuant to §§ 3.172(d) and 3.173(a)(2). Table 1 to § 3.173—Scope of Application Qualitative disclosures (a) The name of the top corporate entity in the group to which subpart E of this part applies. (b) A brief description of the differences in the basis for consolidating entities 1 (1) That are fully consolidated; (2) That are deconsolidated and deducted from total capital; (3) For which the total capital requirement is deducted; and (4) That are neither consolidated nor deducted (for example, where the investment in the entity is assigned a risk weight in accordance with this subpart). (c) Any restrictions, or other major impediments, on transfer of funds or total capital within the group. Quantitative disclosures (d) The aggregate amount of surplus capital of insurance subsidiaries included in the total capital of the consolidated group. (e) The aggregate amount by which actual total capital is less than the minimum total capital requirement in all subsidiaries, with total capital requirements and the name(s) of the subsidiaries with such deficiencies. 1 Table 2 to § 3.173—Capital Structure Qualitative disclosures (a) Summary information on the terms and conditions of the main features of all regulatory capital instruments. Quantitative disclosures (b) The amount of common equity tier 1 capital, with separate disclosure of: (1) Common stock and related surplus; (2) Retained earnings; (3) Common equity minority interest; (4) AOCI (net of tax) and other reserves; and (5) Regulatory adjustments and deductions made to common equity tier 1 capital. (c) The amount of tier 1 capital, with separate disclosure of: (1) Additional tier 1 capital elements, including additional tier 1 capital instruments and tier 1 minority interest not included in common equity tier 1 capital; and (2) Regulatory adjustments and deductions made to tier 1 capital. (d) The amount of total capital, with separate disclosure of: (1) Tier 2 capital elements, including tier 2 capital instruments and total capital minority interest not included in tier 1 capital; and (2) Regulatory adjustments and deductions made to total capital. (e) (1) Whether the national bank or Federal savings association has elected to phase in recognition of the transitional amounts as defined in § 3.301. (2) The national bank's or Federal savings association's common equity tier 1 capital, tier 1 capital, and total capital without including the transitional amounts. Table 3 to § 3.173—Capital Adequacy Qualitative disclosures (a) A summary discussion of the national bank's or Federal savings association's approach to assessing the adequacy of its capital to support current and future activities. Quantitative disclosures (b) Risk-weighted assets for credit risk from: (1) Wholesale exposures; (2) Residential mortgage exposures; (3) Qualifying revolving exposures; (4) Other retail exposures; (5) Securitization exposures; (6) Equity exposures: (7) Equity exposures subject to the simple risk weight approach; and (8) Equity exposures subject to the internal models approach. (c) Standardized market risk-weighted assets and advanced market risk-weighted assets as calculated under subpart F of this part: (1) Standardized approach for specific risk; and (2) Internal models approach for specific risk. (d) Risk-weighted assets for operational risk. (e) (1) Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the transition provisions described in § 3.301: (A) For the top consolidated group; and (2) For each depository institution subsidiary. (f) Common equity tier 1, tier 1 and total risk-based capital ratios reflecting the full adoption of CECL: (1) For the top consolidated group; and (2) For each depository institution subsidiary. (g) Total risk-weighted assets. Table 4 to § 3.173—Capital Conservation and Countercyclical Capital Buffers Qualitative disclosures (a) The national bank or Federal savings association must publicly disclose the geographic breakdown of its private sector credit exposures used in the calculation of the countercyclical capital buffer. Quantitative disclosures (b) At least quarterly, the national bank or Federal savings association must calculate and publicly disclose the capital conservation buffer and the countercyclical capital buffer as described under § 3.11 of subpart B. (c) At least quarterly, the national bank or Federal savings association must calculate and publicly disclose the buffer retained income of the national bank or Federal savings association, as described under § 3.11 of subpart B. (d) At least quarterly, the national bank or Federal savings association must calculate and publicly disclose any limitations it has on distributions and discretionary bonus payments resulting from the capital conservation buffer and the countercyclical capital buffer framework described under § 3.11 of subpart B, including the maximum payout amount for the quarter. (b) General qualitative disclosure requirement. (1) Strategies and processes; (2) The structure and organization of the relevant risk management function; (3) The scope and nature of risk reporting and/or measurement systems; and (4) Policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigants. Table 5 1 Qualitative disclosures (a) The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk disclosed in accordance with Table 7 to § 3.173), including: (1) Policy for determining past due or delinquency status; (2) Policy for placing loans on nonaccrual; (3) Policy for returning loans to accrual status; (4) Definition of and policy for identifying impaired loans (for financial accounting purposes). (5) Description of the methodology that the entity uses to estimate its allowance for loan and lease losses or adjusted allowance for credit losses, as applicable, including statistical methods used where applicable; (6) Policy for charging-off uncollectible amounts; and (7) Discussion of the national bank's or Federal savings association's credit risk management policy Quantitative disclosures (b) Total credit risk exposures and average credit risk exposures, after accounting offsets in accordance with GAAP, 2 (1) Loans, off-balance sheet commitments, and other non-derivative off-balance sheet exposures; (2) Debt securities; and (3) OTC derivatives. (c) Geographic 3 (d) Industry or counterparty type distribution of exposures, categorized by major types of credit exposure. (e) By major industry or counterparty type: (1) Amount of impaired loans for which there was a related allowance under GAAP; (2) Amount of impaired loans for which there was no related allowance under GAAP; (3) Amount of loans past due 90 days and on nonaccrual; (4) Amount of loans past due 90 days and still accruing; 4 (5) The balance in the allowance for loan and lease losses at the end of each period, disaggregated on the basis of the entity's impairment method. To disaggregate the information required on the basis of impairment methodology, an entity shall separately disclose the amounts based on the requirements in GAAP; and (6) Charge-offs during the period. (f) Amount of impaired loans and, if available, the amount of past due loans categorized by significant geographic areas including, if practical, the amounts of allowances related to each geographical area, 5 (g) Reconciliation of changes in ALLL or AACL, as applicable. 6 (h) Remaining contractual maturity breakdown (for example, one year or less) of the whole portfolio, categorized by credit exposure. 1 2 See, 3 4 5 6 Table 6 to § 3.173—Credit Risk: Disclosures for Portfolios Subject to IRB Risk-Based Capital Formulas Qualitative disclosures (a) Explanation and review of the: (1) Structure of internal rating systems and if the national bank or Federal savings association considers external ratings, the relation between internal and external ratings; (2) Use of risk parameter estimates other than for regulatory capital purposes; (3) Process for managing and recognizing credit risk mitigation (see Table 8 to § 3.173); and (4) Control mechanisms for the rating system, including discussion of independence, accountability, and rating systems review. (b) Description of the internal ratings process, provided separately for the following: (1) Wholesale category; (2) Retail subcategories; (i) Residential mortgage exposures; (ii) Qualifying revolving exposures; and (iii) Other retail exposures. For each category and subcategory above the description should include: (A) The types of exposure included in the category/subcategories; and (B) The definitions, methods and data for estimation and validation of PD, LGD, and EAD, including assumptions employed in the derivation of these variables. 1 Quantitative disclosures: risk assessment (c) (1) For wholesale exposures, present the following information across a sufficient number of PD grades (including default) to allow for a meaningful differentiation of credit risk: 2 (i) Total EAD; 3 (ii) Exposure-weighted average LGD (percentage); (iii) Exposure-weighted average risk weight; and (iv) Amount of undrawn commitments and exposure-weighted average EAD including average drawdowns prior to default for wholesale exposures. (2) For each retail subcategory, present the disclosures outlined above across a sufficient number of segments to allow for a meaningful differentiation of credit risk. Quantitative disclosures: historical results (d) Actual losses in the preceding period for each category and subcategory and how this differs from past experience. A discussion of the factors that impacted the loss experience in the preceding period—for example, has the national bank or Federal savings association experienced higher than average default rates, loss rates or EADs. (e) The national bank's or Federal savings association's estimates compared against actual outcomes over a longer period. 4 5 6 1 2 3 4 5 6 Table 7 to § 3.173—General Disclosure for Counterparty Credit Risk of OTC Derivative Contracts, Repo-Style Transactions, and Eligible Margin Loans Qualitative Disclosures (a) The general qualitative disclosure requirement with respect to OTC derivatives, eligible margin loans, and repo-style transactions, including: (1) Discussion of methodology used to assign economic capital and credit limits for counterparty credit exposures; (2) Discussion of policies for securing collateral, valuing and managing collateral, and establishing credit reserves; (3) Discussion of the primary types of collateral taken; (4) Discussion of policies with respect to wrong-way risk exposures; and (5) Discussion of the impact of the amount of collateral the national bank or Federal savings association would have to provide if the national bank or Federal savings association were to receive a credit rating downgrade. Quantitative Disclosures (b) Gross positive fair value of contracts, netting benefits, netted current credit exposure, collateral held (including type, for example, cash, government securities), and net unsecured credit exposure. 1 2 (c) Notional amount of purchased and sold credit derivatives, segregated between use for the national bank's or Federal savings association's own credit portfolio and for its intermediation activities, including the distribution of the credit derivative products used, categorized further by protection bought and sold within each product group. (d) The estimate of alpha if the national bank or Federal savings association has received supervisory approval to estimate alpha. 1 2 Table 8 To § 3.173—Credit Risk Mitigation 1 2 Qualitative disclosures (a) The general qualitative disclosure requirement with respect to credit risk mitigation, including: (1) Policies and processes for, and an indication of the extent to which the national bank or Federal savings association uses, on- or off-balance sheet netting; (2) Policies and processes for collateral valuation and management; (3) A description of the main types of collateral taken by the national bank or Federal savings association; (4) The main types of guarantors/credit derivative counterparties and their creditworthiness; and (5) Information about (market or credit) risk concentrations within the mitigation taken. Quantitative disclosures (b) For each separately disclosed portfolio, the total exposure (after, where applicable, on- or off-balance sheet netting) that is covered by guarantees/credit derivatives. 1 2 Table 9 to § 3.173—Securitization Qualitative disclosures (a) The general qualitative disclosure requirement with respect to securitization (including synthetic securitizations), including a discussion of: (1) The national bank's or Federal savings association's objectives for securitizing assets, including the extent to which these activities transfer credit risk of the underlying exposures away from the national bank or Federal savings association to other entities and including the type of risks assumed and retained with resecuritization activity; 1 (2) The nature of the risks (e.g. liquidity risk) inherent in the securitized assets; (3) The roles played by the national bank or Federal savings association in the securitization process 2 (4) The processes in place to monitor changes in the credit and market risk of securitization exposures including how those processes differ for resecuritization exposures; (5) The national bank's or Federal savings association's policy for mitigating the credit risk retained through securitization and resecuritization exposures; and (6) The risk-based capital approaches that the national bank or Federal savings association follows for its securitization exposures including the type of securitization exposure to which each approach applies. (b) A list of: (1) The type of securitization SPEs that the national bank or Federal savings association, as sponsor, uses to securitize third-party exposures. The national bank or Federal savings association must indicate whether it has exposure to these SPEs, either on- or off- balance sheet; and (2) Affiliated entities: (i) That the national bank or Federal savings association manages or advises; and (ii) That invest either in the securitization exposures that the national bank or Federal savings association has securitized or in securitization SPEs that the national bank or Federal savings association sponsors. 3 (c) Summary of the national bank's or Federal savings association's accounting policies for securitization activities, including: (1) Whether the transactions are treated as sales or financings; (3) Methods and key assumptions and inputs applied in valuing retained or purchased interests; (4) Changes in methods and key assumptions and inputs from the previous period for valuing retained interests and impact of the changes; (5) Treatment of synthetic securitizations; (6) How exposures intended to be securitized are valued and whether they are recorded under subpart E of this part; and (7) Policies for recognizing liabilities on the balance sheet for arrangements that could require the national bank or Federal savings association to provide financial support for securitized assets. (d) An explanation of significant changes to any of the quantitative information set forth below since the last reporting period. Quantitative disclosures (e) The total outstanding exposures securitized 4 5 (f) For exposures securitized by the national bank or Federal savings association in securitizations that meet the operational criteria in § 3.141: (1) Amount of securitized assets that are impaired 6 (2) Losses recognized by the national bank or Federal savings association during the current period categorized by exposure type. 7 (g) The total amount of outstanding exposures intended to be securitized categorized by exposure type. (h) Aggregate amount of: (1) On-balance sheet securitization exposures retained or purchased categorized by exposure type; and (2) Off-balance sheet securitization exposures categorized by exposure type. (i) (1) Aggregate amount of securitization exposures retained or purchased and the associated capital requirements for these exposures, categorized between securitization and resecuritization exposures, further categorized into a meaningful number of risk weight bands and by risk-based capital approach (e.g. SA, SFA, or SSFA). (2) Aggregate amount disclosed separately by type of underlying exposure in the pool of any: (i) After-tax gain-on-sale on a securitization that has been deducted from common equity tier 1 capital: And (ii) Credit-enhancing interest-only strip that is assigned a 1,250 percent risk weight. (j) Summary of current year's securitization activity, including the amount of exposures securitized (by exposure type), and recognized gain or loss on sale by asset type. (k) Aggregate amount of resecuritization exposures retained or purchased categorized according to: (1) Exposures to which credit risk mitigation is applied and those not applied; and (2) Exposures to guarantors categorized according to guarantor creditworthiness categories or guarantor name. 1 2 3 4 5 6 7 Table 10 to § 3.173—Operational Risk Qualitative disclosures (a) The general qualitative disclosure requirement for operational risk. (b) Description of the AMA, including a discussion of relevant internal and external factors considered in the national bank's or Federal savings association's measurement approach. (c) A description of the use of insurance for the purpose of mitigating operational risk. Table 11 to § 3.173—Equities Not Subject to Subpart F of This Part Qualitative disclosures (a) The general qualitative disclosure requirement with respect to the equity risk of equity holdings not subject to subpart F of this part, including: (1) Differentiation between holdings on which capital gains are expected and those held for other objectives, including for relationship and strategic reasons; and (2) Discussion of important policies covering the valuation of and accounting for equity holdings not subject to subpart F of this part. This includes the accounting methodology and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices. Quantitative disclosures (b) Carrying value on the balance sheet of equity investments, as well as the fair value of those investments. (c) The types and nature of investments, including the amount that is: (1) Publicly traded; and (2) Non-publicly traded. (d) The cumulative realized gains (losses) arising from sales and liquidations in the reporting period. (e) (1) Total unrealized gains (losses) 1 (2) Total latent revaluation gains (losses) 2 (3) Any amounts of the above included in tier 1 and/or tier 2 capital. (f) Capital requirements categorized by appropriate equity groupings, consistent with the national bank's or Federal savings association's methodology, as well as the aggregate amounts and the type of equity investments subject to any supervisory transition regarding total capital requirements. 3 1 2 3 Table 12 to § 3.173—Interest Rate Risk for Non-Trading Activities Qualitative disclosures (a) The general qualitative disclosure requirement, including the nature of interest rate risk for non-trading activities and key assumptions, including assumptions regarding loan prepayments and behavior of non-maturity deposits, and frequency of measurement of interest rate risk for non-trading activities. Quantitative disclosures (b) The increase (decline) in earnings or economic value (or relevant measure used by management) for upward and downward rate shocks according to management's method for measuring interest rate risk for non-trading activities, categorized by currency (as appropriate). (c) Except as provided in § 3.172(b), a national bank or Federal savings association described in § 3.172(d) must make the disclosures described in Table 13 to § 3.173; provided, however, the disclosures required under this paragraph are required without regard to whether the national bank or Federal savings association has completed the parallel run process and has received notification from the OCC pursuant to § 3.121(d). The national bank or Federal savings association must make these disclosures publicly available beginning on January 1, 2015. Table 13 to § 3.173—Supplementary Leverage Ratio Dollar amounts in thousands Tril Bil Mil Thou Part 1: Summary comparison of accounting assets and total leverage exposure 1 Total consolidated assets as reported in published financial statements 2 Adjustment for investments in banking, financial, insurance or commercial entities that are consolidated for accounting purposes but outside the scope of regulatory consolidation 3 Adjustment for fiduciary assets recognized on balance sheet but excluded from total leverage exposure 4 Adjustment for derivative exposures 5 Adjustment for repo-style transactions 6 Adjustment for off-balance sheet exposures (that is, conversion to credit equivalent amounts of off-balance sheet exposures) 7 Other adjustments 8 Total leverage exposure Part 2: Supplementary leverage ratio On-balance sheet exposures 1 On-balance sheet assets (excluding on-balance sheet assets for repo-style transactions and derivative exposures, but including cash collateral received in derivative transactions) 2 LESS: Amounts deducted from tier 1 capital 3 Total on-balance sheet exposures (excluding on-balance sheet assets for repo-style transactions and derivative exposures, but including cash collateral received in derivative transactions) (sum of lines 1 and 2) Derivative exposures 4 Current exposure for derivative exposures (that is, net of cash variation margin) 5 Add-on amounts for potential future exposure (PFE) for derivative exposures 6 Gross-up for cash collateral posted if deducted from the on-balance sheet assets, except for cash variation margin 7 LESS: Deductions of receivable assets for cash variation margin posted in derivative transactions, if included in on-balance sheet assets 8 LESS: Exempted CCP leg of client-cleared transactions 9 Effective notional principal amount of sold credit protection 10 LESS: Effective notional principal amount offsets and PFE adjustments for sold credit protection 11 Total derivative exposures (sum of lines 4 to 10) Repo-style transactions 12 On-balance sheet assets for repo-style transactions, except include the gross value of receivables for reverse repurchase transactions. Exclude from this item the value of securities received in a security-for-security repo-style transaction where the securities lender has not sold or re-hypothecated the securities received. Include in this item the value of securities that qualified for sales treatment that must be reversed 13 LESS: Reduction of the gross value of receivables in reverse repurchase transactions by cash payables in repurchase transactions under netting agreements 14 Counterparty credit risk for all repo-style transactions 15 Exposure for repo-style transactions where a banking organization acts as an agent 16 Total exposures for repo-style transactions (sum of lines 12 to 15) Other off-balance sheet exposures 17 Off-balance sheet exposures at gross notional amounts 18 LESS: Adjustments for conversion to credit equivalent amounts 19 Off-balance sheet exposures (sum of lines 17 and 18) Capital and total leverage exposure 20 Tier 1 capital 21 Total leverage exposure (sum of lines 3, 11, 16 and 19) Supplementary leverage ratio 22 Supplementary leverage ratio (in percent) [78 FR 62157, 62273, Oct. 11, 2013, as amended at 79 FR 57743, Sept. 26, 2014; 80 FR 41418, July 15, 2015; 84 FR 4238, Feb. 14, 2019; 84 FR 59265, Nov. 1, 2019; 85 FR 4413, Jan. 24, 2020] §§ 3.174-3.200 [Reserved] Subpart F—Risk-Weighted Assets—Market Risk Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted. § 3.201 Purpose, applicability, and reservation of authority. (a) Purpose. (b) Applicability. (i) 10 percent or more of quarter-end total assets as reported on the most recent quarterly [Call Report or FR Y-9C]; or (ii) $1 billion or more. (2) The OCC may apply this subpart to any national bank or Federal savings association if the OCC deems it necessary or appropriate because of the level of market risk of the national bank or Federal savings association or to ensure safe and sound banking practices. (3) The OCC may exclude a national bank or Federal savings association that meets the criteria of paragraph (b)(1) of this section from application of this subpart if the OCC determines that the exclusion is appropriate based on the level of market risk of the national bank or Federal savings association and is consistent with safe and sound banking practices. (c) Reservation of authority. (2) If the OCC determines that the risk-based capital requirement calculated under this subpart by the national bank or Federal savings association for one or more covered positions or portfolios of covered positions is not commensurate with the risks associated with those positions or portfolios, the OCC may require the national bank or Federal savings association to assign a different risk-based capital requirement to the positions or portfolios that more accurately reflects the risk of the positions or portfolios. (3) The OCC may also require a national bank or Federal savings association to calculate risk-based capital requirements for specific positions or portfolios under this subpart, or under subpart D or subpart E of this part, as appropriate, to more accurately reflect the risks of the positions. (4) Nothing in this subpart limits the authority of the OCC 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 capital levels, or violations of law. § 3.202 Definitions. (a) Terms set forth in § 3.2 and used in this subpart have the definitions assigned thereto in § 3.2. (b) For the purposes of this subpart, the following terms are defined as follows: Backtesting Commodity position Corporate debt position Correlation trading position (1) A securitization position for which all or substantially all of the value of the underlying exposures is based on the credit quality of a single company for which a two-way market exists, or on commonly traded indices based on such exposures for which a two-way market exists on the indices; or (2) A position that is not a securitization position and that hedges a position described in paragraph (1) of this definition; and (3) A correlation trading position does not include: (i) A resecuritization position; (ii) A derivative of a securitization position that does not provide a pro rata share in the proceeds of a securitization tranche; or (iii) A securitization position for which the underlying assets or reference exposures are retail exposures, residential mortgage exposures, or commercial mortgage exposures. Covered position (1) A trading asset or trading liability (whether on- or off-balance sheet), 32 32 (i) The position is a trading position or hedges another covered position; 33 33 (ii) The position is free of any restrictive covenants on its tradability or the national bank or Federal savings association is able to hedge the material risk elements of the position in a two-way market; (2) A foreign exchange or commodity position, regardless of whether the position is a trading asset or trading liability (excluding any structural foreign currency positions that the national bank or Federal savings association chooses to exclude with prior supervisory approval); and (3) Notwithstanding paragraphs (1) and (2) of this definition, a covered position does not include: (i) An intangible asset, including any servicing asset; (ii) Any hedge of a trading position that the OCC determines to be outside the scope of the national bank's or Federal savings association's hedging strategy required in paragraph (a)(2) of § 3.203; (iii) Any position that, in form or substance, acts as a liquidity facility that provides support to asset-backed commercial paper; (iv) A credit derivative the national bank or Federal savings association recognizes as a guarantee for risk-weighted asset amount calculation purposes under subpart D or subpart E of this part; (v) Any position that is recognized as a credit valuation adjustment hedge under § 3.132(e)(5) or § 3.132(e)(6), except as provided in § 3.132(e)(6)(vii); (vi) Any equity position that is not publicly traded, other than a derivative that references a publicly traded equity and other than a position in an investment company as defined in and registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq. (vii) Any equity position that is not publicly traded, other than a derivative that references a publicly traded equity and other than a position in an entity not domiciled in the United States (or a political subdivision thereof) that is supervised and regulated in a manner similar to entities described in paragraph (3)(vi) of this definition; (viii) Any position a national bank or Federal savings association holds with the intent to securitize; or (ix) Any direct real estate holding. Debt position Default by a sovereign entity Equity position Event risk Foreign exchange position General market risk Hedge Idiosyncratic risk Incremental risk Market risk Resecuritization position (1) An on- or off-balance sheet exposure to a resecuritization; or (2) An exposure that directly or indirectly references a resecuritization exposure in paragraph (1) of this definition. Securitization (1) All or a portion of the credit risk of one or more underlying exposures is transferred to one or more third parties; (2) The credit risk associated with the underlying exposures has been separated into at least two tranches that reflect different levels of seniority; (3) Performance of the securitization exposures depends upon the performance of the underlying exposures; (4) All or substantially all of the underlying exposures are financial exposures (such as loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities); (5) For non-synthetic securitizations, the underlying exposures are not owned by an operating company; (6) The underlying exposures are not owned by a small business investment company described in section 302 of the Small Business Investment Act; (7) The underlying exposures are not owned by a firm an investment in which qualifies as a community development investment under section 24(Eleventh) of the National Bank Act; (8) The OCC may determine that a transaction in which the underlying exposures are owned by an investment firm that exercises substantially unfettered control over the size and composition of its assets, liabilities, and off-balance sheet exposures is not a securitization based on the transaction's leverage, risk profile, or economic substance; (9) The OCC may deem an exposure to a transaction that meets the definition of a securitization, notwithstanding paragraph (5), (6), or (7) of this definition, to be a securitization based on the transaction's leverage, risk profile, or economic substance; and (10) The transaction is not: (i) An investment fund; (ii) A collective investment fund (as defined in [12 CFR 208.34 (Board), 12 CFR 9.18 (OCC)]); (iii) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of ERISA, 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; or (iv) Registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq. Securitization position (1) An on-balance sheet or off-balance sheet credit exposure (including credit-enhancing representations and warranties) that arises from a securitization (including a resecuritization); or (2) An exposure that directly or indirectly references a securitization exposure described in paragraph (1) of this definition. Sovereign debt position Specific risk Structural position in a foreign currency (1) Subordinated debt, equity, or minority interest in a consolidated subsidiary that is denominated in a foreign currency; (2) Capital assigned to foreign branches that is denominated in a foreign currency; (3) A position related to an unconsolidated subsidiary or another item that is denominated in a foreign currency and that is deducted from the national bank's or Federal savings association's tier 1 or tier 2 capital; or (4) A position designed to hedge a national bank's or Federal savings association's capital ratios or earnings against the effect on paragraphs (1), (2), or (3) of this definition of adverse exchange rate movements. Term repo-style transaction Trading position Two-way market Value-at-Risk (VaR) [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 35258, July 22, 2019; 85 FR 4405, Jan. 24, 2020] § 3.203 Requirements for application of this subpart F. (a) Trading positions Identification of trading positions. (i) The extent to which a position, or a hedge of its material risks, can be marked-to-market daily by reference to a two-way market; and (ii) Possible impairments to the liquidity of a position or its hedge. (2) Trading and hedging strategies. (i) The trading strategy must articulate the expected holding period of, and the market risk associated with, each portfolio of trading positions. (ii) The hedging strategy must articulate for each portfolio of trading positions the level of market risk the national bank or Federal savings association is willing to accept and must detail the instruments, techniques, and strategies the national bank or Federal savings association will use to hedge the risk of the portfolio. (b) Management of covered positions Active management. (i) Marking positions to market or to model on a daily basis; (ii) Daily assessment of the national bank's or Federal savings association's ability to hedge position and portfolio risks, and of the extent of market liquidity; (iii) Establishment and daily monitoring of limits on positions by a risk control unit independent of the trading business unit; (iv) Daily monitoring by senior management of information described in paragraphs (b)(1)(i) through (b)(1)(iii) of this section; (v) At least annual reassessment of established limits on positions by senior management; and (vi) At least annual assessments by qualified personnel of the quality of market inputs to the valuation process, the soundness of key assumptions, the reliability of parameter estimation in pricing models, and the stability and accuracy of model calibration under alternative market scenarios. (2) Valuation of covered positions. (c) Requirements for internal models. (2) A national bank or Federal savings association must meet all of the requirements of this section on an ongoing basis. The national bank or Federal savings association must promptly notify the OCC when: (i) The national bank or Federal savings association plans to extend the use of a model that the OCC has approved under this subpart to an additional business line or product type; (ii) The national bank or Federal savings association makes any change to an internal model approved by the OCC under this subpart that would result in a material change in the national bank's or Federal savings association's risk-weighted asset amount for a portfolio of covered positions; or (iii) The national bank or Federal savings association makes any material change to its modeling assumptions. (3) The OCC may rescind its approval of the use of any internal model (in whole or in part) or of the determination of the approach under § 3.209(a)(2)(ii) for a national bank's or Federal savings association's modeled correlation trading positions and determine an appropriate capital requirement for the covered positions to which the model would apply, if the OCC determines that the model no longer complies with this subpart or fails to reflect accurately the risks of the national bank's or Federal savings association's covered positions. (4) The national bank or Federal savings association must periodically, but no less frequently than annually, review its internal models in light of developments in financial markets and modeling technologies, and enhance those models as appropriate to ensure that they continue to meet the OCC's standards for model approval and employ risk measurement methodologies that are most appropriate for the national bank's or Federal savings association's covered positions. (5) The national bank or Federal savings association must incorporate its internal models into its risk management process and integrate the internal models used for calculating its VaR-based measure into its daily risk management process. (6) The level of sophistication of a national bank's or Federal savings association's internal models must be commensurate with the complexity and amount of its covered positions. A national bank's or Federal savings association's internal models may use any of the generally accepted approaches, including but not limited to variance-covariance models, historical simulations, or Monte Carlo simulations, to measure market risk. (7) The national bank's or Federal savings association's internal models must properly measure all the material risks in the covered positions to which they are applied. (8) The national bank's or Federal savings association's internal models must conservatively assess the risks arising from less liquid positions and positions with limited price transparency under realistic market scenarios. (9) The national bank or Federal savings association must have a rigorous and well-defined process for re-estimating, re-evaluating, and updating its internal models to ensure continued applicability and relevance. (10) If a national bank or Federal savings association uses internal models to measure specific risk, the internal models must also satisfy the requirements in paragraph (b)(1) of § 3.207. (d) Control, oversight, and validation mechanisms. (2) The national bank or Federal savings association must validate its internal models initially and on an ongoing basis. The national bank's or Federal savings association's validation process must be independent of the internal models' development, implementation, and operation, or the validation process must be subjected to an independent review of its adequacy and effectiveness. Validation must include: (i) An evaluation of the conceptual soundness of (including developmental evidence supporting) the internal models; (ii) An ongoing monitoring process that includes verification of processes and the comparison of the national bank's or Federal savings association's model outputs with relevant internal and external data sources or estimation techniques; and (iii) An outcomes analysis process that includes backtesting. For internal models used to calculate the VaR-based measure, this process must include a comparison of the changes in the national bank's or Federal savings association's portfolio value that would have occurred were end-of-day positions to remain unchanged (therefore, excluding fees, commissions, reserves, net interest income, and intraday trading) with VaR-based measures during a sample period not used in model development. (3) The national bank or Federal savings association must stress test the market risk of its covered positions at a frequency appropriate to each portfolio, and in no case less frequently than quarterly. The stress tests must take into account concentration risk (including but not limited to concentrations in single issuers, industries, sectors, or markets), illiquidity under stressed market conditions, and risks arising from the national bank's or Federal savings association's trading activities that may not be adequately captured in its internal models. (4) The national bank or Federal savings association must have an internal audit function independent of business-line management that at least annually assesses the effectiveness of the controls supporting the national bank's or Federal savings association's market risk measurement systems, including the activities of the business trading units and independent risk control unit, compliance with policies and procedures, and calculation of the national bank's or Federal savings association's measures for market risk under this subpart. At least annually, the internal audit function must report its findings to the national bank's or Federal savings association's board of directors (or a committee thereof). (e) Internal assessment of capital adequacy. (f) Documentation. § 3.204 Measure for market risk. (a) General requirement. (2) Measure for market risk. de minimis de minimis (i) VaR-based capital requirement. (A) The previous day's VaR-based measure as calculated under § 3.205; or (B) The average of the daily VaR-based measures as calculated under § 3.205 for each of the preceding 60 business days multiplied by three, except as provided in paragraph (b) of this section. (ii) Stressed VaR-based capital requirement. (A) The most recent stressed VaR-based measure as calculated under § 3.206; or (B) The average of the stressed VaR-based measures as calculated under § 3.206 for each of the preceding 12 weeks multiplied by three, except as provided in paragraph (b) of this section. (iii) Specific risk add-ons. (iv) Incremental risk capital requirement. (v) Comprehensive risk capital requirement. (vi) Capital requirement for de minimis exposures. de minimis (A) The absolute value of the fair value of those de minimis (B) With the prior written approval of the OCC, the capital requirement for any de minimis (b) Backtesting. (1) Once each quarter, the national bank or Federal savings association must identify the number of exceptions (that is, the number of business days for which the actual daily net trading loss, if any, exceeds the corresponding daily VaR-based measure) that have occurred over the preceding 250 business days. (2) A national bank or Federal savings association must use the multiplication factor in Table 1 to § 3.204 that corresponds to the number of exceptions identified in paragraph (b)(1) of this section to determine its VaR-based capital requirement for market risk under paragraph (a)(2)(i) of this section and to determine its stressed VaR-based capital requirement for market risk under paragraph (a)(2)(ii) of this section until it obtains the next quarter's backtesting results, unless the OCC notifies the national bank or Federal savings association in writing that a different adjustment or other action is appropriate. Table 1 to § 3.204—Multiplication Factors Based on Results of Backtesting Number of exceptions Multiplication factor 4 or fewer 3.00 5 3.40 6 3.50 7 3.65 8 3.75 9 3.85 10 or more 4.00 § 3.205 VaR-based measure. (a) General requirement. (1) The national bank's or Federal savings association's internal models for calculating its VaR-based measure must use risk factors sufficient to measure the market risk inherent in all covered positions. The market risk categories must include, as appropriate, interest rate risk, credit spread risk, equity price risk, foreign exchange risk, and commodity price risk. For material positions in the major currencies and markets, modeling techniques must incorporate enough segments of the yield curve—in no case less than six—to capture differences in volatility and less than perfect correlation of rates along the yield curve. (2) The VaR-based measure may incorporate empirical correlations within and across risk categories, provided the national bank or Federal savings association validates and demonstrates the reasonableness of its process for measuring correlations. If the VaR-based measure does not incorporate empirical correlations across risk categories, the national bank or Federal savings association must add the separate measures from its internal models used to calculate the VaR-based measure for the appropriate market risk categories (interest rate risk, credit spread risk, equity price risk, foreign exchange rate risk, and/or commodity price risk) to determine its aggregate VaR-based measure. (3) The VaR-based measure must include the risks arising from the nonlinear price characteristics of options positions or positions with embedded optionality and the sensitivity of the fair value of the positions to changes in the volatility of the underlying rates, prices, or other material risk factors. A national bank or Federal savings association with a large or complex options portfolio must measure the volatility of options positions or positions with embedded optionality by different maturities and/or strike prices, where material. (4) The national bank or Federal savings association must be able to justify to the satisfaction of the OCC the omission of any risk factors from the calculation of its VaR-based measure that the national bank or Federal savings association uses in its pricing models. (5) The national bank or Federal savings association must demonstrate to the satisfaction of the OCC the appropriateness of any proxies used to capture the risks of the national bank's or Federal savings association's actual positions for which such proxies are used. (b) Quantitative requirements for VaR-based measure. (2) The VaR-based measure must be based on a historical observation period of at least one year. Data used to determine the VaR-based measure must be relevant to the national bank's or Federal savings association's actual exposures and of sufficient quality to support the calculation of risk-based capital requirements. The national bank or Federal savings association must update data sets at least monthly or more frequently as changes in market conditions or portfolio composition warrant. For a national bank or Federal savings association that uses a weighting scheme or other method for the historical observation period, the national bank or Federal savings association must either: (i) Use an effective observation period of at least one year in which the average time lag of the observations is at least six months; or (ii) Demonstrate to the OCC that its weighting scheme is more effective than a weighting scheme with an average time lag of at least six months representing the volatility of the national bank's or Federal savings association's trading portfolio over a full business cycle. A national bank or Federal savings association using this option must update its data more frequently than monthly and in a manner appropriate for the type of weighting scheme. (c) A national bank or Federal savings association must divide its portfolio into a number of significant subportfolios approved by the OCC for subportfolio backtesting purposes. These subportfolios must be sufficient to allow the national bank or Federal savings association and the OCC to assess the adequacy of the VaR model at the risk factor level; the OCC will evaluate the appropriateness of these subportfolios relative to the value and composition of the national bank's or Federal savings association's covered positions. The national bank or Federal savings association must retain and make available to the OCC the following information for each subportfolio for each business day over the previous two years (500 business days), with no more than a 60-day lag: (1) A daily VaR-based measure for the subportfolio calibrated to a one-tail, 99.0 percent confidence level; (2) The daily profit or loss for the subportfolio (that is, the net change in price of the positions held in the portfolio at the end of the previous business day); and (3) The p-value of the profit or loss on each day (that is, the probability of observing a profit that is less than, or a loss that is greater than, the amount reported for purposes of paragraph (c)(2) of this section based on the model used to calculate the VaR-based measure described in paragraph (c)(1) of this section). § 3.206 Stressed VaR-based measure. (a) General requirement. (b) Quantitative requirements for stressed VaR-based measure. (2) The stressed VaR-based measure must be calculated at least weekly and be no less than the national bank's or Federal savings association's VaR-based measure. (3) A national bank or Federal savings association must have policies and procedures that describe how it determines the period of significant financial stress used to calculate the national bank's or Federal savings association's stressed VaR-based measure under this section and must be able to provide empirical support for the period used. The national bank or Federal savings association must obtain the prior approval of the OCC for, and notify the OCC if the national bank or Federal savings association makes any material changes to, these policies and procedures. The policies and procedures must address: (i) How the national bank or Federal savings association links the period of significant financial stress used to calculate the stressed VaR-based measure to the composition and directional bias of its current portfolio; and (ii) The national bank's or Federal savings association's process for selecting, reviewing, and updating the period of significant financial stress used to calculate the stressed VaR-based measure and for monitoring the appropriateness of the period to the national bank's or Federal savings association's current portfolio. (4) Nothing in this section prevents the OCC from requiring a national bank or Federal savings association to use a different period of significant financial stress in the calculation of the stressed VaR-based measure. § 3.207 Specific risk. (a) General requirement. (b) Modeled specific risk. (1) Requirements for specific risk modeling. (A) Explain the historical price variation in the portfolio; (B) Be responsive to changes in market conditions; (C) Be robust to an adverse environment, including signaling rising risk in an adverse environment; and (D) Capture all material components of specific risk for the debt and equity positions in the portfolio. Specifically, the internal models must: ( 1 ( 2 (ii) If a national bank or Federal savings association calculates an incremental risk measure for a portfolio of debt or equity positions under section 208 of this subpart, the national bank or Federal savings association is not required to capture default and credit migration risks in its internal models used to measure the specific risk of those portfolios. (2) Specific risk fully modeled for one or more portfolios. (c) Specific risk not modeled. (2) A national bank or Federal savings association must calculate a specific risk add-on under the standardized measurement method as described in § 3.210 for all of its securitization positions that are not modeled under § 3.209. § 3.208 Incremental risk. (a) General requirement. (b) Requirements for incremental risk modeling. (1) Measure incremental risk over a one-year time horizon and at a one-tail, 99.9 percent confidence level, either under the assumption of a constant level of risk, or under the assumption of constant positions. (i) A constant level of risk assumption means that the national bank or Federal savings association rebalances, or rolls over, its trading positions at the beginning of each liquidity horizon over the one-year horizon in a manner that maintains the national bank's or Federal savings association's initial risk level. The national bank or Federal savings association must determine the frequency of rebalancing in a manner consistent with the liquidity horizons of the positions in the portfolio. The liquidity horizon of a position or set of positions is the time required for a national bank or Federal savings association to reduce its exposure to, or hedge all of its material risks of, the position(s) in a stressed market. The liquidity horizon for a position or set of positions may not be less than the shorter of three months or the contractual maturity of the position. (ii) A constant position assumption means that the national bank or Federal savings association maintains the same set of positions throughout the one-year horizon. If a national bank or Federal savings association uses this assumption, it must do so consistently across all portfolios. (iii) A national bank's or Federal savings association's selection of a constant position or a constant risk assumption must be consistent between the national bank's or Federal savings association's incremental risk model and its comprehensive risk model described in section 209 of this subpart, if applicable. (iv) A national bank's or Federal savings association's treatment of liquidity horizons must be consistent between the national bank's or Federal savings association's incremental risk model and its comprehensive risk model described in section 209, if applicable. (2) Recognize the impact of correlations between default and migration events among obligors. (3) Reflect the effect of issuer and market concentrations, as well as concentrations that can arise within and across product classes during stressed conditions. (4) Reflect netting only of long and short positions that reference the same financial instrument. (5) Reflect any material mismatch between a position and its hedge. (6) Recognize the effect that liquidity horizons have on dynamic hedging strategies. In such cases, a national bank or Federal savings association must: (i) Choose to model the rebalancing of the hedge consistently over the relevant set of trading positions; (ii) Demonstrate that the inclusion of rebalancing results in a more appropriate risk measurement; (iii) Demonstrate that the market for the hedge is sufficiently liquid to permit rebalancing during periods of stress; and (iv) Capture in the incremental risk model any residual risks arising from such hedging strategies. (7) Reflect the nonlinear impact of options and other positions with material nonlinear behavior with respect to default and migration changes. (8) Maintain consistency with the national bank's or Federal savings association's internal risk management methodologies for identifying, measuring, and managing risk. (c) Calculation of incremental risk capital requirement. (1) The average of the incremental risk measures over the previous 12 weeks; or (2) The most recent incremental risk measure. § 3.209 Comprehensive risk. (a) General requirement. (2) A national bank or Federal savings association that measures the price risk of a portfolio of correlation trading positions using internal models must calculate at least weekly a comprehensive risk measure that captures all price risk according to the requirements of this section. The comprehensive risk measure is either: (i) The sum of: (A) The national bank's or Federal savings association's modeled measure of all price risk determined according to the requirements in paragraph (b) of this section; and (B) A surcharge for the national bank's or Federal savings association's modeled correlation trading positions equal to the total specific risk add-on for such positions as calculated under section 210 of this subpart multiplied by 8.0 percent; or (ii) With approval of the OCC and provided the national bank or Federal savings association has met the requirements of this section for a period of at least one year and can demonstrate the effectiveness of the model through the results of ongoing model validation efforts including robust benchmarking, the greater of: (A) The national bank's or Federal savings association's modeled measure of all price risk determined according to the requirements in paragraph (b) of this section; or (B) The total specific risk add-on that would apply to the bank's modeled correlation trading positions as calculated under section 210 of this subpart multiplied by 8.0 percent. (b) Requirements for modeling all price risk. (1) The internal model must measure comprehensive risk over a one-year time horizon at a one-tail, 99.9 percent confidence level, either under the assumption of a constant level of risk, or under the assumption of constant positions. (2) The model must capture all material price risk, including but not limited to the following: (i) The risks associated with the contractual structure of cash flows of the position, its issuer, and its underlying exposures; (ii) Credit spread risk, including nonlinear price risks; (iii) The volatility of implied correlations, including nonlinear price risks such as the cross-effect between spreads and correlations; (iv) Basis risk; (v) Recovery rate volatility as it relates to the propensity for recovery rates to affect tranche prices; and (vi) To the extent the comprehensive risk measure incorporates the benefits of dynamic hedging, the static nature of the hedge over the liquidity horizon must be recognized. In such cases, a national bank or Federal savings association must: (A) Choose to model the rebalancing of the hedge consistently over the relevant set of trading positions; (B) Demonstrate that the inclusion of rebalancing results in a more appropriate risk measurement; (C) Demonstrate that the market for the hedge is sufficiently liquid to permit rebalancing during periods of stress; and (D) Capture in the comprehensive risk model any residual risks arising from such hedging strategies; (3) The national bank or Federal savings association must use market data that are relevant in representing the risk profile of the national bank's or Federal savings association's correlation trading positions in order to ensure that the national bank or Federal savings association fully captures the material risks of the correlation trading positions in its comprehensive risk measure in accordance with this section; and (4) The national bank or Federal savings association must be able to demonstrate that its model is an appropriate representation of comprehensive risk in light of the historical price variation of its correlation trading positions. (c) Requirements for stress testing. (i) Default rates; (ii) Recovery rates; (iii) Credit spreads; (iv) Correlations of underlying exposures; and (v) Correlations of a correlation trading position and its hedge. (2) Other requirements. (ii) A national bank or Federal savings association must report to the OCC promptly any instances where the stress tests indicate any material deficiencies in the comprehensive risk model. (d) Calculation of comprehensive risk capital requirement. (1) The average of the comprehensive risk measures over the previous 12 weeks; or (2) The most recent comprehensive risk measure. § 3.210 Standardized measurement method for specific risk. (a) General requirement. (1) The specific risk add-on for an individual debt or securitization position that represents sold credit protection is capped at the notional amount of the credit derivative contract. The specific risk add-on for an individual debt or securitization position that represents purchased credit protection is capped at the current fair value of the transaction plus the absolute value of the present value of all remaining payments to the protection seller under the transaction. This sum is equal to the value of the protection leg of the transaction. (2) For debt, equity, or securitization positions that are derivatives with linear payoffs, a national bank or Federal savings association must assign a specific risk-weighting factor to the fair value of the effective notional amount of the underlying instrument or index portfolio, except for a securitization position for which the national bank or Federal savings association directly calculates a specific risk add-on using the SFA in paragraph (b)(2)(vii)(B) of this section. A swap must be included as an effective notional position in the underlying instrument or portfolio, with the receiving side treated as a long position and the paying side treated as a short position. For debt, equity, or securitization positions that are derivatives with nonlinear payoffs, a national bank or Federal savings association must risk weight the fair value of the effective notional amount of the underlying instrument or portfolio multiplied by the derivative's delta. (3) For debt, equity, or securitization positions, a national bank or Federal savings association may net long and short positions (including derivatives) in identical issues or identical indices. A national bank or Federal savings association may also net positions in depositary receipts against an opposite position in an identical equity in different markets, provided that the national bank or Federal savings association includes the costs of conversion. (4) A set of transactions consisting of either a debt position and its credit derivative hedge or a securitization position and its credit derivative hedge has a specific risk add-on of zero if: (i) The debt or securitization position is fully hedged by a total return swap (or similar instrument where there is a matching of swap payments and changes in fair value of the debt or securitization position); (ii) There is an exact match between the reference obligation of the swap and the debt or securitization position; (iii) There is an exact match between the currency of the swap and the debt or securitization position; and (iv) There is either an exact match between the maturity date of the swap and the maturity date of the debt or securitization position; or, in cases where a total return swap references a portfolio of positions with different maturity dates, the total return swap maturity date must match the maturity date of the underlying asset in that portfolio that has the latest maturity date. (5) The specific risk add-on for a set of transactions consisting of either a debt position and its credit derivative hedge or a securitization position and its credit derivative hedge that does not meet the criteria of paragraph (a)(4) of this section is equal to 20.0 percent of the capital requirement for the side of the transaction with the higher specific risk add-on when: (i) The credit risk of the position is fully hedged by a credit default swap or similar instrument; (ii) There is an exact match between the reference obligation of the credit derivative hedge and the debt or securitization position; (iii) There is an exact match between the currency of the credit derivative hedge and the debt or securitization position; and (iv) There is either an exact match between the maturity date of the credit derivative hedge and the maturity date of the debt or securitization position; or, in the case where the credit derivative hedge has a standard maturity date: (A) The maturity date of the credit derivative hedge is within 30 business days of the maturity date of the debt or securitization position; or (B) For purchased credit protection, the maturity date of the credit derivative hedge is later than the maturity date of the debt or securitization position, but is no later than the standard maturity date for that instrument that immediately follows the maturity date of the debt or securitization position. The maturity date of the credit derivative hedge may not exceed the maturity date of the debt or securitization position by more than 90 calendar days. (6) The specific risk add-on for a set of transactions consisting of either a debt position and its credit derivative hedge or a securitization position and its credit derivative hedge that does not meet the criteria of either paragraph (a)(4) or (a)(5) of this section, but in which all or substantially all of the price risk has been hedged, is equal to the specific risk add-on for the side of the transaction with the higher specific risk add-on. (b) Debt and securitization positions. (2) For the purpose of this section, the appropriate specific risk-weighting factors include: (i) Sovereign debt positions. Table 1 to § 3.210—Specific Risk-Weighting Factors for Sovereign Debt Positions Specific risk-weighting factor (in percent) CRC: 0-1 0.0 2-3 Remaining contractual maturity of 6 months or less 0.25 Remaining contractual maturity of greater than 6 and up to and including 24 months 1.0 Remaining contractual maturity exceeds 24 months 1.6 4-6 8.0 7 12.0 OECD Member with No CRC 0.0 Non-OECD Member with No CRC 8.0 Sovereign Default 12.0 (B) Notwithstanding paragraph (b)(2)(i)(A) of this section, a national bank or Federal savings association may assign to a sovereign debt position a specific risk-weighting factor that is lower than the applicable specific risk-weighting factor in Table 1 to § 3.210 if: ( 1 ( 2 ( 3 (C) A national bank or Federal savings association must assign a 12.0 percent specific risk-weighting factor to a sovereign debt position immediately upon determination a default has occurred; or if a default has occurred within the previous five years. (D) A national bank or Federal savings association must assign a 0.0 percent specific risk-weighting factor to a sovereign debt position if the sovereign entity is a member of the OECD and does not have a CRC assigned to it, except as provided in paragraph (b)(2)(i)(C) of this section. (E) A national bank or Federal savings association must assign an 8.0 percent specific risk-weighting factor to a sovereign debt position if the sovereign is not a member of the OECD and does not have a CRC assigned to it, except as provided in paragraph (b)(2)(i)(C) of this section. (ii) Certain supranational entity and multilateral development bank debt positions. (iii) GSE debt positions. (iv) Depository institution, foreign bank, and credit union debt positions. Table 2 to § 3.210—Specific Risk-Weighting Factors for Depository Institution, Foreign Bank, and Credit Union Debt Positions Specific risk-weighting factor (in percent) CRC 0-2 or OECD Member with No CRC Remaining contractual maturity of 6 months or less 0.25 Remaining contractual maturity of greater than 6 and up to and including 24 months 1.0 Remaining contractual maturity exceeds 24 months 1.6 CRC 3 8.0 CRC 4-7 12.0 Non-OECD Member with No CRC 8.0 Sovereign Default 12.0 (B) A national bank or Federal savings association must assign a specific risk-weighting factor of 8.0 percent to a debt position that is an exposure to a depository institution or a foreign bank that is includable in the depository institution's or foreign bank's regulatory capital and that is not subject to deduction as a reciprocal holding under § 3.22. (C) A national bank or Federal savings association must assign a 12.0 percent specific risk-weighting factor to a debt position that is an exposure to a foreign bank immediately upon determination that a default by the foreign bank's home country has occurred or if a default by the foreign bank's home country has occurred within the previous five years. (v) PSE debt positions. (B) A national bank or Federal savings association may assign a lower specific risk-weighting factor than would otherwise apply under Tables 3 and 4 of this section to a debt position that is an exposure to a foreign PSE if: ( 1 ( 2 (C) A national bank or Federal savings association must assign a 12.0 percent specific risk-weighting factor to a PSE debt position immediately upon determination that a default by the PSE's home country has occurred or if a default by the PSE's home country has occurred within the previous five years. Table 3 to § 3.210—Specific Risk-Weighting Factors for PSE General Obligation Debt Positions General obligation specific risk-weighting factor (in percent) CRC 0-2 or OECD Member with No CRC Remaining contractual maturity of 6 months or less 0.25 Remaining contractual maturity of greater than 6 and up to and including 24 months 1.0 Remaining contractual maturity exceeds 24 months 1.6 CRC 3 8.0 CRC 4-7 12.0 Non-OECD Member with No CRC 8.0 Sovereign Default 12.0 Table 4 to § 3.210—Specific Risk-Weighting Factors for PSE Revenue Obligation Debt Positions Revenue obligation specific risk-weighting factor (in percent) CRC 0-1 or OECD Member with No CRC Remaining contractual maturity of 6 months or less 0.25 Remaining contractual maturity of greater than 6 and up to and including 24 months 1.0 Remaining contractual maturity exceeds 24 months 1.6 CRC 2-3 8.0 CRC 4-7 12.0 Non-OECD Member with No CRC 8.0 Sovereign Default 12.0 (vi) Corporate debt positions. (A) Investment grade methodology. 1 1 Table 5 to § 3.210—Specific Risk-Weighting Factors for Corporate Debt Positions Under the Investment Grade Methodology Category Remaining contractual maturity Specific risk-weighting factor Investment Grade 6 months or less 0.50 Greater than 6 and up to and including 24 months 2.00 Greater than 24 months 4.00 Non-investment Grade 12.00 ( 2 (B) Limitations. 1 ( 2 (vii) Securitization positions. 1 ( 2 ( 3 (B) SFA. (C) SSFA. (D) N th -to-default credit derivatives. th th ( 1 th ( i th ( ii th th ( 2 th (c) Modeled correlation trading positions. (1) The sum of the national bank's or Federal savings association's specific risk add-ons for each net long correlation trading position calculated under this section; or (2) The sum of the national bank's or Federal savings association's specific risk add-ons for each net short correlation trading position calculated under this section. (d) Non-modeled securitization positions. (1) The sum of the national bank's or Federal savings association's specific risk add-ons for each net long securitization position calculated under this section; or (2) The sum of the national bank's or Federal savings association's specific risk add-ons for each net short securitization position calculated under this section. (e) Equity positions. (1) The national bank or Federal savings association must multiply the absolute value of the current fair value of each net long or net short equity position by a specific risk-weighting factor of 8.0 percent. For equity positions that are index contracts comprising a well-diversified portfolio of equity instruments, the absolute value of the current fair value of each net long or net short position is multiplied by a specific risk-weighting factor of 2.0 percent. 34 34 (2) For equity positions arising from the following futures-related arbitrage strategies, a national bank or Federal savings association may apply a 2.0 percent specific risk-weighting factor to one side (long or short) of each position with the opposite side exempt from an additional capital requirement: (i) Long and short positions in exactly the same index at different dates or in different market centers; or (ii) Long and short positions in index contracts at the same date in different, but similar indices. (3) For futures contracts on main indices that are matched by offsetting positions in a basket of stocks comprising the index, a national bank or Federal savings association may apply a 2.0 percent specific risk-weighting factor to the futures and stock basket positions (long and short), provided that such trades are deliberately entered into and separately controlled, and that the basket of stocks is comprised of stocks representing at least 90.0 percent of the capitalization of the index. A main index refers to the Standard & Poor's 500 Index, the FTSE All-World Index, and any other index for which the national bank or Federal savings association can demonstrate to the satisfaction of the OCC that the equities represented in the index have liquidity, depth of market, and size of bid-ask spreads comparable to equities in the Standard & Poor's 500 Index and FTSE All-World Index. (f) Due diligence requirements for securitization positions. (2) A national bank or Federal savings association must demonstrate its comprehensive understanding for each securitization position by: (i) Conducting an analysis of the risk characteristics of a securitization position prior to acquiring the position and document such analysis within three business days after acquiring position, considering: (A) Structural features of the securitization that would materially impact the performance of the position, for example, the contractual cash flow waterfall, waterfall-related triggers, credit enhancements, liquidity enhancements, fair value triggers, the performance of organizations that service the position, and deal-specific definitions of default; (B) Relevant information regarding the performance of the underlying credit exposure(s), for example, the percentage of loans 30, 60, and 90 days past due; default rates; prepayment rates; loans in foreclosure; property types; occupancy; average credit score or other measures of creditworthiness; average loan-to-value ratio; and industry and geographic diversification data on the underlying exposure(s); (C) Relevant market data of the securitization, for example, bid-ask spreads, most recent sales price and historical price volatility, trading volume, implied market rating, and size, depth and concentration level of the market for the securitization; and (D) For resecuritization positions, performance information on the underlying securitization exposures, for example, the issuer name and credit quality, and the characteristics and performance of the exposures underlying the securitization exposures. (ii) On an on-going basis (no less frequently than quarterly), evaluating, reviewing, and updating as appropriate the analysis required under paragraph (f)(1) of this section for each securitization position. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 84 FR 35258, July 22, 2019; 85 FR 4405, Jan. 24, 2020] § 3.211 Simplified supervisory formula approach (SSFA). (a) General requirements. (b) SSFA parameters. (1) K G G G (2) Parameter W is expressed as a decimal value between zero and one. Parameter W is the ratio of the sum of the dollar amounts of any underlying exposures of the securitization that meet any of the criteria as set forth in paragraphs (b)(2)(i) through (vi) of this section to the balance, measured in dollars, of underlying exposures: (i) Ninety days or more past due; (ii) Subject to a bankruptcy or insolvency proceeding; (iii) In the process of foreclosure; (iv) Held as real estate owned; (v) Has contractually deferred payments for 90 days or more, other than principal or interest payments deferred on: (A) Federally-guaranteed student loans, in accordance with the terms of those guarantee programs; or (B) Consumer loans, including non-federally-guaranteed student loans, provided that such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed that provide for period(s) of deferral that are not initiated based on changes in the creditworthiness of the borrower; or (vi) Is in default. (3) Parameter A is the attachment point for the position, which represents the threshold at which credit losses will first be allocated to the position. Except as provided in § 3.210(b)(2)(vii)(D) for n th (4) Parameter D is the detachment point for the position, which represents the threshold at which credit losses of principal allocated to the position would result in a total loss of principal. Except as provided in § 3.210(b)(2)(vii)(D) for n th pari passu (5) A supervisory calibration parameter, p, is equal to 0.5 for securitization positions that are not resecuritization positions and equal to 1.5 for resecuritization positions. (c) Mechanics of the SSFA. G A G A A (1) When the detachment point, parameter D, for a securitization position is less than or equal to K A (2) When the attachment point, parameter A, for a securitization position is greater than or equal to K A (3) When A is less than K A A SSFA (i) The weight assigned to 1.00 equals § 3.212 Market risk disclosures. (a) Scope. (b) Disclosure policy. (c) Quantitative disclosures. (i) The high, low, and mean VaR-based measures over the reporting period and the VaR-based measure at period-end; (ii) The high, low, and mean stressed VaR-based measures over the reporting period and the stressed VaR-based measure at period-end; (iii) The high, low, and mean incremental risk capital requirements over the reporting period and the incremental risk capital requirement at period-end; (iv) The high, low, and mean comprehensive risk capital requirements over the reporting period and the comprehensive risk capital requirement at period-end, with the period-end requirement broken down into appropriate risk classifications (for example, default risk, migration risk, correlation risk); (v) Separate measures for interest rate risk, credit spread risk, equity price risk, foreign exchange risk, and commodity price risk used to calculate the VaR-based measure; and (vi) A comparison of VaR-based estimates with actual gains or losses experienced by the national bank or Federal savings association, with an analysis of important outliers. (2) In addition, the national bank or Federal savings association must disclose publicly the following information at least quarterly: (i) The aggregate amount of on-balance sheet and off-balance sheet securitization positions by exposure type; and (ii) The aggregate amount of correlation trading positions. (d) Qualitative disclosures. (1) The composition of material portfolios of covered positions; (2) The national bank's or Federal savings association's valuation policies, procedures, and methodologies for covered positions including, for securitization positions, the methods and key assumptions used for valuing such positions, any significant changes since the last reporting period, and the impact of such change; (3) The characteristics of the internal models used for purposes of this subpart. For the incremental risk capital requirement and the comprehensive risk capital requirement, this must include: (i) The approach used by the national bank or Federal savings association to determine liquidity horizons; (ii) The methodologies used to achieve a capital assessment that is consistent with the required soundness standard; and (iii) The specific approaches used in the validation of these models; (4) A description of the approaches used for validating and evaluating the accuracy of internal models and modeling processes for purposes of this subpart; (5) For each market risk category (that is, interest rate risk, credit spread risk, equity price risk, foreign exchange risk, and commodity price risk), a description of the stress tests applied to the positions subject to the factor; (6) The results of the comparison of the national bank's or Federal savings association's internal estimates for purposes of this subpart with actual outcomes during a sample period not used in model development; (7) The soundness standard on which the national bank's or Federal savings association's internal capital adequacy assessment under this subpart is based, including a description of the methodologies used to achieve a capital adequacy assessment that is consistent with the soundness standard; (8) A description of the national bank's or Federal savings association's processes for monitoring changes in the credit and market risk of securitization positions, including how those processes differ for resecuritization positions; and (9) A description of the national bank's or Federal savings association's policy governing the use of credit risk mitigation to mitigate the risks of securitization and resecuritization positions. §§ 3.213-3.299 [Reserved] Subpart G—Transition Provisions Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted. § 3.300 Transitions. (a) Capital conservation and countercyclical capital buffer. (2) Beginning January 1, 2016 through December 31, 2018 a national bank's or Federal savings association's maximum payout ratio shall be determined as set forth in Table 1 to § 3.300. Table 1 to § 3.300 Transition Capital conservation buffer Maximum payout ratio (as a percentage of eligible retained income) Calendar year 2016 Greater than 0.625 percent (plus 25 percent of any applicable countercyclical capital buffer amount) No payout ratio limitation applies under this section. Less than or equal to 0.625 percent (plus 25 percent of any applicable countercyclical capital buffer amount), and greater than 0.469 percent (plus 17.25 percent of any applicable countercyclical capital buffer amount) 60 percent. Less than or equal to 0.469 percent (plus 17.25 percent of any applicable countercyclical capital buffer amount), and greater than 0.313 percent (plus 12.5 percent of any applicable countercyclical capital buffer amount) 40 percent. Less than or equal to 0.313 percent (plus 12.5 percent of any applicable countercyclical capital buffer amount), and greater than 0.156 percent (plus 6.25 percent of any applicable countercyclical capital buffer amount) 20 percent. Less than or equal to 0.156 percent (plus 6.25 percent of any applicable countercyclical capital buffer amount) 0 percent. Calendar year 2017 Greater than 1.25 percent (plus 50 percent of any applicable countercyclical capital buffer amount) No payout ratio limitation applies under this section. Less than or equal to 1.25 percent (plus 50 percent of any applicable countercyclical capital buffer amount), and greater than 0.938 percent (plus 37.5 percent of any applicable countercyclical capital buffer amount) 60 percent. Less than or equal to 0.938 percent (plus 37.5 percent of any applicable countercyclical capital buffer amount), and greater than 0.625 percent (plus 25 percent of any applicable countercyclical capital buffer amount) 40 percent. Less than or equal to 0.625 percent (plus 25 percent of any applicable countercyclical capital buffer amount), and greater than 0.313 percent (plus 12.5 percent of any applicable countercyclical capital buffer amount) 20 percent. Less than or equal to 0.313 percent (plus 12.5 percent of any applicable countercyclical capital buffer amount) 0 percent. Calendar year 2018 Greater than 1.875 percent (plus 75 percent of any applicable countercyclical capital buffer amount) No payout ratio limitation applies under this section. Less than or equal to 1.875 percent (plus 75 percent of any applicable countercyclical capital buffer amount), and greater than 1.406 percent (plus 56.25 percent of any applicable countercyclical capital buffer amount) 60 percent. Less than or equal to 1.406 percent (plus 56.25 percent of any applicable countercyclical capital buffer amount), and greater than 0.938 percent (plus 37.5 percent of any applicable countercyclical capital buffer amount) 40 percent. Less than or equal to 0.938 percent (plus 37.5 percent of any applicable countercyclical capital buffer amount), and greater than 0.469 percent (plus 18.75 percent of any applicable countercyclical capital buffer amount) 20 percent. Less than or equal to 0.469 percent (plus 18.75 percent of any applicable countercyclical capital buffer amount) 0 percent. (b) [Reserved] (c) Non-qualifying capital instruments. (1)-(3) [Reserved] (4) Depository institutions. (ii) Table 9 to § 3.300 applies separately to tier 1 and tier 2 non-qualifying capital instruments. (iii) The amount of non-qualifying capital instruments that cannot be included in additional tier 1 capital under this section may be included in tier 2 capital without limitation, provided that the instruments meet the criteria for tier 2 capital instruments under § 3.20(d). Table 9 to § 3.300 Transition period (calendar year) Percentage of non-qualifying capital instruments includable in additional tier 1 or tier 2 capital Calendar year 2014 80 Calendar year 2015 70 Calendar year 2016 60 Calendar year 2017 50 Calendar year 2018 40 Calendar year 2019 30 Calendar year 2020 20 Calendar year 2021 10 Calendar year 2022 and thereafter 0 (d) [Reserved] (e) Prompt corrective action. (f) A national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association may apply the treatment under §§ 3.21 and 3.22(c)(2), (5), (6), and (d)(2) applicable to an advanced approaches national bank or Federal savings association during the calendar quarter beginning January 1, 2020. During the quarter beginning January 1, 2020, a national bank or Federal savings association that makes such an election must deduct 80 percent of the amount otherwise required to be deducted under § 3.22(d)(2) and must apply a 100 percent risk weight to assets not deducted under § 3.22(d)(2). In addition, during the quarter beginning January 1, 2020, a national bank or Federal savings association that makes such an election must include in its regulatory capital 20 percent of any minority interest that exceeds the amount of minority interest includable in regulatory capital under § 3.21 as it applies to an advanced approaches national bank or Federal savings association. A national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association must apply the treatment under §§ 3.21 and 3.22 applicable to a national bank or Federal savings association that is not an advanced approaches national bank or Federal savings association beginning April 1, 2020, and thereafter. (g) SA-CCR. (h) Default fund contributions. [78 FR 62157, 62273, Oct. 11, 2013, as amended at 82 FR 55315, Nov. 21, 2017; 84 FR 35258, July 22, 2019; 84 FR 61807, Nov. 13, 2019; 85 FR 4414, Jan. 24, 2020] § 3.301 Current Expected Credit Losses (CECL) transition. (a) CECL transition provision. (2) Except as provided in paragraph (d) of this section, a national bank or Federal savings association that elects to use the CECL transition provision must elect to use the CECL transition provision in the first Call Report that includes CECL filed by the national bank or Federal savings association after it adopts CECL. (3) A national bank or Federal savings association that does not elect to use the CECL transition provision as of the first Call Report that includes CECL filed as described in paragraph (a)(2) of this section may not elect to use the CECL transition provision in subsequent reporting periods. (b) Definitions. (1) Transition period (2) CECL transitional amount (3) DTA transitional amount (4) AACL transitional amount (5) Eligible credit reserves transitional amount (c) Calculation of the three-year CECL transition provision. (i) Increase retained earnings by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase retained earnings by fifty percent of its CECL transitional amount during the second year of the transition period, and increase retained earnings by twenty-five percent of its CECL transitional amount during the third year of the transition period; (ii) Decrease amounts of DTAs arising from temporary differences by seventy-five percent of its DTA transitional amount during the first year of the transition period, decrease amounts of DTAs arising from temporary differences by fifty percent of its DTA transitional amount during the second year of the transition period, and decrease amounts of DTAs arising from temporary differences by twenty-five percent of its DTA transitional amount during the third year of the transition period; (iii) Decrease amounts of AACL by seventy-five percent of its AACL transitional amount during the first year of the transition period, decrease amounts of AACL by fifty percent of its AACL transitional amount during the second year of the transition period, and decrease amounts of AACL by twenty-five percent of its AACL transitional amount during the third year of the transition period; and (iv) Increase average total consolidated assets as reported on the Call Report for purposes of the leverage ratio by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase average total consolidated assets as reported on the Call Report for purposes of the leverage ratio by fifty percent of its CECL transitional amount during the second year of the transition period, and increase average total consolidated assets as reported on the Call Report for purposes of the leverage ratio by twenty-five percent of its CECL transitional amount during the third year of the transition period. (2) For purposes of the election described in paragraph (a)(1) of this section, an advanced approaches or Category III national bank or Federal savings association must make the following additional adjustments to its calculation of its applicable regulatory capital ratios: (i) Increase total leverage exposure for purposes of the supplementary leverage ratio by seventy-five percent of its CECL transitional amount during the first year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by fifty percent of its CECL transitional amount during the second year of the transition period, and increase total leverage exposure for purposes of the supplementary leverage ratio by twenty-five percent of its CECL transitional amount during the third year of the transition period; and (ii) An advanced approaches national bank or Federal savings association that has completed the parallel run process and that has received notification from the OCC pursuant to § 3.121(d) must decrease amounts of eligible credit reserves by seventy-five percent of its eligible credit reserves transitional amount during the first year of the transition period, decrease amounts of eligible credit reserves by fifty percent of its eligible credit reserves transitional amount during the second year of the transition provision, and decrease amounts of eligible credit reserves by twenty-five percent of its eligible credit reserves transitional amount during the third year of the transition period. (d) 2020 CECL transition provision. (1) Definitions. (i) Modified CECL transitional amount (A) During the first two years of the transition period, the difference between AACL as reported in the most recent Call Report and the AACL as of the beginning of the fiscal year in which the national bank or Federal savings association adopts CECL, multiplied by 0.25, plus the CECL transitional amount; and (B) During the last three years of the transition period, the difference between AACL as reported in the Call Report at the end of the second year of the transition period and the AACL as of the beginning of the fiscal year in which the national bank or Federal savings association adopts CECL, multiplied by 0.25, plus the CECL transitional amount. (ii) Modified AACL transitional amount (A) During the first two years of the transition period, the difference between AACL as reported in the most recent Call Report and the AACL as of the beginning of the fiscal year in which the national bank or Federal savings association adopts CECL, multiplied by 0.25, plus the AACL transitional amount; and (B) During the last three years of the transition period, the difference between AACL as reported in the Call Report at the end of the second year of the transition period and the AACL as of the beginning of the fiscal year in which the national bank or Federal savings association adopts CECL, multiplied by 0.25, plus the AACL transitional amount. (2) Calculation of 2020 CECL transition provision. (A) Increase retained earnings by one-hundred percent of its modified CECL transitional amount during the first year of the transition period, increase retained earnings by one hundred percent of its modified CECL transitional amount during the second year of the transition period, increase retained earnings by seventy-five percent of its modified CECL transitional amount during the third year of the transition period, increase retained earnings by fifty percent of its modified CECL transitional amount during the fourth year of the transition period, and increase retained earnings by twenty-five percent of its modified CECL transitional amount during the fifth year of the transition period; (B) Decrease amounts of DTAs arising from temporary differences by one-hundred percent of its DTA transitional amount during the first year of the transition period, decrease amounts of DTAs arising from temporary differences by one hundred percent of its DTA transitional amount during the second year of the transition period, decrease amounts of DTAs arising from temporary differences by seventy-five percent of its DTA transitional amount during the third year of the transition period, decrease amounts of DTAs arising from temporary differences by fifty percent of its DTA transitional amount during the fourth year of the transition period, and decrease amounts of DTAs arising from temporary differences by twenty-five percent of its DTA transitional amount during the fifth year of the transition period; (C) Decrease amounts of AACL by one-hundred percent of its modified AACL transitional amount during the first year of the transition period, decrease amounts of AACL by one hundred percent of its modified AACL transitional amount during the second year of the transition period, decrease amounts of AACL by seventy-five percent of its modified AACL transitional amount during the third year of the transition period, decrease amounts of AACL by fifty percent of its modified AACL transitional amount during the fourth year of the transition period, and decrease amounts of AACL by twenty-five percent of its modified AACL transitional amount during the fifth year of the transition period; and (D) Increase average total consolidated assets as reported on the Call Report for purposes of the leverage ratio by one-hundred percent of its modified CECL transitional amount during the first year of the transition period, increase average total consolidated assets as reported on the Call Report for purposes of the leverage ratio by one hundred percent of its modified CECL transitional amount during the second year of the transition period, increase average total consolidated assets as reported on the Call Report for purposes of the leverage ratio by seventy-five percent of its modified CECL transitional amount during the third year of the transition period, increase average total consolidated assets as reported on the Call Report for purposes of the leverage ratio by fifty percent of its modified CECL transitional amount during the fourth year of the transition period, and increase average total consolidated assets as reported on the Call Report for purposes of the leverage ratio by twenty-five percent of its modified CECL transitional amount during the fifth year of the transition period. (ii) An advanced approaches or Category III national bank or Federal savings association that has elected the 2020 CECL transition provision described in this paragraph (d) may make the following additional adjustments to its calculation of its applicable regulatory capital ratios: (A) Increase total leverage exposure for purposes of the supplementary leverage ratio by one-hundred percent of its modified CECL transitional amount during the first year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by one hundred percent of its modified CECL transitional amount during the second year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by seventy-five percent of its modified CECL transitional amount during the third year of the transition period, increase total leverage exposure for purposes of the supplementary leverage ratio by fifty percent of its modified CECL transitional amount during the fourth year of the transition period, and increase total leverage exposure for purposes of the supplementary leverage ratio by twenty-five percent of its modified CECL transitional amount during the fifth year of the transition period; and (B) An advanced approaches national bank or Federal savings association that has completed the parallel run process and that has received notification from the OCC pursuant to § 3.121(d) must decrease amounts of eligible credit reserves by one-hundred percent of its eligible credit reserves transitional amount during the first year of the transition period, decrease amounts of eligible credit reserves by one hundred percent of its eligible credit reserves transitional amount during the second year of the transition period, decrease amounts of eligible credit reserves by seventy-five percent of its eligible credit reserves transitional amount during the third year of the transition period, decrease amounts of eligible credit reserves by fifty percent of its eligible credit reserves transitional amount during the fourth year of the transition period, and decrease amounts of eligible credit reserves by twenty-five percent of its eligible credit reserves transitional amount during the fifth year of the transition period. (e) Eligible credit reserves shortfall. (f) Business combinations. (1) If the acquirer national bank or Federal savings association (as determined under GAAP) elected the treatment described in this section, the acquirer national bank or Federal savings association must continue to use the transitional amounts (unaffected by the business combination) that it calculated as of the date that it adopted CECL through the end of its transition period. (2) If the acquired insured depository institution (as determined under GAAP) elected the treatment described in this section, any transitional amount of the acquired insured depository institution does not transfer to the resulting national bank or Federal savings association. [85 FR 61586, Sept. 30, 2020] § 3.302 Exposures related the Money Market Mutual Fund Liquidity Facility. Notwithstanding any other section of this part, a national bank or federal savings association may exclude exposures acquired pursuant to a non-recourse loan that is provided as part of the Money Market Mutual Fund Liquidity Facility, announced by the Board on March 18, 2020, from total leverage exposure, average total consolidated assets, advanced approaches total risk-weighted assets, and standardized total risk-weighted assets, as applicable. For the purpose of this provision, a national bank's or federal savings association's liability under the facility must be reduced by the purchase price of the assets acquired with funds advanced from the facility. [85 FR 16236, Mar. 23, 2020] § 3.303 [Reserved] § 3.304 Temporary exclusions from total leverage exposure. (a) In general. (1) U.S. Treasury securities; and (2) Funds on deposit at a Federal Reserve Bank. (b) Opt-in period. (c) Calculation of relief. (d) Termination of exclusions. (e) Custody bank. (f) Disclosure. (g) OCC approval for distributions. [85 FR 32988, June 1, 2020, as amended at 86 FR 731, Jan. 6, 2021] § 3.305 Exposures related to the Paycheck Protection Program Lending Facility. Notwithstanding any other section of this part, a national bank or Federal savings association may exclude exposures pledged as collateral for a non-recourse loan that is provided as part of the Paycheck Protection Program Lending Facility, announced by the Federal Reserve Board on April 7, 2020, from total leverage exposure, average total consolidated assets, advanced approaches total risk-weighted assets, and standardized total risk-weighted assets, as applicable. For the purpose of this section, a national bank's or Federal savings association's liability under the facility must be reduced by the principal amount of the loans pledged as collateral for funds advanced under the facility. [85 FR 20393, Apr. 13, 2020] Subpart H—Establishment of Minimum Capital Ratios for an Individual Bank or Individual Federal Savings Association Source: 78 FR 62269, Oct. 11, 2013, unless otherwise noted. § 3.401 Purpose and scope. The rules and procedures specified in this subpart are applicable to a proceeding to establish required minimum capital ratios that would otherwise be applicable to a national bank or Federal savings association under subpart B of this part. The OCC is authorized under 12 U.S.C. 1464(s)(2) and 3907(a)(2) to establish such minimum capital requirements for a national bank or Federal savings association as the OCC, in its discretion, deems appropriate in light of the particular circumstances at that national bank or Federal savings association. Proceedings under this subpart also may be initiated to require a national bank or Federal savings association having capital ratios above those set forth in subpart B of this part, or other legal authority to continue to maintain those higher ratios. § 3.402 Applicability. The OCC may require higher minimum capital ratios for an individual national bank or Federal savings association in view of its circumstances. For example, higher capital ratios may be appropriate for: (a) A newly chartered national bank or Federal savings association; (b) A national bank or Federal savings association receiving special supervisory attention; (c) A national bank or Federal savings association that has, or is expected to have, losses resulting in capital inadequacy; (d) A national bank or Federal savings association with significant exposure due to the risks from concentrations of credit, certain risks arising from nontraditional activities, or management's overall inability to monitor and control financial and operating risks presented by concentrations of credit and nontraditional activities; (e) A national bank or Federal savings association with significant exposure to declines in the economic value of its capital due to changes in interest rates; (f) A national bank or Federal savings association with significant exposure due to fiduciary or operational risk; (g) A national bank or Federal savings association exposed to a high degree of asset depreciation, or a low level of liquid assets in relation to short term liabilities; (h) A national bank or Federal savings association exposed to a high volume of, or particularly severe, problem loans; (i) A national bank or Federal savings association that is growing rapidly, either internally or through acquisitions; or (j) A national bank or Federal savings association that may be adversely affected by the activities or condition of its holding company, affiliate(s), or other persons or institutions, including chain banking organizations, with which it has significant business relationships. § 3.403 Standards for determination of appropriate individual minimum capital ratios. The appropriate minimum capital ratios for an individual national bank or Federal savings association cannot be determined solely through the application of a rigid mathematical formula or wholly objective criteria. The decision is necessarily based in part on subjective judgment grounded in agency expertise. The factors to be considered in the determination will vary in each case and may include, for example: (a) The conditions or circumstances leading to the OCC's determination that higher minimum capital ratios are appropriate or necessary for the national bank or Federal savings association; (b) The exigency of those circumstances or potential problems; (c) The overall condition, management strength, and future prospects of the national bank or Federal savings association and, if applicable, its holding company and/or affiliate(s); (d) The national bank's or Federal savings association's liquidity, capital, risk asset and other ratios compared to the ratios of its peer group; and (e) The views of the national bank's or Federal savings association's directors and senior management. § 3.404 Procedures. (a) Notice. (b) Response. (2) Failure to respond within 30 days or such other time period as may be specified by the OCC shall constitute a waiver of any objections to the proposed minimum capital ratios or the deadline for their achievement. (c) Decision. (d) Submission of plan. (e) Change in circumstances. § 3.405 Relation to other actions. In lieu of, or in addition to, the procedures in this subpart, the required minimum capital ratios for a national bank or Federal savings association may be established or revised through a written agreement or cease and desist proceedings under 12 U.S.C. 1818 (b) or (c) (12 CFR part 19) or as a condition for approval of an application. [78 FR 62269, Oct. 11, 2013, as amended at 88 FR 89842, Dec. 28, 2023] Subpart I—Enforcement Source: 78 FR 62269, Oct. 11, 2013, unless otherwise noted. § 3.501 Remedies. A national bank or Federal savings association that does not have or maintain the minimum capital ratios applicable to it, whether required in subpart B of this part, in a decision pursuant to subpart H of this part, in a written agreement or temporary or final order under 12 U.S.C. 1818 (b) or (c), or in a condition for approval of an application, or a national bank or Federal savings association that has failed to submit or comply with an acceptable plan to attain those ratios, will be subject to such administrative action or sanctions as the OCC considers appropriate. These sanctions may include the issuance of a Directive pursuant to subpart J of this part or other enforcement action, assessment of civil money penalties, and/or the denial, conditioning, or revocation of applications. A national bank's or Federal savings association's failure to achieve or maintain minimum capital ratios in subpart B of this part may also be the basis for an action by the Federal Deposit Insurance Corporation to terminate Federal deposit insurance. See 12 CFR part 308, subpart F. Subpart J—Issuance of a Directive Source: 78 FR 62269, Oct. 11, 2013, unless otherwise noted. § 3.601 Purpose and scope. (a) This subpart is applicable to proceedings by the OCC to issue a directive under 12 U.S.C. 3907(b)(2) or 12 U.S.C. 1464(s), as appropriate. A directive is an order issued to a national bank or Federal savings association that does not have or maintain capital at or above the minimum ratios set forth in subpart B of this part, or established for the national bank or Federal savings association under subpart H of this part, by a written agreement under 12 U.S.C. 1818(b), or as a condition for approval of an application. A directive may order the national bank or Federal savings association to: (1) Achieve the minimum capital ratios applicable to it by a specified date; (2) Adhere to a previously submitted plan to achieve the applicable capital ratios; (3) Submit and adhere to a plan acceptable to the OCC describing the means and time schedule by which the national bank or Federal savings association shall achieve the applicable capital ratios; (4) Take other action, such as reduction of assets or the rate of growth of assets, or restrictions on the payment of dividends, to achieve the applicable capital ratios; or (5) A combination of any of these or similar actions. (b) A directive issued under this rule, including a plan submitted under a directive, is enforceable under the provisions of 12 U.S.C. 1818(i) in the same manner and to the same extent as an effective and outstanding cease and desist order issued pursuant to 12 U.S.C. 1818(b) that has become final. Violation of a directive may result in assessment of civil money penalties in accordance with 12 U.S.C. 3909(d). [78 FR 62269, Oct. 11, 2013, as amended at 85 FR 42640, July 14, 2020] § 3.602 Notice of intent to issue a directive. The OCC will notify a national bank or Federal savings association in writing of its intention to issue a directive. The notice will state: (a) Reasons for issuance of the directive; and (b) The proposed contents of the directive. § 3.603 Response to notice. (a) A national bank or Federal savings association may respond to the notice by stating why a directive should not be issued and/or by proposing alternative contents for the directive. The response should include any matters which the national bank or Federal savings association would have the OCC consider in deciding whether to issue a directive and/or what the contents of the directive should be. The response may include a plan for achieving the minimum capital ratios applicable to the national bank or Federal savings association. The response must be in writing and delivered to the designated OCC official within 30 days after the date on which the national bank or Federal savings association received the notice. The OCC may shorten the 30-day time period: (1) When, in the opinion of the OCC, the condition of the national bank or Federal savings association so requires, provided that the national bank or Federal savings association shall be informed promptly of the new time period; (2) With the consent of the national bank or Federal savings association; or (3) When the national bank or Federal savings association already has advised the OCC that it cannot or will not achieve its applicable minimum capital ratios. (b) In its discretion, the OCC may extend the time period for good cause. (c) Failure to respond within 30 days or such other time period as may be specified by the OCC shall constitute a waiver of any objections to the proposed directive. § 3.604 Decision. After the closing date of the national bank's or Federal savings association's response period, or receipt of the national bank's or Federal savings association's response, if earlier, the OCC will consider the national bank's or Federal savings association's response, and may seek additional information or clarification of the response. Thereafter, the OCC will determine whether or not to issue a directive, and if one is to be issued, whether it should be as originally proposed or in modified form. § 3.605 Issuance of a directive. (a) A directive will be served by delivery to the national bank or Federal savings association. It will include or be accompanied by a statement of reasons for its issuance. (b) A directive is effective immediately upon its receipt by the national bank or Federal savings association, or upon such later date as may be specified therein, and shall remain effective and enforceable until it is stayed, modified, or terminated by the OCC. § 3.606 Change in circumstances. Upon a change in circumstances, a national bank or Federal savings association may request the OCC to reconsider the terms of its directive or may propose changes in the plan to achieve the national bank's or Federal savings association's applicable minimum capital ratios. The OCC also may take such action on its own motion. The OCC may decline to consider requests or proposals that are not based on a significant change in circumstances or are repetitive or frivolous. Pending a decision on reconsideration, the directive and plan shall continue in full force and effect. § 3.607 Relation to other administrative actions. A directive may be issued in addition to, or in lieu of, any other action authorized by law, including cease and desist proceedings, civil money penalties, or the conditioning or denial of applications. The OCC also may, in its discretion, take any action authorized by law, in lieu of a directive, in response to a national bank's or Federal savings association's failure to achieve or maintain the applicable minimum capital ratios. Subpart K—Interpretations Source: 78 FR 62272, Oct. 11, 2013, unless otherwise noted. § 3.701 Capital and surplus. For purposes of determining statutory limits that are based on the amount of a national bank's capital surplus, (a) Capital. capital (b) Capital Stock. capital stock capital (c) Surplus. surplus (1) Capital surplus; undivided profits; reserves for contingencies and other capital reserves (excluding accrued dividends on perpetual and limited life preferred stock); net worth certificates issued pursuant to 12 U.S.C. 1823(i); minority interests in consolidated subsidiaries; and allowances for loan and lease losses; minus intangible assets; (2) Mortgage servicing assets; (3) Mandatory convertible debt to the extent of 20 percent of the sum of paragraphs (a) and (c) (1) and (2) of this section; (4) Other mandatory convertible debt, limited life preferred stock and subordinated notes and debentures to the extent set forth in paragraph (f)(2) of this section. (d) Unimpaired surplus fund. unimpaired surplus fund surplus (e) Definitions. Allowance for loan and lease losses (2) Capital surplus (i) Amounts paid in in excess of the par or stated value of capital stock; (ii) Amounts contributed to the national bank other than for capital stock; (iii) Amounts transferred from undivided profits pursuant to 12 U.S.C. 60; and (iv) Other amounts transferred from undivided profits. (3) Intangible assets Instructions—Consolidated Reports of Condition and Income (4) Limited life preferred stock (5) Mandatory convertible debt (6) Minority interest in consolidated subsidiaries (7) Mortgage servicing assets (8) Perpetual preferred stock (f) Requirements and restrictions: Limited life preferred stock, mandatory convertible debt, and other subordinated debt Requirements. surplus. (i) Be subordinated to the claims of depositors; (ii) State on the instrument that it is not a deposit and is not insured by the FDIC; (iii) Be unsecured; (iv) Be ineligible as collateral for a loan by the issuing national bank; (v) Provide that once any scheduled payments of principal begin, all scheduled payments shall be made at least annually and the amount repaid in each year shall be no less than in the prior year; and (vi) Provide that no prepayment (including payment pursuant to an acceleration clause or redemption prior to maturity) shall be made without prior OCC approval unless the national bank remains an eligible bank, as defined in 12 CFR 5.3, after the prepayment. (2) Restrictions. (3) Reservation of authority. (g) Transitional rules. (2) Intangible assets (other than mortgage servicing assets) purchased prior to April 15, 1985, and accounted for in accordance with OCC instructions, may continue to be included as surplus up to 25 percent of the sum of paragraphs (a) and (c)(1) of this section. [78 FR 62272, Oct. 11, 2013, as amended at 85 FR 80434, Dec. 11, 2020]

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