12 CFR Part 252 — Enhanced Prudential Standards (Regulation YY)

PART 252—ENHANCED PRUDENTIAL STANDARDS (REGULATION YY) Authority: 12 U.S.C. 321-338a, 481-486, 1467a, 1818, 1828, 1831n, 1831o, 1831p-1, 1831w, 1835, 1844(b), 1844(c), 3101 et seq., Source: 77 FR 62391, Oct. 12, 2012, unless otherwise noted. Subpart A—General Provisions Source: Reg. YY, 79 FR 17315, Mar. 27, 2014, unless otherwise noted. § 252.1 Authority and purpose. (a) Authority. et seq. (b) Purpose. [84 FR 59096, Nov. 1, 2019] § 252.2 Definitions. Unless otherwise specified, the following definitions apply for purposes of this part: Affiliate Applicable accounting standards Average combined U.S. assets Average cross-jurisdictional activity Average off-balance sheet exposure Average total consolidated assets Average total nonbank assets Average U.S. non-branch assets Average weighted short-term wholesale funding Bank holding company Banking organization (1) A bank holding company that is a U.S. bank holding company; (2) A U.S. intermediate holding company; or (3) A foreign banking organization. Board Category II bank holding company Category II foreign banking organization Category II U.S. intermediate holding company Category III bank holding company Category III foreign banking organization Category III U.S. intermediate holding company Category IV bank holding company Category IV foreign banking organization Category IV U.S. intermediate holding company Combined U.S. assets Combined U.S. operations (1) The U.S. branches and agencies of the foreign banking organization; and (2) The U.S. subsidiaries of the foreign banking organization (excluding any section 2(h)(2) company, if applicable) and subsidiaries of such U.S. subsidiaries. Company Control Council Credit enhancement Cross-jurisdictional activity. Depository institution DPC branch subsidiary Foreign banking organization FR Y-7 FR Y-7Q FR Y-9C FR Y-9LP FR Y-15 Global methodology Global systemically important banking organization Global systemically important BHC Global systemically important foreign banking organization GAAP Home country, Home country resolution authority, Home-country supervisor, Nonbank financial company supervised by the Board Non-U.S. affiliate Off-balance sheet exposure. (i) The total exposure of such banking organization, as reported by the banking organization on the FR Y-15; minus (ii) The total consolidated assets of such banking organization for the same calendar quarter. (2) The off-balance sheet exposure of a foreign banking organization is equal to: (i) The total exposure of the combined U.S. operations of the foreign banking organization, as reported by the foreign banking organization on the FR Y-15; minus (ii) The combined U.S. assets of the foreign banking organization for the same calendar quarter. Publicly traded (1) Any exchange registered with the U.S. Securities and Exchange Commission as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f); or (2) Any non-U.S.-based securities exchange that: (i) Is registered with, or approved by, a non-U.S. national securities regulatory authority; and (ii) Provides a liquid, two-way market for the instrument in question, meaning that there are enough independent bona fide offers to buy and sell so that a sales price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined promptly and a trade can be settled at such price within a reasonable time period conforming with trade custom. (3) A company can rely on its determination that a particular non-U.S.-based securities exchange provides a liquid two-way market unless the Board determines that the exchange does not provide a liquid two-way market. Section 2(h)(2) company State State member bank Subsidiary Top-tier foreign banking organization, Total consolidated assets. (2) Total consolidated assets of a foreign banking organization is equal to the total consolidated assets of the foreign banking organization, as reported on the FR Y-7Q. (3) Total consolidated assets of a state member bank is equal to the total consolidated assets as reported by a state member bank on its Consolidated Report of Condition and Income (Call Report). Total nonbank assets. (2) Total nonbank assets of a foreign banking organization is equal to: (i) The sum of the total nonbank assets of any U.S. intermediate holding company, if any, as reported on the FR Y-9LP; plus (ii) The assets of the foreign banking organization's nonbank U.S. subsidiaries excluding the U.S. intermediate holding company, if any; plus (iii) The sum of the foreign banking organization's equity investments in unconsolidated U.S. subsidiaries, excluding equity investments in any section 2(h)(2) company; minus (iv) The assets of any section 2(h)(2) company. U.S. agency U.S. bank holding company (1) Incorporated in or organized under the laws of the United States or any State; and (2) Not a consolidated subsidiary of a bank holding company that is incorporated in or organized under the laws of the United States or any State. U.S. branch U.S. branches and agencies U.S. government agency U.S. government-sponsored enterprise U.S. intermediate holding company U.S. non-branch assets. U.S. subsidiary Weighted short-term wholesale funding [84 FR 59096, Nov. 1, 2019] § 252.3 Reservation of authority. (a) In general. (b) Modifications or extensions of this part. (c) Reservation of authority for certain foreign banking organizations. (1) The ownership structure of the foreign banking organization, including whether the foreign banking organization is owned or controlled by a foreign government; (2) Whether the action would be consistent with the purposes of this part; and (3) Any other factors that the Board determines are relevant. [Reg. YY, 79 FR 17315, Mar. 27, 2014, as amended at 84 FR 59098, Nov. 1, 2019] § 252.4 Nonbank financial companies supervised by the Board. (a) U.S. nonbank financial companies supervised by the Board. (1) The nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the U.S. nonbank financial company; (2) The degree to which the U.S. nonbank financial company is already regulated by one or more primary financial regulatory agencies; and (3) Any other risk-related factor that the Board determines is appropriate. (b) Foreign nonbank financial companies supervised by the Board. (1) The nature, scope, size, scale, concentration, interconnectedness, and mix of the activities of the foreign nonbank financial company; (2) The extent to which the foreign nonbank financial company is subject to prudential standards on a consolidated basis in its home country that are administered and enforced by a comparable foreign supervisory authority; and (3) Any other risk-related factor that the Board determines is appropriate. § 252.5 Categorization of banking organizations. (a) General. (2) A U.S. intermediate holding company with average total consolidated assets of $100 billion or more must determine its category among the three categories described in paragraphs (c) through (e) of this section at least quarterly. (3) A foreign banking organization with average total consolidated assets of $100 billion or more and average combined U.S. assets of $100 billion or more must determine its category among the three categories described in paragraphs (c) through (e) of this section at least quarterly. (b) Global systemically important BHC. (c) Category II. (i) Has: (A)( 1 ( 2 (B)( 1 ( 2 i ( ii (ii) Is not a global systemically important BHC. (2) After meeting the criteria in paragraph (c)(1) of this section, a banking organization continues to be a Category II banking organization until the banking organization: (i) Has: (A)( 1 ( 2 (B) Less than $75 billion in cross-jurisdictional activity for each of the four most recent calendar quarters; (ii) Has: (A) For a U.S. bank holding company or a U.S. intermediate holding company, less than $100 billion in total consolidated assets for each of the four most recent calendar quarters; (B) For a foreign banking organization, less than $100 billion in combined U.S. assets for each of the four most recent calendar quarters; or (iii) Meets the criteria in paragraph (b) to be a global systemically important BHC. (d) Category III. (i) Has: (A)( 1 ( 2 (B)( 1 i ( ii ( 2 ( i ( ii ( iii (ii) Is not a global systemically important BHC; and (iii) Is not a Category II banking organization. (2) After meeting the criteria in paragraph (d)(1) of this section, a banking organization continues to be a Category III banking organization until the banking organization: (i) Has: (A)( 1 ( 2 (B) Less than $75 billion in total nonbank assets for each of the four most recent calendar quarters; (C) Less than $75 billion in weighted short-term wholesale funding for each of the four most recent calendar quarters; and (D) Less than $75 billion in off-balance sheet exposure for each of the four most recent calendar quarters; or (ii) Has: (A) For a U.S. bank holding company or a U.S. intermediate holding company, less than $100 billion in total consolidated assets for each of the four most recent calendar quarters; or (B) For a foreign banking organization, less than $100 billion in combined U.S. assets for each of the four most recent calendar quarters; (iii) Meets the criteria in paragraph (b) of this section to be a global systemically important BHC; or (iv) Meets the criteria in paragraph (c)(1) of this section to be a Category II banking organization. (e) Category IV. (i) Is not global systemically important BHC; (ii) Is not a Category II banking organization; (iii) Is not a Category III banking organization; and (iv) Has: (A) For a U.S. bank holding company or a U.S. intermediate holding company, average total consolidated assets of $100 billion or more; or (B) For a foreign banking organization, average combined U.S. assets of $100 billion or more. (2) After meeting the criteria in paragraph (e)(1), a banking organization continues to be a Category IV banking organization until the banking organization: (i) Has: (A) For a U.S. bank holding company or a U.S. intermediate holding company, less than $100 billion in total consolidated assets for each of the four most recent calendar quarters; (B) For a foreign banking organization, less than $100 billion in combined U.S. assets for each of the four most recent calendar quarters; (ii) Meets the criteria in paragraph (b) of this section to be a global systemically important BHC; (iii) Meets the criteria in paragraph (c)(1) of this section to be a Category II banking organization; or (iv) Meets the criteria in paragraph (d)(1) of this section to be a Category III banking organization. [84 FR 59099, Nov. 1, 2019] Subpart B—Company-Run Stress Test Requirements for State Member Banks With Total Consolidated Assets Over $250 Billion Source: Reg. YY, 79 FR 64045, Oct. 27, 2014, unless otherwise noted. § 252.10 [Reserved] § 252.11 Authority and purpose. (a) Authority. (b) Purpose. [84 FR 59100, Nov. 1, 2019] § 252.12 Definitions. For purposes of this subpart, the following definitions apply: Advanced approaches Asset threshold Baseline scenario Capital action Covered company subsidiary Planning horizon Pre-provision net revenue Provision for credit losses (1) With respect to a state member bank that has adopted the current expected credit losses methodology under GAAP, the provision for credit losses, as would be reported by the state member bank on the Call Report in the current stress test cycle; and (2) With respect to a state member bank that has not adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses as would be reported by the state member bank on the Call Report in the current stress test cycle. Regulatory capital ratio Scenarios Severely adverse scenario Stress test Stress test cycle Subsidiary [84 FR 59100, Nov. 1, 2019] § 252.13 Applicability. (a) Scope Applicability. (2) Ongoing applicability. (b) Transition period. (2) A state member bank that exceeds the asset threshold for the first time after September 30 of a calendar year must comply with the requirements of this subpart beginning on January 1 of the third year after the state member bank becomes subject to this subpart, unless that time is extended by the Board in writing. [84 FR 59100, Nov. 1, 2019] § 252.14 Stress test. (a) In general. (2) Frequency General. Table 1 to § 252.14( a i If the state member bank is a Then the stress test must be conducted Subsidiary of a global systemically important BHC Annually, by April 5 of each calendar year, based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. Subsidiary of a Category II bank holding company Annually, by April 5 of each calendar year, based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. Subsidiary of a Category II U.S. intermediate holding company Annually, by April 5 of each calendar year, based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. Not a subsidiary of a: Biennially, by April 5 of each calendar year ending in an even number, based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. (ii) Change in frequency. (3) Notice and response Notification of change in frequency. (ii) Request for reconsideration and Board response. (b) Scenarios provided by the Board In general. (2) Additional components. (ii) The Board may require a state member bank to include one or more additional components in its severely adverse scenario in the stress test required by this section based on the state member bank's financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy. (3) Additional scenarios. (4) Notice and response Notification of additional component or scenario. (ii) Request for reconsideration and Board response. (iii) Description of component. [84 FR 59100, Nov. 1, 2019] § 252.15 Methodologies and practices. (a) Potential impact on capital. (1) Losses, pre-provision net revenue, provision for credit losses, and net income; and (2) The potential impact on the regulatory capital levels and ratios applicable to the covered bank, and any other capital ratios specified by the Board, incorporating the effects of any capital action over the planning horizon and maintenance of an allowance for loan losses or adjusted allowance for credit losses, as appropriate, for credit exposures throughout the planning horizon. (b) Controls and oversight of stress testing processes In general. (2) Oversight of stress testing processes. (3) Role of stress testing results. [Reg. YY, 79 FR 64045, Oct. 27, 2014, as amended at 80 FR 75425, Dec. 2, 2015; 84 FR 4245, Feb. 14, 2019; 84 FR 59101, Nov. 1, 2019] § 252.16 Reports of stress test results. (a) Reports to the Board of stress test results General. (2) Timing. (i) A state member bank that is a covered company subsidiary must report the results of the stress test to the Board by April 5, unless that time is extended by the Board in writing; and (ii) A state member bank that is not a covered company subsidiary must report the results of the stress test to the Board by July 31, unless that time is extended by the Board in writing. (b) Contents of reports. (1) A description of the types of risks being included in the stress test; (2) A summary description of the methodologies used in the stress test; and (3) For each quarter of the planning horizon, estimates of aggregate losses, pre-provision net revenue, provision for credit losses, net income, and regulatory capital ratios; (c) Confidential treatment of information submitted. [Reg. YY, 79 FR 64045, Oct. 27, 2014, as amended at 84 FR 4245, Feb. 14, 2019; 84 FR 59101, Nov. 1, 2019; 85 FR 15604, Mar. 18, 2020] § 252.17 Disclosure of stress test results. (a) Public disclosure of results General. (2) Timing. (i) A state member bank that is a covered company subsidiary must publicly disclose a summary of the results of the stress test within 15 calendar days after the Board discloses the results of its supervisory stress test of the covered company pursuant to § 252.46(b), unless that time is extended by the Board in writing; and (ii) A state member bank that is not a covered company subsidiary must publicly disclose a summary of the results of the stress test in the period beginning on October 15 and ending on October 31, unless that time is extended by the Board in writing. (3) Disclosure method. (b) Summary of results State member banks that are subsidiaries of bank holding companies. (2) State member banks that are not subsidiaries of bank holding companies. (i) A description of the types of risks being included in the stress test; (ii) A summary description of the methodologies used in the stress test; (iii) Estimates of— (A) Aggregate losses; (B) Pre-provision net revenue (C) Provision for credit losses; (D) Net income; and (E) Pro forma regulatory capital ratios and any other capital ratios specified by the Board; and (iv) An explanation of the most significant causes for the changes in regulatory capital ratios. (c) Content of results. (2) The disclosure of pro forma regulatory capital ratios and any other capital ratios specified by the Board that is required under paragraph (b) of this section must include the beginning value, ending value and minimum value of each ratio over the planning horizon. [Reg. YY, 79 FR 64045, Oct. 27, 2014, as amended at 84 FR 4245, Feb. 14, 2019; 84 FR 59102, Nov. 1, 2019] Subpart C—Risk Committee Requirement for Bank Holding Companies With Total Consolidated Assets of $50 Billion or More and Less Than $100 Billion Source: Reg. YY, 79 FR 17316, Mar. 27, 2014, unless otherwise noted. § 252.20 [Reserved] § 252.21 Applicability. (a) General applicability. (b) Cessation of requirements. (1) Its total consolidated assets are below $50 billion for each of four consecutive calendar quarters; and (2) It becomes subject to the requirements of subpart D of this part. [84 FR 59102, Nov. 1, 2019] § 252.22 Risk committee requirement for bank holding companies with total consolidated assets of $50 billion or more. (a) Risk committee General. (2) Risk-management framework. (i) Policies and procedures establishing risk-management governance, risk-management procedures, and risk-control infrastructure for its global operations; and (ii) Processes and systems for implementing and monitoring compliance with such policies and procedures, including: (A) Processes and systems for identifying and reporting risks and risk-management deficiencies, including regarding emerging risks, and ensuring effective and timely implementation of actions to address emerging risks and risk-management deficiencies for its global operations; (B) Processes and systems for establishing managerial and employee responsibility for risk management; (C) Processes and systems for ensuring the independence of the risk-management function; and (D) Processes and systems to integrate risk management and associated controls with management goals and its compensation structure for its global operations. (3) Corporate governance requirements. (i) Have a formal, written charter that is approved by the bank holding company's board of directors; (ii) Be an independent committee of the board of directors that has, as its sole and exclusive function, responsibility for the risk-management policies of the bank holding company's global operations and oversight of the operation of the bank holding company's global risk-management framework; (iii) Report directly to the bank holding company's board of directors; (iv) Receive and review regular reports on a not less than a quarterly basis from the bank holding company's chief risk officer provided pursuant to paragraph (b)(3)(ii) of this section; and (v) Meet at least quarterly, or more frequently as needed, and fully document and maintain records of its proceedings, including risk-management decisions. (4) Minimum member requirements. (i) Include at least one member having experience in identifying, assessing, and managing risk exposures of large, complex financial firms; and (ii) Be chaired by a director who: (A) Is not an officer or employee of the bank holding company and has not been an officer or employee of the bank holding company during the previous three years; (B) Is not a member of the immediate family, as defined in 12 CFR 225.41(b)(3), of a person who is, or has been within the last three years, an executive officer of the bank holding company, as defined in 12 CFR 215.2(e)(1); and (C)( 1 ( 2 (b) Chief risk officer General. (2) Responsibilities. (A) The establishment of risk limits on an enterprise-wide basis and the monitoring of compliance with such limits; (B) The implementation of and ongoing compliance with the policies and procedures set forth in paragraph (a)(2)(i) of this section and the development and implementation of the processes and systems set forth in paragraph (a)(2)(ii) of this section; and (C) The management of risks and risk controls within the parameters of the company's risk-control framework, and monitoring and testing of the company's risk controls. (ii) The chief risk officer is responsible for reporting risk-management deficiencies and emerging risks to the risk committee and resolving risk-management deficiencies in a timely manner. (3) Corporate governance requirements. (ii) The chief risk officer must report directly to both the risk committee and chief executive officer of the company. [84 FR 59102, Nov. 1, 2019] Subpart D—Enhanced Prudential Standards for Bank Holding Companies With Total Consolidated Assets of $100 Billion or More Source: Reg. YY, 79 FR 17317, Mar. 27, 2014, unless otherwise noted. § 252.30 Scope. This subpart applies to bank holding companies with average total consolidated assets of $100 billion or more. [84 FR 59103, Nov. 1, 2019] § 252.31 Applicability. (a) Applicability Initial applicability. (2) Changes in requirements following a change in category. (b) Cessation of requirements. (c) Applicability for bank holding companies that are subsidiaries of foreign banking organizations. [84 FR 59103, Nov. 1, 2019] § 252.32 Risk-based and leverage capital and stress test requirements. A bank holding company subject to this subpart must comply with, and hold capital commensurate with the requirements of, any regulations adopted by the Board relating to capital planning and stress tests, in accordance with the applicability provisions set forth therein. [84 FR 59103, Nov. 1, 2019] § 252.33 Risk-management and risk committee requirements. (a) Risk committee General. (2) Risk-management framework. (i) Policies and procedures establishing risk-management governance, risk-management procedures, and risk-control infrastructure for its global operations; and (ii) Processes and systems for implementing and monitoring compliance with such policies and procedures, including: (A) Processes and systems for identifying and reporting risks and risk-management deficiencies, including regarding emerging risks, and ensuring effective and timely implementation of actions to address emerging risks and risk-management deficiencies for its global operations; (B) Processes and systems for establishing managerial and employee responsibility for risk management; (C) Processes and systems for ensuring the independence of the risk-management function; and (D) Processes and systems to integrate risk management and associated controls with management goals and its compensation structure for its global operations. (3) Corporate governance requirements. (i) Have a formal, written charter that is approved by the bank holding company's board of directors; (ii) Be an independent committee of the board of directors that has, as its sole and exclusive function, responsibility for the risk-management policies of the bank holding company's global operations and oversight of the operation of the bank holding company's global risk-management framework; (iii) Report directly to the bank holding company's board of directors; (iv) Receive and review regular reports on not less than a quarterly basis from the bank holding company's chief risk officer provided pursuant to paragraph (b)(3)(ii) of this section; and (v) Meet at least quarterly, or more frequently as needed, and fully document and maintain records of its proceedings, including risk-management decisions. (4) Minimum member requirements. (i) Include at least one member having experience in identifying, assessing, and managing risk exposures of large, complex financial firms; and (ii) Be chaired by a director who: (A) Is not an officer or employee of the bank holding company and has not been an officer or employee of the bank holding company during the previous three years; (B) Is not a member of the immediate family, as defined in section 225.41(b)(3) of the Board's Regulation Y (12 CFR 225.41(b)(3)), of a person who is, or has been within the last three years, an executive officer of the bank holding company, as defined in section 215.2(e)(1) of the Board's Regulation O (12 CFR 215.2(e)(1)); and (C)( 1 ( 2 (b) Chief risk officer General. (2) Responsibilities. (A) The establishment of risk limits on an enterprise-wide basis and the monitoring of compliance with such limits; (B) The implementation of and ongoing compliance with the policies and procedures set forth in paragraph (a)(2)(i) of this section and the development and implementation of the processes and systems set forth in paragraph (a)(2)(ii) of this section; and (C) The management of risks and risk controls within the parameters of the company's risk control framework, and monitoring and testing of the company's risk controls. (ii) The chief risk officer is responsible for reporting risk-management deficiencies and emerging risks to the risk committee and resolving risk-management deficiencies in a timely manner. (3) Corporate governance requirements. (ii) The chief risk officer must report directly to both the risk committee and chief executive officer of the company. [Reg. YY, 79 FR 17317, Mar. 27, 2014, as amended at 84 FR 59103, Nov. 1, 2019] § 252.34 Liquidity risk-management requirements. (a) Responsibilities of the board of directors Liquidity risk tolerance. (i) Approve the acceptable level of liquidity risk that the bank holding company may assume in connection with its operating strategies (liquidity risk tolerance) at least annually, taking into account the bank holding company's capital structure, risk profile, complexity, activities, and size; and (ii) Receive and review at least semi-annually information provided by senior management to determine whether the bank holding company is operating in accordance with its established liquidity risk tolerance. (2) Liquidity risk-management strategies, policies, and procedures. (b) Responsibilities of the risk committee. (c) Responsibilities of senior management Liquidity risk. (ii) Senior management must oversee the development and implementation of liquidity risk measurement and reporting systems, including those required by this section and § 252.35. (iii) Senior management must determine at least quarterly whether the bank holding company is operating in accordance with such policies and procedures and whether the bank holding company is in compliance with this section and § 252.35 (or more often, if changes in market conditions or the liquidity position, risk profile, or financial condition warrant), and establish procedures regarding the preparation of such information. (2) Liquidity risk tolerance. (3) Business lines or products. (ii) Senior management must review at least annually significant business lines and products to determine whether any line or product creates or has created any unanticipated liquidity risk, and to determine whether the liquidity risk of each strategy or product is within the company's established liquidity risk tolerance. (4) Cash-flow projections. (5) Liquidity risk limits. (6) Liquidity stress testing. (i) Approve the liquidity stress testing practices, methodologies, and assumptions required in § 252.35(a) at least quarterly, and whenever the bank holding company materially revises its liquidity stress testing practices, methodologies or assumptions; (ii) Review the liquidity stress testing results produced under § 252.35(a) at least quarterly; (iii) Review the independent review of the liquidity stress tests under § 252.34(d) periodically; and (iv) Approve the size and composition of the liquidity buffer established under § 252.35(b) at least quarterly. (d) Independent review function. (2) The independent review function must: (i) Regularly, but no less frequently than annually, review and evaluate the adequacy and effectiveness of the company's liquidity risk-management processes, including its liquidity stress test processes and assumptions; (ii) Assess whether the company's liquidity risk-management function complies with applicable laws and regulations, and sound business practices; and (iii) Report material liquidity risk-management issues to the board of directors or the risk committee in writing for corrective action, to the extent permitted by applicable law. (e) Cash-flow projections. (2) The bank holding company must establish a methodology for making cash-flow projections that results in projections that: (i) Include cash flows arising from contractual maturities, intercompany transactions, new business, funding renewals, customer options, and other potential events that may impact liquidity; (ii) Include reasonable assumptions regarding the future behavior of assets, liabilities, and off-balance sheet exposures; (iii) Identify and quantify discrete and cumulative cash flow mismatches over these time periods; and (iv) Include sufficient detail to reflect the capital structure, risk profile, complexity, currency exposure, activities, and size of the bank holding company and include analyses by business line, currency, or legal entity as appropriate. (3) The bank holding company must adequately document its methodology for making cash flow projections and the included assumptions and submit such documentation to the risk committee. (f) Contingency funding plan General. (2) Components of the contingency funding plan Quantitative assessment. (A) Identify liquidity stress events that could have a significant impact on the bank holding company's liquidity; (B) Assess the level and nature of the impact on the bank holding company's liquidity that may occur during identified liquidity stress events; (C) Identify the circumstances in which the bank holding company would implement its action plan described in paragraph (f)(2)(ii)(A) of this section, which circumstances must include failure to meet any minimum liquidity requirement imposed by the Board; (D) Assess available funding sources and needs during the identified liquidity stress events; (E) Identify alternative funding sources that may be used during the identified liquidity stress events; and (F) Incorporate information generated by the liquidity stress testing required under § 252.35(a). (ii) Liquidity event management process. (A) Include an action plan that clearly describes the strategies the company will use to respond to liquidity shortfalls for identified liquidity stress events, including the methods that the company will use to access alternative funding sources; (B) Identify a liquidity stress event management team that would execute the action plan described in paragraph (f)(2)(ii)(A) of this section; (C) Specify the process, responsibilities, and triggers for invoking the contingency funding plan, describe the decision-making process during the identified liquidity stress events, and describe the process for executing contingency measures identified in the action plan; and (D) Provide a mechanism that ensures effective reporting and communication within the bank holding company and with outside parties, including the Board and other relevant supervisors, counterparties, and other stakeholders. (iii) Monitoring. (iv) Testing. (A) The components of the contingency funding plan to assess the plan's reliability during liquidity stress events; (B) The operational elements of the contingency funding plan, including operational simulations to test communications, coordination, and decision-making by relevant management; and (C) The methods the bank holding company will use to access alternative funding sources to determine whether these funding sources will be readily available when needed. (g) Liquidity risk limits General. (2) Liquidity risk limits established by a global systemically important BHC, Category II bank holding company, or Category III bank holding company. (i) Concentrations in sources of funding by instrument type, single counterparty, counterparty type, secured and unsecured funding, and as applicable, other forms of liquidity risk; (ii) The amount of liabilities that mature within various time horizons; and (iii) Off-balance sheet exposures and other exposures that could create funding needs during liquidity stress events. (h) Collateral, legal entity, and intraday liquidity risk monitoring. (1) Collateral. (i) Calculates all of its collateral positions according to the frequency specified in paragraph (h)(1)(i)(A) or (B) of this section, or as directed by the Board, specifying the value of pledged assets relative to the amount of security required under the relevant contracts and the value of unencumbered assets available to be pledged; (A) If the bank holding company is not a Category IV bank holding company, on at least a weekly basis; or (B) If the bank holding company is a Category IV bank holding company, on at least a monthly basis; (ii) Monitors the levels of unencumbered assets available to be pledged by legal entity, jurisdiction, and currency exposure; (iii) Monitors shifts in the bank holding company's funding patterns, such as shifts between intraday, overnight, and term pledging of collateral; and (iv) Tracks operational and timing requirements associated with accessing collateral at its physical location (for example, the custodian or securities settlement system that holds the collateral). (2) Legal entities, currencies, and business lines. (3) Intraday exposures. (i) Monitor and measure expected daily gross liquidity inflows and outflows; (ii) Manage and transfer collateral to obtain intraday credit; (iii) Identify and prioritize time-specific obligations so that the bank holding company can meet these obligations as expected and settle less critical obligations as soon as possible; (iv) Manage the issuance of credit to customers where necessary; and (v) Consider the amounts of collateral and liquidity needed to meet payment systems obligations when assessing the bank holding company's overall liquidity needs. [Reg. YY, 79 FR 17317, Mar. 27, 2014, as amended at 84 FR 59103, Nov. 1, 2019] § 252.35 Liquidity stress testing and buffer requirements. (a) Liquidity stress testing requirement General. (i) The bank holding company must take into consideration its balance sheet exposures, off-balance sheet exposures, size, risk profile, complexity, business lines, organizational structure, and other characteristics of the bank holding company that affect its liquidity risk profile in conducting its stress test. (ii) In conducting a liquidity stress test using the scenarios described in paragraphs (a)(3)(i) and (iii) of this section, the bank holding company must address the potential direct adverse impact of associated market disruptions on the bank holding company and incorporate the potential actions of other market participants experiencing liquidity stresses under the market disruptions that would adversely affect the bank holding company. (2) Frequency. (i) If the bank holding company is not a Category IV bank holding company, at least monthly; or (ii) If the bank holding company is a Category IV bank holding company, at least quarterly. (3) Stress scenarios. (A) A scenario reflecting adverse market conditions; (B) A scenario reflecting an idiosyncratic stress event for the bank holding company; and (C) A scenario reflecting combined market and idiosyncratic stresses. (ii) The bank holding company must incorporate additional liquidity stress scenarios into its liquidity stress test, as appropriate, based on its financial condition, size, complexity, risk profile, scope of operations, or activities. The Board may require the bank holding company to vary the underlying assumptions and stress scenarios. (4) Planning horizon. (5) Requirements for assets used as cash-flow sources in a stress test. (ii) Assets used as cash-flow sources during a planning horizon must be diversified by collateral, counterparty, borrowing capacity, and other factors associated with the liquidity risk of the assets. (iii) A line of credit does not qualify as a cash flow source for purposes of a stress test with a planning horizon of 30 days or less. A line of credit may qualify as a cash flow source for purposes of a stress test with a planning horizon that exceeds 30 days. (6) Tailoring. (7) Governance Policies and procedures. (ii) Controls and oversight. (iii) Management information systems. (8) Notice and response. (b) Liquidity buffer requirement. (2) Net stressed cash-flow need. (3) Asset requirements. (i) Highly liquid asset. (A) Cash; (B) Assets that meet the criteria for high quality liquid assets as defined in 12 CFR 249.20; or (C) Any other asset that the bank holding company demonstrates to the satisfaction of the Board: ( 1 ( 2 ( 3 (ii) Unencumbered. (A) Is free of legal, regulatory, contractual, or other restrictions on the ability of such company promptly to liquidate, sell or transfer the asset; and (B) Is either: ( 1 ( 2 (iii) Calculating the amount of a highly liquid asset. (iv) Operational requirements. (A) Establish and implement policies and procedures that require highly liquid assets comprising the liquidity buffer to be under the control of the management function in the bank holding company that is charged with managing liquidity risk; and (B) Demonstrate the capability to monetize a highly liquid asset under each scenario required under § 252.35(a)(3). (v) Diversification. [Reg. YY, 79 FR 17317, Mar. 27, 2014, as amended at 84 FR 59105, Nov. 1, 2019] Subpart E—Supervisory Stress Test Requirements for Certain U.S. Banking Organizations With $100 Billion or More in Total Consolidated Assets and Nonbank Financial Companies Supervised by the Board Source: Reg. YY, 79 FR 64049, Oct. 27, 2014, unless otherwise noted. § 252.40 [Reserved] § 252.41 Authority and purpose. (a) Authority. (b) Purpose. [84 FR 59105, Nov. 1, 2019] § 252.42 Definitions. For purposes of this subpart E, the following definitions apply: Advanced approaches Baseline scenario Covered company (1) A U.S. bank holding company with average total consolidated assets of $100 billion or more; (2) A U.S. intermediate holding company subject to this section pursuant to § 252.153; and (3) A nonbank financial company supervised by the Board. Foreign banking organization Pre-provision net revenue Planning horizon Provision for credit losses (1) With respect to a covered company that has adopted the current expected credit losses methodology under GAAP, the provision for credit losses, as would be reported by the covered company on the FR Y-9C in the current stress test cycle; and, (2) With respect to a covered company that has not adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses as would be reported by the covered company on the FR Y-9C in the current stress test cycle. Regulatory capital ratio Scenarios Severely adverse scenario Stress test cycle Subsidiary [84 FR 59106, Nov. 1, 2019] § 252.43 Applicability. (a) Scope Applicability. (i) Any U.S. bank holding company with average total consolidated assets of $100 billion or more; (ii) Any U.S. intermediate holding company subject to this section pursuant to § 252.153; and (iii) Any nonbank financial company supervised by the Board that is made subject to this section pursuant to a rule or order of the Board. (2) Ongoing applicability. (b) Transitional arrangements. (2) A bank holding company that becomes a covered company after September 30 of a calendar year must comply with the requirements of this subpart beginning on January 1 of the third calendar year after the bank holding company becomes a covered company, unless that time is extended by the Board in writing. [Reg. YY, 79 FR 64049, Oct. 27, 2014, as amended at 80 FR 75425, Dec. 2, 2015; 82 FR 9329, Feb. 3, 2017; 84 FR 59106, Nov. 1, 2019] § 252.44 Analysis conducted by the Board. (a) In general. (2) The analysis will include an assessment of the projected losses, net income, and pro forma capital levels and regulatory capital ratios and other capital ratios for the covered company and use such analytical techniques that the Board determines are appropriate to identify, measure, and monitor risks of the covered company that may affect the financial stability of the United States. (3) In conducting the analysis, the Board will not incorporate changes to a firm's business plan that are likely to have a material impact on the covered company's capital adequacy and funding profile in its projections of losses, net income, pro forma capital levels, and capital ratios. (b) Economic and financial scenarios related to the Board's analysis. (c) In conducting a stress test under this section, the Board will make the following assumptions regarding a covered company's capital actions over the planning horizon: (1) The covered company will not pay any dividends on any instruments that qualify as common equity tier 1 capital; (2) The covered company will make payments on instruments that qualify as additional tier 1 capital or tier 2 capital equal to the stated dividend, interest, or principal due on such instrument; (3) The covered company will not make a redemption or repurchase of any capital instrument that is eligible for inclusion in the numerator of a regulatory capital ratio; and (4) The covered company will not make any issuances of common stock or preferred stock. (d) Frequency of analysis conducted by the Board General. Table 1 to § 252.44( d If the covered company is a: Then the Board will conduct its analysis: Global systemically important BHC Annually. Category II bank holding company Annually. Category II U.S. intermediate holding company Annually. Category III bank holding company Annually. Category III U.S. intermediate holding company Annually. Category IV bank holding company Biennially, occurring in each year ending in an even number. Category IV U.S. intermediate holding company Biennially, occurring in each year ending in an even number. Nonbank financial company supervised by the Board Annually. (2) Change in frequency. (ii) A Category IV bank holding company or Category IV U.S. intermediate holding company may elect to have the Board conduct a stress test with respect to the company in a year ending in an odd number by providing notice to the Board and the appropriate Federal Reserve Bank by January 15 of that year. Notwithstanding the previous sentence, such a company may elect to have the Board conduct a stress test with respect to the company in the year 2021 by providing notice to the Board and the appropriate Federal Reserve Bank by April 5, 2021. (3) Notice and response Notification of change in frequency. (ii) Request for reconsideration and Board response. [Reg. YY, 79 FR 64049, Oct. 27, 2014, as amended at 80 FR 75425, Dec. 2, 2015; 84 FR 59106, Nov. 1, 2019; 85 FR 15604, Mar. 18, 2020; 86 FR 7949, Feb. 3, 2021] § 252.45 Data and information required to be submitted in support of the Board's analyses. (a) Regular submissions. (b) Additional submissions required by the Board. (1) Ensure that the Board has sufficient information to conduct its analysis under this subpart; and (2) Project a company's pre-provision net revenue, losses, provision for credit losses, and net income; and pro forma capital levels, regulatory capital ratios, and any other capital ratio specified by the Board under the scenarios described in § 252.44(b). (c) Confidential treatment of information submitted. [Reg. YY, 79 FR 64049, Oct. 27, 2014, as amended at 80 FR 75426, Dec. 2, 2015; 84 FR 4245, Feb. 14, 2019] § 252.46 Review of the Board's analysis; publication of summary results. (a) Review of results. (b) Publication of results by the Board. (2) The Board will notify companies of the date on which it expects to publicly disclose a summary of the Board's analyses pursuant to paragraph (b)(1) of this section at least 14 calendar days prior to the expected disclosure date. [Reg. YY, 79 FR 64049, Oct. 27, 2014, as amended at 82 FR 9329, Feb. 3, 2017] § 252.47 Corporate use of stress test results. (a) In general. (1) As part of the covered company's capital plan and capital planning process, including when making changes to the covered company's capital structure (including the level and composition of capital); (2) When assessing the covered company's exposures, concentrations, and risk positions; and (3) In the development or implementation of any plans of the covered company for recovery or resolution. (b) Resolution plan updates. Subpart F—Company-Run Stress Test Requirements for Certain U.S. Bank Holding Companies and Nonbank Financial Companies Supervised by the Board Source: Reg. YY, 79 FR 64051, Oct. 27, 2014, unless otherwise noted. § 252.50 [Reserved] § 252.51 Authority and purpose. (a) Authority. (b) Purpose. [84 FR 59107, Nov. 1, 2019] § 252.52 Definitions. For purposes of this subpart, the following definitions apply: Advanced approaches Baseline scenario Capital action Covered company (1) A global systemically important BHC; (2) A Category II bank holding company; (3) A Category III bank holding company; (4) A Category II U.S. intermediate holding company subject to this section pursuant to § 252.153; (5) A Category III U.S. intermediate holding company subject to this section pursuant to § 252.153; and (6) A nonbank financial company supervised by the Board that is made subject to this section pursuant to a rule or order of the Board. Foreign banking organization Planning horizon Pre-provision net revenue Provision for credit losses (1) With respect to a covered company that has adopted the current expected credit losses methodology under GAAP, the provision for credit losses, as would be reported by the covered company on the FR Y-9C in the current stress test cycle; and (2) With respect to a covered company that has not adopted the current expected credit losses methodology under GAAP, the provision for loan and lease losses as would be reported by the covered company on the FR Y-9C in the current stress test cycle. Regulatory capital ratio Scenarios Severely adverse scenario Stress test Stress test cycle Subsidiary [84 FR 59107, Nov. 1, 2019] § 252.53 Applicability. (a) Scope Applicability. (i) Any global systemically important BHC; (ii) Any Category II bank holding company; (iii) Any Category III bank holding company; (iv) Any Category II U.S. intermediate holding company subject to this section pursuant to § 252.153; (v) Any Category III U.S. intermediate holding company subject to this section pursuant to § 252.153; and (vi) Any nonbank financial company supervised by the Board that is made subject to this section pursuant to a rule or order of the Board. (2) Ongoing applicability. (A) Is not a global systemically important BHC; (B) Is not a Category II bank holding company; and (C) Is not a Category III bank holding company. (ii) A U.S. intermediate holding company (including any successor company) that is subject to any requirement in this subpart shall remain subject to any such requirement unless and until the U.S. intermediate holding company: (A) Is not a Category II U.S. intermediate holding company; and (B) Is not a Category III U.S. intermediate holding company. (3) Insurance bank holding companies. (b) Transitional arrangements. (2) A company that becomes a covered company after September 30 of a calendar year must comply with the requirements of this subpart beginning on January 1 of the third calendar year after the company becomes a covered company, unless that time is extended by the Board in writing. [84 FR 59107, Nov. 1, 2019, as amended at 88 FR 82980, Nov. 27, 2023] § 252.54 Stress test. (a) Stress test In general. (2) Frequency General. Table 1 to § 252.54( a i If the covered company is a Then the stress test must be conducted Global systemically important BHC Annually, by April 5 of each calendar year based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. Category II bank holding company Annually, by April 5 of each calendar year based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. Category II U.S. intermediate holding company Annually, by April 5 of each calendar year based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. Category III bank holding company Biennially, by April 5 of each calendar year ending in an even number, based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. Category III U.S. intermediate holding company Biennially, by April 5 of each calendar year ending in an even number, based on data as of December 31 of the preceding calendar year, unless the time or the as-of date is extended by the Board in writing. Nonbank financial company supervised by the Board Periodically, as determined by rule or order. (ii) Change in frequency. (3) Notice and response Notification of change in frequency. (ii) Request for reconsideration and Board response. (b) Scenarios provided by the Board In general. (2) Additional components. (A) Aggregate trading assets and liabilities of $50 billion or more, or aggregate trading assets and liabilities equal to 10 percent or more of total consolidated assets; (B) Is not a Category IV bank holding company. (ii) The Board may require a covered company to include one or more additional components in its severely adverse scenario in the stress test required by this section based on the company's financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy. (3) Additional scenarios. (4) Notice and response Notification of additional component. (ii) Request for reconsideration and Board response. (iii) Description of component. [Reg. YY, 79 FR 64051, Oct. 27, 2014, as amended at 82 FR 9330, Feb. 3, 2017; 84 FR 59108, Nov. 1, 2019; 85 FR 15605, Mar. 18, 2020; 86 FR 7949, Feb. 3, 2021; 86 FR 22844, Apr. 30, 2021] § 252.55 [Reserved] § 252.56 Methodologies and practices. (a) Potential impact on capital. (1) Losses, pre-provision net revenue, provision for credit losses, and net income; and (2) The potential impact on the regulatory capital levels and ratios applicable to the covered bank, and any other capital ratios specified by the Board, and in doing so must: (i) Incorporate the effects of any capital action over the planning horizon and maintenance of an allowance for loan losses or adjusted allowance for credit losses, as appropriate, for credit exposures throughout the planning horizon; and (ii) Exclude the impacts of changes to a firm's business plan that are likely to have a material impact on the covered company's capital adequacy and funding profile. (b) Assumptions regarding capital actions. (1) The covered company will not pay any dividends on any instruments that qualify as common equity tier 1 capital; (2) The covered company will make payments on instruments that qualify as additional tier 1 capital or tier 2 capital equal to the stated dividend, interest, or principal due on such instrument; (3) The covered company will not make a redemption or repurchase of any capital instrument that is eligible for inclusion in the numerator of a regulatory capital ratio; and (4) The covered company will not make any issuances of common stock or preferred stock. (c) Controls and oversight of stress testing processes In general. (2) Oversight of stress testing processes. (3) Role of stress testing results. (i) As part of the covered company's capital plan and capital planning process, including when making changes to the covered company's capital structure (including the level and composition of capital); (ii) When assessing the covered company's exposures, concentrations, and risk positions; and (iii) In the development or implementation of any plans of the covered company for recovery or resolution. [Reg. YY, 79 FR 64051, Oct. 27, 2014, as amended at 80 FR 75426, Dec. 2, 2015; 84 FR 4246, Feb. 14, 2019; 84 FR 59109, Nov. 1, 2019; 85 FR 15605, Mar. 18, 2020; 86 FR 7949, Feb. 3, 2021] § 252.57 Reports of stress test results. (a) Reports to the Board of stress test results. (b) Confidential treatment of information submitted. [Reg. YY, 79 FR 64051, Oct. 27, 2014, as amended at 82 FR 9330, Feb. 3, 2017; 84 FR 59109, Nov. 1, 2019] § 252.58 Disclosure of stress test results. (a) Public disclosure of results In general. (2) Disclosure method. (b) Summary of results. (1) A description of the types of risks included in the stress test; (2) A general description of the methodologies used in the stress test, including those employed to estimate losses, revenues, provision for credit losses, and changes in capital positions over the planning horizon. (3) Estimates of— (i) Pre-provision net revenue and other revenue; (ii) Provision for credit losses, realized losses or gains on available-for-sale and held-to-maturity securities, trading and counterparty losses or gains; (iii) Net income before taxes; (iv) Loan losses (dollar amount and as a percentage of average portfolio balance) in the aggregate and by subportfolio, including: Domestic closed-end first-lien mortgages; domestic junior lien mortgages and home equity lines of credit; commercial and industrial loans; commercial real estate loans; credit card exposures; other consumer loans; and all other loans; and (v) Pro forma regulatory capital ratios and any other capital ratios specified by the Board; (4) An explanation of the most significant causes for the changes in regulatory capital ratios; and (5) With respect to any depository institution subsidiary that is subject to stress testing requirements pursuant to 12 U.S.C. 5365(i)(2), as implemented by subpart B of this part, 12 CFR part 46 (OCC), or 12 CFR part 325, subpart C (FDIC), changes over the planning horizon in regulatory capital ratios and any other capital ratios specified by the Board and an explanation of the most significant causes for the changes in regulatory capital ratios. (c) Content of results. (i) Pre-provision net revenue and other revenue; (ii) Provision for credit losses, realized losses/gains on available-for-sale and held-to-maturity securities, trading and counterparty losses, and other losses or gain; (iii) Net income before taxes; and (iv) Loan losses in the aggregate and by subportfolio. (2) The disclosure of pro forma regulatory capital ratios and any other capital ratios specified by the Board that is required under paragraph (b) of this section must include the beginning value, ending value, and minimum value of each ratio over the planning horizon. [Reg. YY, 79 FR 64051, Oct. 27, 2014, as amended at 80 FR 75426, Dec. 2, 2015; 82 FR 9330, Feb. 3, 2017; 84 FR 4246, Feb. 14, 2019; 84 FR 59109, Nov. 1, 2019; 86 FR 7949, Feb. 3, 2021] Subpart G—External Long-term Debt Requirement, External Total Loss-absorbing Capacity Requirement and Buffer, and Restrictions on Corporate Practices for U.S. Global Systemically Important Banking Organizations Source: 82 FR 8306, Jan. 24, 2017, unless otherwise noted. § 252.60 Applicability. (a) General applicability. (b) Initial applicability. (1) January 1, 2019; or (2) 1095 days (three years) after the date on which the company becomes a global systemically important BHC. § 252.61 Definitions. For purposes of this subpart: Additional tier 1 capital Common equity tier 1 capital Common equity tier 1 capital ratio Common equity tier 1 minority interest Default right (i) Right of a party, whether contractual or otherwise (including rights incorporated by reference to any other contract, agreement or document, and rights afforded by statute, civil code, regulation and common law), to liquidate, terminate, cancel, rescind, or accelerate the agreement or transactions thereunder, set off or net amounts owing in respect thereto (except rights related to same-day payment netting), exercise remedies in respect of collateral or other credit support or property related thereto (including the purchase and sale of property), demand payment or delivery thereunder or in respect thereof (other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure), suspend, delay or defer payment or performance thereunder, modify the obligations of a party thereunder or any similar rights; and (ii) Right or contractual provision that alters the amount of collateral or margin that must be provided with respect to an exposure thereunder, including by altering any initial amount, threshold amount, variation margin, minimum transfer amount, the margin value of collateral or any similar amount, that entitles a party to demand the return of any collateral or margin transferred by it to the other party or a custodian or that modifies a transferee's right to reuse collateral or margin (if such right previously existed), or any similar rights, in each case, other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure; and (2) Does not include any right under a contract that allows a party to terminate the contract on demand or at its option at a specified time, or from time to time, without the need to show cause. Discretionary bonus payment Distribution Eligible debt security (1) A debt instrument that: (i) Is paid in, and issued by the global systemically important BHC; (ii) Is not secured, not guaranteed by the global systemically important BHC or a subsidiary of the global systemically important BHC, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument; (iii) Has a maturity of greater than or equal to 365 days (one year) from the date of issuance; (iv) Is governed by the laws of the United States or any State thereof; (v) Does not provide the holder of the instrument a contractual right to accelerate payment of principal or interest on the instrument, except a right that is exercisable on one or more dates that are specified in the instrument or in the event of: (A) A receivership, insolvency, liquidation, or similar proceeding of the global systemically important BHC; or (B) A failure of the global systemically important BHC to pay principal or interest on the instrument when due and payable that continues for 30 days or more; (vi) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the global systemically important BHC's credit quality, but may have an interest rate that is adjusted periodically independent of the global systemically important BHC's credit quality, in relation to general market interest rates or similar adjustments; (vii) Is not a structured note; and (viii) Does not provide that the instrument may be converted into or exchanged for equity of the global systemically important BHC; and (2) A debt instrument issued prior to December 31, 2016 that: (i) Is paid in, and issued by the global systemically important BHC; (ii) Is not secured, not guaranteed by the global systemically important BHC or a subsidiary of the global systemically important BHC, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument; (iii) Has a maturity of greater than or equal to 365 days (one year) from the date of issuance; (iv) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the global systemically important BHC's credit quality, but may have an interest rate that is adjusted periodically independent of the global systemically important BHC's credit quality, in relation to general market interest rates or similar adjustments; (v) Is not a structured note; and (vi) Does not provide that the instrument may be converted into or exchanged for equity of the global systemically important BHC. External TLAC risk-weighted buffer GAAP Global systemically important BHC GSIB surcharge Method 1 capital surcharge Outstanding eligible external long-term debt amount Person Qualified financial contract Structured note (1) Has a principal amount, redemption amount, or stated maturity that is subject to reduction based on the performance of any asset, entity, index, or embedded derivative or similar embedded feature; (2) Has an embedded derivative or similar embedded feature that is linked to one or more equity securities, commodities, assets, or entities; (3) Does not specify a minimum principal amount that becomes due upon acceleration or early termination; or (4) Is not classified as debt under GAAP, provided that an instrument is not a structured note solely because it is one or both of the following: (i) An instrument that is not denominated in U.S. dollars; or (ii) An instrument where interest payments are based on an interest rate index. Supplementary leverage ratio Tier 1 minority interest Tier 2 capital Total leverage exposure Total risk-weighted assets [82 FR 8306, Jan. 24, 2017, as amended at 86 FR 738, Jan. 6, 2021; 90 FR 55290, Dec. 1, 2025] § 252.62 External long-term debt requirement. (a) External long-term debt requirement. (1) The global systemically important BHC's total risk-weighted assets multiplied by the sum of 6 percent plus the global systemically important BHC's GSIB surcharge (expressed as a percentage); and (2) The global systemically important BHC's total leverage exposure multiplied by the sum of 2.5 percent plus the global systemically important BHC's leverage buffer requirement under 12 CFR 217.11 (expressed as a percentage). (b) Outstanding eligible external long-term debt amount. (i) One hundred (100) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the global systemically important BHC in greater than or equal to 730 days (two years); (ii) Fifty (50) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the global systemically important BHC in greater than or equal to 365 days (one year) and less than 730 days (two years); and (iii) Zero (0) percent of the amount due to be paid of unpaid principal of the outstanding eligible debt securities issued by the global systemically important BHC in less than 365 days (one year). (2) For purposes of paragraph (b)(1) of this section, the date on which principal is due to be paid on an outstanding eligible debt security is calculated from the earlier of: (i) The date on which payment of principal is required under the terms governing the instrument, without respect to any right of the holder to accelerate payment of principal; and (ii) The date the holder of the instrument first has the contractual right to request or require payment of the amount of principal, provided that, with respect to a right that is exercisable on one or more dates that are specified in the instrument only on the occurrence of an event (other than an event of a receivership, insolvency, liquidation, or similar proceeding of the global systemically important BHC, or a failure of the global systemically important BHC to pay principal or interest on the instrument when due), the date for the outstanding eligible debt security under this paragraph (b)(2)(ii) will be calculated as if the event has occurred. (3) After notice and response proceedings consistent with 12 CFR part 263, subpart E, the Board may order a global systemically important BHC to exclude from its outstanding eligible long-term debt amount any debt security with one or more features that would significantly impair the ability of such debt security to take losses. (c) Redemption and repurchase. [82 FR 8306, Jan. 24, 2017, as amended at 90 FR 55290, Dec. 1, 2025] § 252.63 External total loss-absorbing capacity requirement and buffer. (a) External total loss-absorbing capacity requirement. (1) 18 percent of the global systemically important BHC's total risk-weighted assets; and (2) 7.5 percent of the global systemically important BHC's total leverage exposure. (b) Outstanding external total loss-absorbing capacity amount. (1) The global systemically important BHC's common equity tier 1 capital (excluding any common equity tier 1 minority interest); (2) The global systemically important BHC's additional tier 1 capital (excluding any tier 1 minority interest); and (3) The global systemically important BHC's outstanding eligible external long-term debt amount plus 50 percent of the amount due to be paid of unpaid principal of outstanding eligible debt securities issued by the global systemically important BHC in, as calculated in § 252.62(b)(2), greater than or equal to 365 days (one year) but less than 730 days (two years). (c) External TLAC buffer Composition of the external TLAC risk-weighted buffer. (2) Definitions. (i) Eligible retained income. (A) The global systemically important BHC's net income, calculated in accordance with the instructions to the FR Y-9C, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income; and (B) The average of the global systemically important BHC's net income, calculated in accordance with the instructions to the FR Y-9C, for the four calendar quarters preceding the current calendar quarter. (ii) Maximum external TLAC risk-weighted payout ratio. (iii) Maximum external TLAC risk-weighted payout amount. (iv) Maximum external TLAC leverage payout ratio. (v) Maximum external TLAC leverage payout amount. (3) Calculation of the external TLAC risk-weighted buffer level. (A) 18 percent; minus (B) The ratio (expressed as a percentage) of the global systemically important BHC's additional tier 1 capital (excluding any tier 1 minority interest) to its total risk-weighted assets; and minus (C) The ratio (expressed as a percentage) of the global systemically important BHC's outstanding eligible external long-term debt amount plus 50 percent of the amount of unpaid principal of outstanding eligible debt securities issued by the global systemically important BHC due to be paid in, as calculated in § 252.62(b)(2), greater than or equal to 365 days (one year) but less than 730 days (two years) to total risk-weighted assets. (ii) Notwithstanding paragraph (c)(3)(i) of this section, if the ratio (expressed as a percentage) of a global systemically important BHC's external total loss-absorbing capacity amount as calculated under paragraph (b) of this section to its risk-weighted assets is less than or equal to 18 percent, the global systemically important BHC's external TLAC risk-weighted buffer level is zero. (4) Limits on distributions and discretionary bonus payments. (ii) A global systemically important BHC with an external TLAC risk-weighted buffer level that is greater than the external TLAC risk-weighted buffer and an external TLAC leverage buffer level that is greater than the global systemically important BHC's leverage buffer requirement under 12 CFR 217.11, in accordance with paragraph (c)(5) of this section, is not subject to a maximum external TLAC risk-weighted payout amount or a maximum external TLAC leverage payout amount. (iii) Except as provided in paragraph (c)(4)(iv) of this section, a global systemically important BHC may not make distributions or discretionary bonus payments during the current calendar quarter if the global systemically important BHC's: (A) Eligible retained income is negative; and (B) External TLAC risk-weighted buffer level was less than the external TLAC risk-weighted buffer as of the end of the previous calendar quarter or external TLAC leverage buffer level was less than the global systemically important BHC's leverage buffer requirement under 12 CFR 217.11 as of the end of the previous calendar quarter. (iv) Notwithstanding the limitations in paragraphs (c)(4)(i) through (iii) of this section, the Board may permit a global systemically important BHC to make a distribution or discretionary bonus payment upon a request of the global systemically important BHC, if the Board determines that the distribution or discretionary bonus payment would not be contrary to the purposes of this section, or to the safety and soundness of the global systemically important BHC. In making such a determination, the Board will consider the nature and extent of the request and the particular circumstances giving rise to the request. (v)(A) A global systemically important BHC is subject to the lowest of the maximum payout amounts as determined under 12 CFR 217.11(a)(2), the maximum external TLAC risk-weighted payout amount as determined under this paragraph, and the maximum external TLAC leverage payout amount as determined under this paragraph. (B) Additional limitations on distributions may apply to a global systemically important BHC under 12 CFR 225.4, 225.8, and 263.202. (5) External TLAC leverage buffer General. (ii) Composition of the external TLAC leverage buffer. (iii) Calculation of the external TLAC leverage buffer level. ( 1 ( 2 (B) Notwithstanding paragraph (c)(5)(iii) of this section, if the ratio (expressed as a percentage) of a global systemically important BHC's external total loss-absorbing capacity amount as calculated under paragraph (b) of this section to its total leverage exposure is less than or equal to 7.5 percent, the global systemically important BHC's external TLAC leverage buffer level is zero. Table 1 to § 252.63—Calculation of Maximum External TLAC Risk-Weighted Payout Amount External TLAC risk-weighted buffer level Maximum External TLAC risk-weighted payout ratio Greater than the external TLAC risk-weighted buffer No payout ratio limitation applies. Less than or equal to the external TLAC risk-weighted buffer, and 60 percent. Less than or equal to 75 percent of the external TLAC risk-weighted buffer, and 40 percent. Less than or equal to 50 percent of the external TLAC risk-weighted buffer, and 20 percent. Less than or equal to 25 percent of the external TLAC risk-weighted buffer 0 percent. Table 2 to § 252.63—Calculation of Maximum External TLAC Leverage Payout Amount External TLAC leverage buffer level Maximum external TLAC leverage payout ratio Greater than 100 percent of the global systemically important BHC's leverage buffer requirement under 12 CFR 217.11 No payout ratio limitation applies. Less than or equal to 100 percent of the global systemically important BHC's leverage buffer requirement under 12 CFR 217.11, and 60 percent. Less than or equal to 75 percent of the global systemically important BHC's leverage buffer requirement under 12 CFR 217.11, and 40 percent. Less than or equal to 50 percent of the global systemically important BHC's leverage buffer requirement under 12 CFR 217.11, and 20 percent. Less than or equal to 25 percent of global systemically important BHC's leverage buffer requirement under 12 CFR 217.11 0 percent. [82 FR 8306, Jan. 24, 2017, as amended at 85 FR 17006, Mar. 26, 2020; 86 FR 738, Jan. 6, 2021; 90 FR 55290, Dec. 1, 2025] § 252.64 Restrictions on corporate practices of U.S. global systemically important banking organizations. (a) Prohibited corporate practices. (1) Issue any debt instrument with an original maturity of less than 365 days (one year), including short term deposits and demand deposits, to any person, unless the person is a subsidiary of the global systemically important BHC; (2) Issue any instrument, or enter into any related contract, with respect to which the holder of the instrument has a contractual right to offset debt owed by the holder or its affiliates to a subsidiary of the global systemically important BHC against the amount, or a portion of the amount, owed by the global systemically important BHC under the instrument; (3) Enter into a qualified financial contract that is not a credit enhancement with a person that is not a subsidiary of the global systemically important BHC; (4) Enter into an agreement in which the global systemically important BHC guarantees a liability of a subsidiary of the global systemically important BHC if such liability permits the exercise of a default right that is related, directly or indirectly, to the global systemically important BHC becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding other than a receivership proceeding under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5381 through 5394) unless the liability is subject to requirements of the Board restricting such default rights or subject to any similar requirements of another U.S. federal banking agency; or (5) Enter into, or otherwise begin to benefit from, any agreement that provides for its liabilities to be guaranteed by any of its subsidiaries. (b) Limit on unrelated liabilities. (2) For purposes of paragraph (b)(1) of this section, an unrelated liability is any non-contingent liability of the global systemically important BHC owed to a person that is not an affiliate of the global systemically important BHC other than: (i) The instruments that are used to satisfy the global systemically important BHC's external total loss-absorbing capacity amount, as calculated under § 252.63(b); (ii) Any dividend or other liability arising from the instruments that are used to satisfy the global systemically important BHC's external total loss-absorbing capacity amount, as calculated under § 252.63(b); (iii) An eligible debt security that does not provide the holder of the instrument with a currently exercisable right to require immediate payment of the total or remaining principal amount; and (iv) A secured liability, to the extent that it is secured, or a liability that otherwise represents a claim that would be senior to eligible debt securities in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(b)) and the Bankruptcy Code (11 U.S.C. 507). (c) A Covered BHC is not subject to paragraph (b) of this section if all of the eligible debt securities issued by the Covered BHC would represent the most subordinated debt claim in a receivership, insolvency, liquidation, or similar proceeding of the Covered BHC. § 252.65 Disclosure requirements. (a) A global systemically important BHC must publicly disclose a description of the financial consequences to unsecured debtholders of the global systemically important BHC entering into a resolution proceeding in which the global systemically important BHC is the only entity that would be subject to the resolution proceeding. (b) A global systemically important BHC must provide the disclosure required by paragraph (a) of this section: (1) In the offering documents for all of its eligible debt securities; and (2) Either: (i) On the global systemically important BHC's Web site; or (ii) In more than one public financial report or other public regulatory reports, provided that the global systemically important BHC publicly provides a summary table specifically indicating the location(s) of this disclosure. Subpart H—Single-Counterparty Credit Limits Source: 83 FR 38493, Aug. 6, 2018, unless otherwise noted. § 252.70 Applicability and general provisions. (a) In general. (2) For purposes of this subpart: (i) Covered company (A) A global systemically important BHC; (B) A Category II bank holding company; and (C) A Category III bank holding company; (ii) Major covered company (b) Credit exposure limits. (2) A covered company is required to calculate its aggregate net credit exposure, gross credit exposure, and net credit exposure to a counterparty using the methods in this subpart. (c) Applicability of this subpart. (ii) Notwithstanding paragraph (c)(1)(i) of this section, a company that is a major covered company as of October 5, 2018, must comply with the requirements of this subpart, including but not limited to § 252.72, beginning on January 1, 2020, unless that time is extended by the Board in writing. (2) A covered company that becomes subject to this subpart after October 5, 2018 must comply with the requirements of this subpart beginning on the first day of the ninth calendar quarter after it becomes a covered company, unless that time is accelerated or extended by the Board in writing. (d) Cessation of requirements. (i) The covered company is not a global systemically important BHC; (ii) The covered company is not a Category II bank holding company; and (iii) The covered company is not a Category III bank holding company. (2) A covered company that has ceased to be a major covered company for purposes of § 252.72(b) is no longer subject to the requirements of § 252.72(b) beginning on the first day of the calendar quarter following the reporting date on which it ceased to be a major covered company; provided that the covered company remains subject to the requirements of this subpart, unless it ceases to be a covered company pursuant to paragraph (d)(1) of this section. [83 FR 38493, Aug. 6, 2018, as amended at 84 FR 59109, Nov. 1, 2019] § 252.71 Definitions. Unless defined in this section, terms that are set forth in § 252.2 of this part and used in this subpart have the definitions assigned in § 252.2. For purposes of this subpart: (a) Adjusted market value (1) With respect to the value of cash, securities, or other eligible collateral transferred by the covered company to a counterparty, the sum of: (i) The market value of the cash, securities, or other eligible collateral; and (ii) The product of the market value of the securities or other eligible collateral multiplied by the applicable collateral haircut in Table 1 to § 217.132 of the Board's Regulation Q (12 CFR 217.132); and (2) With respect to cash, securities, or other eligible collateral received by the covered company from a counterparty: (i) The market value of the cash, securities, or other eligible collateral; minus (ii) The market value of the securities or other eligible collateral multiplied by the applicable collateral haircut in Table 1 to § 217.132 of the Board's Regulation Q (12 CFR 217.132). (3) Prior to calculating the adjusted market value pursuant to paragraphs (a)(1) and (2) of this section, with regard to a transaction that meets the definition of “repo-style transaction” in § 217.2 of the Board's Regulation Q (12 CFR 217.2), the covered company would first multiply the applicable collateral haircuts in Table 1 to § 217.132 of the Board's Regulation Q (12 CFR 217.132) by the square root of 1/2 (b) Affiliate (1) Any subsidiary of the company and any other company that is consolidated with the company under applicable accounting standards; or (2) For a company that is not subject to principles or standards referenced in paragraph (b)(1) of this section, any subsidiary of the company and any other company that would be consolidated with the company, if consolidation would have occurred if such principles or standards had applied. (c) Aggregate net credit exposure (d) Bank-eligible investments (e) Counterparty (1) With respect to a natural person, the natural person, and, if the credit exposure of the covered company to such natural person exceeds 5 percent of the covered company's tier 1 capital, the natural person and members of the person's immediate family collectively; (2) With respect to any company that is not a subsidiary of the covered company, the company and its affiliates collectively; (3) With respect to a State, the State and all of its agencies, instrumentalities, and political subdivisions (including any municipalities) collectively; (4) With respect to a foreign sovereign entity that is not assigned a zero percent risk weight under the standardized approach in the Board's Regulation Q (12 CFR part 217, subpart D), the foreign sovereign entity and all of its agencies and instrumentalities (but not including any political subdivision) collectively; and (5) With respect to a political subdivision of a foreign sovereign entity such as a state, province, or municipality, any political subdivision of the foreign sovereign entity and all of such political subdivision's agencies and instrumentalities, collectively. 1 1 (f) Covered company (g) Credit derivative (h) Credit transaction (1) Any extension of credit to the counterparty, including loans, deposits, and lines of credit, but excluding uncommitted lines of credit; (2) Any repurchase agreement or reverse repurchase agreement with the counterparty; (3) Any securities lending or securities borrowing transaction with the counterparty; (4) Any guarantee, acceptance, or letter of credit (including any endorsement, confirmed letter of credit, or standby letter of credit) issued on behalf of the counterparty; (5) Any purchase of securities issued by or other investment in the counterparty; (6) Any credit exposure to the counterparty in connection with a derivative transaction between the covered company and the counterparty; (7) Any credit exposure to the counterparty in connection with a credit derivative or equity derivative between the covered company and a third party, the reference asset of which is an obligation or equity security of, or equity investment in, the counterparty; and (8) Any transaction that is the functional equivalent of the above, and any other similar transaction that the Board, by regulation or order, determines to be a credit transaction for purposes of this subpart. (i) Depository institution (j) Derivative transaction (k) Eligible collateral (1) Cash on deposit with the covered company or a subsidiary of the covered company (including cash in foreign currency or U.S. dollars held for the covered company by a custodian or trustee, whether inside or outside of the United States); (2) Debt securities (other than mortgage- or asset-backed securities and resecuritization securities, unless those securities are issued by a U.S. government-sponsored enterprise) that are bank-eligible investments and that are investment grade, except for any debt securities issued by the covered company or any subsidiary of the covered company; (3) Equity securities that are publicly traded, except for any equity securities issued by the covered company or any subsidiary of the covered company; (4) Convertible bonds that are publicly traded, except for any convertible bonds issued by the covered company or any subsidiary of the covered company; or (5) Gold bullion. (l) Eligible credit derivative (1) The contract meets the requirements of an eligible guarantee and has been confirmed by the protection purchaser and the protection provider; (2) Any assignment of the contract has been confirmed by all relevant parties; (3) If the credit derivative is a credit default swap, the contract includes the following credit events: (i) Failure to pay any amount due under the terms of the reference exposure, subject to any applicable minimal payment threshold that is consistent with standard market practice and with a grace period that is closely in line with the grace period of the reference exposure; and (ii) Receivership, insolvency, liquidation, conservatorship, or inability of the reference exposure issuer to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and similar events; (4) The terms and conditions dictating the manner in which the contract is to be settled are incorporated into the contract; (5) If the contract allows for cash settlement, the contract incorporates a robust valuation process to estimate loss reliably and specifies a reasonable period for obtaining post-credit event valuations of the reference exposure; (6) If the contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of at least one of the exposures that is permitted to be transferred under the contract provide that any required consent to transfer may not be unreasonably withheld; and (7) If the credit derivative is a credit default swap, the contract clearly identifies the parties responsible for determining whether a credit event has occurred, specifies that this determination is not the sole responsibility of the protection provider, and gives the protection purchaser the right to notify the protection provider of the occurrence of a credit event. (m) Eligible equity derivative (1) The derivative contract has been confirmed by all relevant parties; (2) Any assignment of the derivative contract has been confirmed by all relevant parties; and (3) The terms and conditions dictating the manner in which the derivative contract is to be settled are incorporated into the contract. (n) Eligible guarantee (o) Eligible guarantor (p) Equity derivative (q) Exempt counterparty (r) Financial entity (1)(i) A bank holding company or an affiliate thereof; a savings and loan holding company as defined in section 10(n) of the Home Owners' Loan Act (12 U.S.C. 1467a(n)); a U.S. intermediate holding company established or designated for purposes of compliance with this part; or a nonbank financial company supervised by the Board; (ii) A depository institution as defined in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States; a federal credit union or state credit union as defined in section 2 of the Federal Credit Union Act (12 U.S.C. 1752(1) and (6)); a national association, state member bank, or state nonmember bank that is not a depository institution; an institution that functions solely in a trust or fiduciary capacity as described in section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(D)); an industrial loan company, an industrial bank, or other similar institution described in section 2(c)(2)(H) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(H)); (iii) An entity that is state-licensed or registered as: (A) A credit or lending entity, including a finance company; money lender; installment lender; consumer lender or lending company; mortgage lender, broker, or bank; motor vehicle title pledge lender; payday or deferred deposit lender; premium finance company; commercial finance or lending company; or commercial mortgage company; except entities registered or licensed solely on account of financing the entity's direct sales of goods or services to customers; (B) A money services business, including a check casher; money transmitter; currency dealer or exchange; or money order or traveler's check issuer; (iv) Any person registered with the Commodity Futures Trading Commission as a swap dealer or major swap participant pursuant to the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq. et seq. (v) A securities holding company as defined in section 618 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 1850a); a broker or dealer as defined in sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)-(5)); an investment adviser as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq. (vi) A private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is deemed not to be an investment company under section 3 of the Investment Company Act of 1940 pursuant to Investment Company Act Rule 3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange Commission; (vii) A commodity pool, a commodity pool operator, or a commodity trading advisor as defined, respectively, in sections 1a(10), 1a(11), and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10), 1a(11), and 1a(12)); a floor broker, a floor trader, or introducing broker as defined, respectively, in sections 1a(22), 1a(23) and 1a(31) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined in section 1a(28) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28)); (viii) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974 (29 U.S.C. 1002); (ix) An entity that is organized as an insurance company, primarily engaged in writing insurance or reinsuring risks underwritten by insurance companies, or is subject to supervision as such by a State insurance regulator or foreign insurance regulator; (x) Any designated financial market utility, as defined in section 803 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5462); and (xi) An entity that would be a financial entity described in paragraphs (r)(1)(i) through (x) of this section, if it were organized under the laws of the United States or any State thereof; and (2) Provided that, for purposes of this subpart, “financial entity” does not include any counterparty that is a foreign sovereign entity or multilateral development bank. (s) Foreign sovereign entity (t) Gross credit exposure (u) Immediate family (v) Intraday credit exposure (w) Investment grade (x) Major counterparty (1) A major covered company; (2) A top-tier foreign banking organization that meets the requirements of § 252.172(c)(3) through (5); or (3) Any nonbank financial company supervised by the Board. (y) Major covered company (z) Multilateral development bank (aa) Net credit exposure (bb) Qualifying central counterparty (cc) Qualifying master netting agreement (dd) Securities financing transaction (ee) Short sale (ff) Sovereign entity (gg) Subsidiary. subsidiary (1) The company is consolidated by the other company under applicable accounting standards; or (2) For a company that is not subject to principles or standards referenced in paragraph (gg)(1) of this definition, consolidation would have occurred if such principles or standards had applied. (hh) Tier 1 capital (ii) Total consolidated assets. (1) The average of the bank holding company's total consolidated assets in the four most recent consecutive quarters as reported quarterly on the FR Y-9C; or (2) If the bank holding company has not filed an FR Y-9C for each of the four most recent consecutive quarters, the average of the bank holding company's total consolidated assets, as reported on the company's FR Y-9C, for the most recent quarter or consecutive quarters, as applicable. § 252.72 Credit exposure limits. (a) General limit on aggregate net credit exposure. (b) Limit on aggregate net credit exposure of major covered companies to major counterparties. § 252.73 Gross credit exposure. (a) Calculation of gross credit exposure. (1) A deposit of the covered company held by the counterparty, loan by a covered company to the counterparty, and lease in which the covered company is the lessor and the counterparty is the lessee, equal to the amount owed by the counterparty to the covered company under the transaction. (2) A debt security or debt investment held by the covered company that is issued by the counterparty, equal to: (i) The market value of the securities, for trading and available-for-sale securities; and (ii) The amortized purchase price of the securities or investments, for securities or investments held to maturity. (3) An equity security held by the covered company that is issued by the counterparty, equity investment in a counterparty, and other direct investments in a counterparty, equal to the market value. (4) A securities financing transaction must be valued using any of the methods that the covered company is authorized to use under the Board's Regulation Q (12 CFR part 217, subparts D and E) to value such transactions: (i)(A) As calculated for each transaction, in the case of a securities financing transaction between the covered company and the counterparty that is not subject to a bilateral netting agreement or does not meet the definition of “repo-style transaction” in § 217.2 of the Board's Regulation Q (12 CFR 217.2); or (B) As calculated for a netting set, in the case of a securities financing transaction between the covered company and the counterparty that is subject to a bilateral netting agreement with that counterparty and meets the definition of “repo-style transaction” in § 217.2 of the Board's Regulation Q (12 CFR 217.2); (ii) For purposes of paragraph (a)(4)(i) of this section, the covered company must: (A) Assign a value of zero to any security received from the counterparty that does not meet the definition of “eligible collateral” in § 252.71(k); and (B) Include the value of securities that are eligible collateral received by the covered company from the counterparty (including any exempt counterparty), calculated in accordance with paragraphs (a)(4)(i) through (iv) of this section, when calculating its gross credit exposure to the issuer of those securities; (iii) Notwithstanding paragraphs (a)(4)(i) and (ii) of this section and with respect to each credit transaction, a covered company's gross credit exposure to a collateral issuer under this paragraph (a)(4) is limited to the covered company's gross credit exposure to the counterparty on the credit transaction; and (iv) In cases where the covered company receives eligible collateral from a counterparty in addition to the cash or securities received from that counterparty, the counterparty may reduce its gross credit exposure to that counterparty in accordance with § 252.74(b). (5) A committed credit line extended by a covered company to a counterparty, equal to the face amount of the committed credit line. (6) A guarantee or letter of credit issued by a covered company on behalf of a counterparty, equal to the maximum potential loss to the covered company on the transaction. (7) A derivative transaction must be valued using any of the methods that the covered company is authorized to use under the Board's Regulation Q (12 CFR part 217, subparts D and E) to value such transactions: (i)(A) As calculated for each transaction, in the case of a derivative transaction between the covered company and the counterparty, including an equity derivative but excluding a credit derivative described in paragraph (a)(8) of this section, that is not subject to a qualifying master netting agreement; or (B) As calculated for a netting set, in the case of a derivative transaction between the covered company and the counterparty, including an equity derivative but excluding a credit derivative described in paragraph (a)(8) of this section, that is subject to a qualifying master netting agreement. (ii) In cases where a covered company is required to recognize an exposure to an eligible guarantor pursuant to § 252.74(d), the covered company must exclude the relevant derivative transaction when calculating its gross exposure to the original counterparty under this section. (8) A credit derivative between the covered company and a third party where the covered company is the protection provider and the reference asset is an obligation or debt security of the counterparty, equal to the maximum potential loss to the covered company on the transaction. (b) Investments in and exposures to securitization vehicles, investment funds, and other special purpose vehicles that are not subsidiaries. (c) Attribution rule. § 252.74 Net credit exposure. (a) In general. (b) Eligible collateral. (2) A covered company that reduces its gross credit exposure to a counterparty as required under paragraph (b)(1) of this section must include the adjusted market value of the eligible collateral, when calculating its gross credit exposure to the collateral issuer. (3) Notwithstanding paragraph (b)(2) of this section, a covered company's gross credit exposure to a collateral issuer under this paragraph (b) is limited to: (i) Its gross credit exposure to the counterparty on the credit transaction, or (ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction if valued in accordance with § 252.73(a). (c) Eligible guarantees. (2) A covered company that reduces its gross credit exposure to a counterparty as required under paragraph (c)(1) of this section must include the amount of eligible guarantees when calculating its gross credit exposure to the eligible guarantor. (3) Notwithstanding paragraph (c)(2) of this section, a covered company's gross credit exposure to an eligible guarantor with respect to an eligible guarantee under this paragraph (c) is limited to: (i) Its gross credit exposure to the counterparty on the credit transaction prior to recognition of the eligible guarantee, or (ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction prior to recognition of the eligible guarantee if valued in accordance with § 252.73(a). (d) Eligible credit and equity derivatives. (i) In the case of any eligible credit derivative from an eligible guarantor, the notional amount of the eligible credit derivative; or (ii) In the case of any eligible equity derivative from an eligible guarantor, the gross credit exposure amount to the counterparty (calculated in accordance with § 252.73(a)(7)). (2)(i) A covered company that reduces its gross credit exposure to a counterparty as provided under paragraph (d)(1) of this section must include, when calculating its net credit exposure to the eligible guarantor, including in instances where the underlying credit transaction would not be subject to the credit limits of § 252.72 (for example, due to an exempt counterparty), either (A) In the case of any eligible credit derivative from an eligible guarantor, the notional amount of the eligible credit derivative; or (B) In the case of any eligible equity derivative from an eligible guarantor, the gross credit exposure amount to the counterparty (calculated in accordance with § 252.73(a)(7)). (ii) Notwithstanding paragraph (d)(2)(i) of this section, in cases where the eligible credit derivative or eligible equity derivative is used to hedge covered positions that are subject to the Board's market risk rule (12 CFR part 217, subpart F) and the counterparty on the hedged transaction is not a financial entity, the amount of credit exposure that a company must recognize to the eligible guarantor is the amount that would be calculated pursuant to § 252.73(a). (3) Notwithstanding paragraph (d)(2) of this section, a covered company's gross credit exposure to an eligible guarantor with respect to an eligible credit derivative or an eligible equity derivative under this paragraph (d) is limited to: (i) Its gross credit exposure to the counterparty on the credit transaction prior to recognition of the eligible credit derivative or the eligible equity derivative, or (ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction prior to recognition of the eligible credit derivative or the eligible equity derivative if valued in accordance with § 252.73(a). (e) Other eligible hedges. (1) The instrument in which the covered company has a short position is junior to, or pari passu (2) The instrument in which the covered company has a short position and the instrument in which the covered company has the long position are either both treated as trading or available-for-sale exposures or both treated as held-to-maturity exposures. (f) Unused portion of certain extensions of credit. (2) To the extent that the used portion of a credit extension has been secured by eligible collateral, the covered company may reduce its gross credit exposure by the adjusted market value of any eligible collateral received from the counterparty, even if the used portion has not been fully secured by eligible collateral. (3) To qualify for the reduction in net credit exposure under this paragraph, the credit contract must specify that any used portion of the credit extension must be fully secured by the adjusted market value of any eligible collateral. (g) Credit transactions involving exempt counterparties. (2) Notwithstanding paragraph (g)(1) of this section, in cases where a covered company has a credit transaction with an exempt counterparty and the covered company has obtained eligible collateral from that exempt counterparty or an eligible guarantee or eligible credit or equity derivative from an eligible guarantor, the covered company must include (for purposes of this subpart) such exposure to the issuer of such eligible collateral or the eligible guarantor, as calculated in accordance with the rules set forth in this section, when calculating its gross credit exposure to that issuer of eligible collateral or eligible guarantor. (h) Currency mismatch adjustments. (1) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible collateral and calculating its gross credit exposure to an issuer of eligible collateral, pursuant to paragraph (b) of this section, the currency mismatch adjustment approach of § 217.37(c)(3)(ii) of the Board's Regulation Q (12 CFR 217.37(c)(3)(ii)); and (2) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible guarantee, eligible equity derivative, or eligible credit derivative from an eligible guarantor and calculating its gross credit exposure to an eligible guarantor, pursuant to paragraphs (c) and (d) of this section, the currency mismatch adjustment approach of § 217.36(f) of the Board's Regulation Q (12 CFR 217.36(f)). (i) Maturity mismatch adjustments. (1) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible collateral or any eligible guarantees, eligible equity derivatives, or eligible credit derivatives from an eligible guarantor, pursuant to paragraphs (b) through (d) of this section, and (2) In calculating its gross credit exposure to an issuer of eligible collateral, pursuant to paragraph (b) of this section, or to an eligible guarantor, pursuant to paragraphs (c) and (d) of this section; provided that (3) The eligible collateral, eligible guarantee, eligible equity derivative, or eligible credit derivative subject to paragraph (i)(1) of this section: (i) Has a shorter maturity than the credit transaction; (ii) Has an original maturity equal to or greater than one year; (iii) Has a residual maturity of not less than three months; and (iv) The adjustment approach is otherwise applicable. § 252.75 Investments in and exposures to securitization vehicles, investment funds, and other special purpose vehicles that are not subsidiaries of the covered company. (a) In general. (i) SPV (ii) SPV exposure (2)(i) A covered company must determine whether the amount of its gross credit exposure to an issuer of assets in an SPV, due to an SPV exposure, is equal to or greater than 0.25 percent of the covered company's tier 1 capital using one of the following two methods: (A) The sum of all of the issuer's assets (with each asset valued in accordance with § 252.73(a)) in the SPV; or (B) The application of the look-through approach described in paragraph (b) of this section. (ii) With respect to the determination required under paragraph (a)(2)(i) of this section, a covered company must use the same method to calculate gross credit exposure to each issuer of assets in a particular SPV. (iii) In making a determination under paragraph (a)(2)(i) of this section, the covered company must consider only the credit exposure to the issuer arising from the covered company's SPV exposure. (iv) For purposes of this paragraph (a)(2), a covered company that is unable to identify each issuer of assets in an SPV must attribute to a single unknown counterparty the amount of its gross credit exposure to all unidentified issuers and calculate such gross credit exposure using one method in either paragraph (a)(2)(i)(A) or (a)(2)(i)(B) of this section. (3)(i) If a covered company determines pursuant to paragraph (a)(2) of this section that the amount of its gross credit exposure to an issuer of assets in an SPV is less than 0.25 percent of the covered company's tier 1 capital, the amount of the covered company's gross credit exposure to that issuer may be attributed to either that issuer of assets or the SPV: (A) If attributed to the issuer of assets, the issuer of assets must be identified as a counterparty, and the gross credit exposure calculated under paragraph (a)(2)(i)(A) of this section to that issuer of assets must be aggregated with any other gross credit exposures (valued in accordance with § 252.73) to that same counterparty; and (B) If attributed to the SPV, the covered company's gross credit exposure is equal to the covered company's SPV exposure, valued in accordance with § 252.73(a). (ii) If a covered company determines pursuant to paragraph (a)(2) of this section that the amount of its gross credit exposure to an issuer of assets in an SPV is equal to or greater than 0.25 percent of the covered company's tier 1 capital or the covered company is unable to determine that the amount of the gross credit exposure is less than 0.25 percent of the covered company's tier 1 capital: (A) The covered company must calculate the amount of its gross credit exposure to the issuer of assets in the SPV using the look-through approach in paragraph (b) of this section; (B) The issuer of assets in the SPV must be identified as a counterparty, and the gross credit exposure calculated in accordance with paragraph (b) must be aggregated with any other gross credit exposures (valued in accordance with § 252.73) to that same counterparty; and (C) When applying the look-through approach in paragraph (b) of this section, a covered company that is unable to identify each issuer of assets in an SPV must attribute to a single unknown counterparty the amount of its gross credit exposure, calculated in accordance with paragraph (b) of this section, to all unidentified issuers. (iii) For purposes of this section, a covered company must aggregate all gross credit exposures to unknown counterparties for all SPVs as if the exposures related to a single unknown counterparty; this single unknown counterparty is subject to the limits of § 252.72 as if it were a single counterparty. (b) Look-through approach. (1) Where all investors in the SPV rank pari passu, (2) Where all investors in the SPV do not rank pari passu, (i) The pro rata share of the covered company's investment in the tranche of the SPV; multiplied by (ii) The lesser of: (A) The market value of the tranche in which the covered company has invested, except in the case of a debt security that is held to maturity, in which case the tranche must be valued at the amortized purchase price of the securities; and (B) The value of each underlying asset attributed to the issuer in the SPV, each as calculated pursuant to § 252.73(a). (c) Exposures to third parties. (2) The amount of any gross credit exposure that is required to be recognized to a third party under paragraph (c)(1) of this section is equal to the covered company's SPV exposure, up to the maximum contractual obligation of that third party to the SPV, valued in accordance with § 252.73(a). (This gross credit exposure is in addition to the covered company's gross credit exposure to the SPV or the issuers of assets of the SPV, calculated in accordance with paragraphs (a) and (b) of this section.) (3) A covered company must aggregate the gross credit exposure to a third party recognized in accordance with paragraphs (c)(1) and (2) of this section with its other gross credit exposures to that third party (that are unrelated to the SPV) for purposes of compliance with the limits of § 252.72. § 252.76 Aggregation of exposures to more than one counterparty due to economic interdependence or control relationships. (a) In general. (2) If, pursuant to an assessment required under paragraph (a)(1) of this section, the covered company determines that one or more of the factors of paragraph (b)(2) or (c)(1) of this section are met with respect to one or more counterparties, or the Board determines pursuant to paragraph (d) of this section that one or more other counterparties of a covered company are economically interdependent or that one or more other counterparties of a covered company are connected by a control relationship, the covered company must aggregate its net credit exposure to the counterparties for all purposes under this subpart, including, but not limited to, § 252.72. (3) In connection with any request pursuant to paragraph (b)(3) or (c)(2) of this section, the Board may require the covered company to provide additional information. (b) Aggregation of exposures to more than one counterparty due to economic interdependence. (2) A covered company must assess whether the financial distress of one counterparty (counterparty A) would prevent the ability of the other counterparty (counterparty B) to fully and timely repay counterparty B's liabilities and whether the insolvency or default of counterparty A is likely to be associated with the insolvency or default of counterparty B and, therefore, these counterparties are economically interdependent, by evaluating the following: (i) Whether 50 percent or more of one counterparty's gross revenue is derived from, or gross expenditures are directed to, transactions with the other counterparty; (ii) Whether counterparty A has fully or partly guaranteed the credit exposure of counterparty B, or is liable by other means, in an amount that is 50 percent or more of the covered company's net credit exposure to counterparty A; (iii) Whether 25 percent or more of one counterparty's production or output is sold to the other counterparty, which cannot easily be replaced by other customers; (iv) Whether the expected source of funds to repay the loans of both counterparties is the same and neither counterparty has another independent source of income from which the loans may be serviced and fully repaid; 1 1 (v) Whether two or more counterparties rely on the same source for the majority of their funding and, in the event of the common provider's default, an alternative provider cannot be found. (3)(i) Notwithstanding paragraph (b)(2) of this section, if a covered company determines that one or more of the factors in paragraph (b)(2) is met, the covered company may request in writing a determination from the Board that those counterparties are not economically interdependent and that the covered company is not required to aggregate those counterparties. (ii) Upon a request by a covered company pursuant to paragraph (b)(3) of this section, the Board may grant temporary relief to the covered company and not require the covered company to aggregate one counterparty with another counterparty provided that the counterparty could promptly modify its business relationships, such as by reducing its reliance on the other counterparty, to address any economic interdependence concerns, and provided that such relief is in the public interest and is consistent with the purpose of this subpart and 12 U.S.C. 5365(e). (c) Aggregation of exposures to more than one counterparty due to certain control relationships. (i) Counterparty A owns, controls, or holds with the power to vote 25 percent or more of any class of voting securities of counterparty B; or (ii) Counterparty A controls in any manner the election of a majority of the directors, trustees, or general partners (or individuals exercising similar functions) of counterparty B. (2)(i) Notwithstanding paragraph (c)(1) of this section, if a covered company determines that one or more of the factors in paragraph (c)(1) is met, the covered company may request in writing a determination from the Board that counterparty A does not control counterparty B and that the covered company is not required to aggregate those counterparties. (ii) Upon a request by a covered company pursuant to paragraph (c)(2) of this section, the Board may grant temporary relief to the covered company and not require the covered company to aggregate counterparty A with counterparty B provided that, taking into account the specific facts and circumstances, such indicia of control does not result in the entities being connected by control relationships for purposes of this subpart, and provided that such relief is in the public interest and is consistent with the purpose of this subpart and 12 U.S.C. 5365(e). (d) Board determinations for aggregation of counterparties due to economic interdependence or control relationships. (1) Economically interdependent for purposes of this subpart, considering the factors in paragraph (b)(2) of this section, as well as any other indicia of economic interdependence that the Board determines in its discretion to be relevant; or (2) Connected by control relationships for purposes of this subpart, considering the factors in paragraph (c)(1) of this section and whether counterparty A: (i) Controls the power to vote 25 percent or more of any class of voting securities of Counterparty B pursuant to a voting agreement; (ii) Has significant influence on the appointment or dismissal of counterparty B's administrative, management, or governing body, or the fact that a majority of members of such body have been appointed solely as a result of the exercise of counterparty A's voting rights; or (iii) Has the power to exercise a controlling influence over the management or policies of counterparty B. (e) Board determinations for aggregation of counterparties to prevent evasion. [83 FR 38493, Aug. 6, 2018, as amended at 83 FR 64023, Dec. 13, 2018] § 252.77 Exemptions. (a) Exempted exposure categories. (1) Any direct claim on, and the portion of a claim that is directly and fully guaranteed as to principal and interest by, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, only while operating under the conservatorship or receivership of the Federal Housing Finance Agency, and any additional obligation issued by a U.S. government-sponsored entity as determined by the Board; (2) Intraday credit exposure to a counterparty; (3) Any trade exposure to a qualifying central counterparty related to the covered company's clearing activity, including potential future exposure arising from transactions cleared by the qualifying central counterparty and pre-funded default fund contributions; (4) Any credit transaction with the Bank for International Settlements, the International Monetary Fund, the International Bank for Reconstruction and Development, the International Finance Corporation, the International Development Association, the Multilateral Investment Guarantee Agency, or the International Centre for Settlement of Investment Disputes; (5) Any credit transaction with the European Commission or the European Central Bank; and (6) Any transaction that the Board exempts if the Board finds that such exemption is in the public interest and is consistent with the purpose of this subpart. (b) Exemption for Federal Home Loan Banks. (c) Additional exemptions by the Board. § 252.78 Compliance. (a) Scope of compliance. (2) A covered company must report its compliance to the Federal Reserve as of the end of the quarter, unless the Board determines and notifies that company in writing that more frequent reporting is required. (3) In reporting its compliance, a covered company must calculate and include in its gross credit exposure to an issuer of eligible collateral or eligible guarantor the amounts of eligible collateral, eligible guarantees, eligible equity derivatives, and eligible credit derivatives that were provided to the covered company in connection with credit transactions with exempt counterparties, valued in accordance with and as required by § 252.74(b) through (d) and (g). (b) Qualifying Master Netting Agreement. (c) Noncompliance. (2) A covered company may request a special temporary credit exposure limit exemption from the Board. The Board may grant approval for such exemption in cases where the Board determines that such credit transactions are necessary or appropriate to preserve the safety and soundness of the covered company or U.S. financial stability. In acting on a request for an exemption, the Board will consider the following: (i) A decrease in the covered company's capital stock and surplus; (ii) The merger of the covered company with another covered company; (iii) A merger of two counterparties; or (iv) An unforeseen and abrupt change in the status of a counterparty as a result of which the covered company's credit exposure to the counterparty becomes limited by the requirements of this section; or (v) Any other factor(s) the Board determines, in its discretion, is appropriate. (d) Other measures. Subpart I—Requirements for Qualified Financial Contracts of Global Systemically Important Banking Organizations Source: Reg. YY, 82 FR 42920, Sept. 12, 2017, unless otherwise noted. § 252.81 Definitions. For purposes of this subpart: Central counterparty (CCP) Chapter 11 proceeding Consolidated affiliate (1) Either consolidates the other company, or is consolidated by the other company, on financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles, the International Financial Reporting Standards, or other similar standards; (2) Is, along with the other company, consolidated with a third company on a financial statement prepared in accordance with principles or standards referenced in paragraph (1) of this definition; or (3) For a company that is not subject to principles or standards referenced in paragraph (1), if consolidation as described in paragraph (1) or (2) of this definition would have occurred if such principles or standards had applied. Default right (i) Right of a party, whether contractual or otherwise (including, without limitation, rights incorporated by reference to any other contract, agreement, or document, and rights afforded by statute, civil code, regulation, and common law), to liquidate, terminate, cancel, rescind, or accelerate such agreement or transactions thereunder, set off or net amounts owing in respect thereto (except rights related to same-day payment netting), exercise remedies in respect of collateral or other credit support or property related thereto (including the purchase and sale of property), demand payment or delivery thereunder or in respect thereof (other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure), suspend, delay, or defer payment or performance thereunder, or modify the obligations of a party thereunder, or any similar rights; and (ii) Right or contractual provision that alters the amount of collateral or margin that must be provided with respect to an exposure thereunder, including by altering any initial amount, threshold amount, variation margin, minimum transfer amount, the margin value of collateral, or any similar amount, that entitles a party to demand the return of any collateral or margin transferred by it to the other party or a custodian or that modifies a transferee's right to reuse collateral or margin (if such right previously existed), or any similar rights, in each case, other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure; (2) With respect to § 252.84, does not include any right under a contract that allows a party to terminate the contract on demand or at its option at a specified time, or from time to time, without the need to show cause. Excluded bank: (1) Means a national bank, a Federal savings association, a Federal branch, a Federal agency, or an FSI that is exempted from the scope of this subpart pursuant to paragraph (b)(2) or (b)(3) of § 252.82; (2) Does not include any entity described in paragraph (1) of this definition that is owned pursuant to section 3(a)(A)(ii) of the Bank Holding Company Act (12 U.S.C. 1842(a)(A)(ii)); is owned by a depository institution in satisfaction of debt previously contracted in good faith; is a portfolio concern, as defined under 13 CFR 107.50, that is controlled by a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662); is owned pursuant to paragraph (11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24); or is a DPC branch subsidiary. FDI Act proceeding FDI Act stay period Financial counterparty (1)(i) A bank holding company or an affiliate thereof; a savings and loan holding company as defined in section 10(n) of the Home Owners' Loan Act (12 U.S.C. 1467a(n)); a U.S. intermediate holding company that is established or designated for purposes of compliance with this part; or a nonbank financial company supervised by the Board; (ii) A depository institution as defined in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States; a Federal credit union or State credit union as defined in section 2 of the Federal Credit Union Act (12 U.S.C. 1752(1) & (6)); an institution that functions solely in a trust or fiduciary capacity as described in section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(D)); an industrial loan company, an industrial bank, or other similar institution described in section 2(c)(2)(H) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(H)); (iii) An entity that is state-licensed or registered as: (A) A credit or lending entity, including a finance company; money lender; installment lender; consumer lender or lending company; mortgage lender, broker, or bank; motor vehicle title pledge lender; payday or deferred deposit lender; premium finance company; commercial finance or lending company; or commercial mortgage company; except entities registered or licensed solely on account of financing the entity's direct sales of goods or services to customers; (B) A money services business, including a check casher; money transmitter; currency dealer or exchange; or money order or traveler's check issuer; (iv) A regulated entity as defined in section 1303(20) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended (12 U.S.C. 4502(20)) or any entity for which the Federal Housing Finance Agency or its successor is the primary federal regulator; (v) Any institution chartered in accordance with the Farm Credit Act of 1971, as amended, 12 U.S.C. 2002 et seq., (vi) Any entity registered with the Commodity Futures Trading Commission as a swap dealer or major swap participant pursuant to the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq. et seq. (vii) A securities holding company, with the meaning specified in section 618 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 1850a); a broker or dealer as defined in sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)-(5)); an investment adviser as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq. (viii) A private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is deemed not to be an investment company under section 3 of the Investment Company Act of 1940 pursuant to Investment Company Act Rule 3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange Commission; (ix) A commodity pool, a commodity pool operator, or a commodity trading advisor as defined, respectively, in sections 1a(10), 1a(11), and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10), 1a(11), and 1a(12)); a floor broker, a floor trader, or introducing broker as defined, respectively, in sections 1a(22), 1a(23) and 1a(31) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined in section 1a(28) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28)); (x) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974 (29 U.S.C. 1002); (xi) An entity that is organized as an insurance company, primarily engaged in writing insurance or reinsuring risks underwritten by insurance companies, or is subject to supervision as such by a State insurance regulator or foreign insurance regulator; or (xii) An entity that would be a financial counterparty described in paragraphs (1)(i)-(xi) of this definition, if the entity were organized under the laws of the United States or any state thereof. (2) The term “financial counterparty” does not include any counterparty that is: (i) A sovereign entity; (ii) A multilateral development bank; or (iii) The Bank for International Settlements. Financial market utility (FMU) (1) Designated contract markets, registered futures associations, swap data repositories, and swap execution facilities registered under the Commodity Exchange Act (7 U.S.C. 1 et seq. et seq. (2) Any broker, dealer, transfer agent, or investment company, or any futures commission merchant, introducing broker, commodity trading advisor, or commodity pool operator, solely by reason of functions performed by such institution as part of brokerage, dealing, transfer agency, or investment company activities, or solely by reason of acting on behalf of a FMU or a participant therein in connection with the furnishing by the FMU of services to its participants or the use of services of the FMU by its participants, provided that services performed by such institution do not constitute critical risk management or processing functions of the FMU. FSI Investment advisory contract Master agreement Person Qualified financial contract (QFC) Retail customer or counterparty Small financial institution (1) Is organized as a bank, as defined in section 3(a) of the Federal Deposit Insurance Act, the deposits of which are insured by the Federal Deposit Insurance Corporation; a savings association, as defined in section 3(b) of the Federal Deposit Insurance Act, the deposits of which are insured by the Federal Deposit Insurance Corporation; a farm credit system institution chartered under the Farm Credit Act of 1971; or an insured Federal credit union or State-chartered credit union under the Federal Credit Union Act; and (2) Has total assets of $10,000,000,000 or less on the last day of the company's most recent fiscal year. U.S. special resolution regimes § 252.82 Applicability. (a) General requirement. (b) Covered entities. (1) A bank holding company that is identified as a global systemically important BHC pursuant to 12 CFR 217.402; (2) A subsidiary of a company identified in paragraph (b)(1) of this section other than a subsidiary that is: (i) A national bank, a Federal savings association, a Federal branch, a Federal agency, an FSI; (ii) A company owned pursuant to section 3(a)(A)(ii), 4(c)(2), 4(k)(4)(H), or 4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. 1842(a)(A)(ii), 1843(c)(2), 1843(k)(4)(H), 1843(k)(4)(I)); (iii) A company owned by a depository institution in satisfaction of debt previously contracted in good faith; (iv) A portfolio concern, as defined under 13 CFR 107.50, that is controlled by a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662); or (v) A company the business of which is to make investments that are designed primarily to promote the public welfare, of the type permitted under paragraph (11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the welfare of low- and moderate-income communities or families (such as providing housing, services, or jobs)); or (3) A U.S. subsidiary, U.S. branch, or U.S. agency of a global systemically important foreign banking organization other than a U.S. subsidiary, U.S. branch, or U.S. agency that is: (i) A national bank, a Federal savings association, a Federal branch, a Federal agency, an FSI; (ii) A company owned pursuant to section 3(a)(A)(ii), 4(c)(2), 4(k)(4)(H), or 4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. 1842(a)(A)(ii), 1843(c)(2), 1843(k)(4)(H), 1843(k)(4)(I)); (iii) A company owned by a depository institution in satisfaction of debt previously contracted in good faith; (iv) A portfolio concern, as defined under 13 CFR 107.50, that is controlled by a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662); (v) A company the business of which is to make investments that are designed primarily to promote the public welfare, of the type permitted under paragraph (11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the welfare of low- and moderate-income communities or families (such as providing housing, services, or jobs); (vi) A section 2(h)(2) company; or (vii) A DPC branch subsidiary. (c) Covered QFCs. (1) With respect to a covered entity that is a covered entity on November 13, 2017, an in-scope QFC that the covered entity: (i) Enters, executes, or otherwise becomes a party to on or after January 1, 2019; or (ii) Entered, executed, or otherwise became a party to before January 1, 2019, if the covered entity or any affiliate that is a covered entity or excluded bank also enters, executes, or otherwise becomes a party to a QFC with the same person or a consolidated affiliate of the same person on or after January 1, 2019. (2) With respect to a covered entity that becomes a covered entity after November 13, 2017, an in-scope QFC that the covered entity: (i) Enters, executes or otherwise becomes a party to on or after the later of the date the covered entity first becomes a covered entity and January 1, 2019; or (ii) Entered, executed, or otherwise became a party to before the date identified in paragraph (c)(2)(i) of this section with respect to the covered entity, if the covered entity or any affiliate that is a covered entity or excluded bank also enters, executes, or otherwise becomes a party to a QFC with the same person or consolidated affiliate of the same person on or after the date identified in paragraph (c)(2)(i) with respect to the covered entity. (d) In-scope QFCs. (1) Restricts the transfer of a QFC (or any interest or obligation in or under, or any property securing, the QFC) from a covered entity; or (2) Provides one or more default rights with respect to a QFC that may be exercised against a covered entity. (e) Rules of construction. (1) A covered entity does not become a party to a QFC solely by acting as agent with respect to the QFC; and (2) The exercise of a default right with respect to a covered QFC includes the automatic or deemed exercise of the default right pursuant to the terms of the QFC or other arrangement. (f) Initial applicability of requirements for covered QFCs. (i) January 1, 2019, if each party to the covered QFC is a covered entity or an excluded bank; (ii) July 1, 2019, if each party to the covered QFC (other than the covered entity) is a financial counterparty that is not a covered entity or excluded bank; or (iii) January 1, 2020, if a party to the covered QFC (other than the covered entity) is not described in paragraph (f)(1)(i) or (f)(1)(ii) of this section or if, notwithstanding paragraph (f)(1)(ii), a party to the covered QFC (other than the covered entity) is a small financial institution. (2) With respect to each of its covered QFCs, a covered entity that is not a covered entity on November 13, 2017 must conform the covered QFC to the requirements of this subpart by: (i) The first day of the calendar quarter immediately following 1 year after the date the covered entity first becomes a covered entity, if each party to the covered QFC is a covered entity or an excluded bank; (ii) The first day of the calendar quarter immediately following 18 months from the date the covered entity first becomes a covered entity if each party to the covered QFC (other than the covered entity) is a financial counterparty that is not a covered entity or excluded bank; or (iii) The first day of the calendar quarter immediately following 2 years from the date the covered entity first becomes a covered entity if a party to the covered QFC (other than the covered entity) is not described in paragraph (f)(2)(i) or (f)(2)(ii) of this section or if, notwithstanding paragraph (f)(2)(ii), a party to the covered QFC (other than the covered entity) is a small financial institution. § 252.83 U.S. Special Resolution Regimes. (a) Covered QFCs not required to be conformed. (i) The covered QFC designates, in the manner described in paragraph (a)(2) of this section, the U.S. special resolution regimes as part of the law governing the QFC; and (ii) Each party to the covered QFC, other than the covered entity, is: (A) An individual that is domiciled in the United States, including any State; (B) A company that is incorporated in or organized under the laws of the United States or any State; (C) A company the principal place of business of which is located in the United States, including any State; or (D) A U.S. branch or U.S. agency. (2) A covered QFC designates the U.S. special resolution regimes as part of the law governing the QFC if the covered QFC: (i) Explicitly provides that the covered QFC is governed by the laws of the United States or a state of the United States; and (ii) Does not explicitly provide that one or both of the U.S. special resolution regimes, or a broader set of laws that includes a U.S. special resolution regime, is excluded from the laws governing the covered QFC. (b) Provisions required. (1) In the event the covered entity becomes subject to a proceeding under a U.S. special resolution regime, the transfer of the covered QFC (and any interest and obligation in or under, and any property securing, the covered QFC) from the covered entity will be effective to the same extent as the transfer would be effective under the U.S. special resolution regime if the covered QFC (and any interest and obligation in or under, and any property securing, the covered QFC) were governed by the laws of the United States or a state of the United States; and (2) In the event the covered entity or an affiliate of the covered entity becomes subject to a proceeding under a U.S. special resolution regime, default rights with respect to the covered QFC that may be exercised against the covered entity are permitted to be exercised to no greater extent than the default rights could be exercised under the U.S. special resolution regime if the covered QFC were governed by the laws of the United States or a state of the United States. (c) Relevance of creditor protection provisions. § 252.84 Insolvency proceedings. (a) Covered QFCs not required to be conformed. (1) Does not explicitly provide any default right with respect to the covered QFC that is related, directly or indirectly, to an affiliate of the direct party becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding; and (2) Does not explicitly prohibit the transfer of a covered affiliate credit enhancement, any interest or obligation in or under the covered affiliate credit enhancement, or any property securing the covered affiliate credit enhancement to a transferee upon or following an affiliate of the direct party becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding or would prohibit such a transfer only if the transfer would result in the supported party being the beneficiary of the credit enhancement in violation of any law applicable to the supported party. (b) General prohibitions. (2) A covered QFC may not prohibit the transfer of a covered affiliate credit enhancement, any interest or obligation in or under the covered affiliate credit enhancement, or any property securing the covered affiliate credit enhancement to a transferee upon or following an affiliate of the direct party becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding unless the transfer would result in the supported party being the beneficiary of the credit enhancement in violation of any law applicable to the supported party. (c) Definitions relevant to the general prohibitions Direct party. (2) Direct QFC. provided that, (3) Affiliate credit enhancement. (d) General creditor protections. (1) The direct party becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding; (2) The direct party not satisfying a payment or delivery obligation pursuant to the covered QFC or another contract between the same parties that gives rise to a default right in the covered QFC; or (3) The covered affiliate support provider or transferee not satisfying a payment or delivery obligation pursuant to a covered affiliate credit enhancement that supports the covered direct QFC. (e) Definitions relevant to the general creditor protections Covered direct QFC. (2) Covered affiliate credit enhancement. (3) Covered affiliate support provider. (4) Supported party. (f) Additional creditor protections for supported QFCs. (1) The covered affiliate support provider that remains obligated under the covered affiliate credit enhancement becomes subject to a receivership, insolvency, liquidation, resolution, or similar proceeding, other than a Chapter 11 proceeding; (2) Subject to paragraph (h) of this section, the transferee, if any, becomes subject to a receivership, insolvency, liquidation, resolution, or similar proceeding; (3) The covered affiliate support provider does not remain, and a transferee does not become, obligated to the same, or substantially similar, extent as the covered affiliate support provider was obligated immediately prior to entering the receivership, insolvency, liquidation, resolution, or similar proceeding with respect to: (i) The covered affiliate credit enhancement; (ii) All other covered affiliate credit enhancements provided by the covered affiliate support provider in support of other covered direct QFCs between the direct party and the supported party under the covered affiliate credit enhancement referenced in paragraph (f)(3)(i) of this section; and (iii) All covered affiliate credit enhancements provided by the covered affiliate support provider in support of covered direct QFCs between the direct party and affiliates of the supported party referenced in paragraph (f)(3)(ii) of this section; or (4) In the case of a transfer of the covered affiliate credit enhancement to a transferee, (i) All of the ownership interests of the direct party directly or indirectly held by the covered affiliate support provider are not transferred to the transferee; or (ii) Reasonable assurance has not been provided that all or substantially all of the assets of the covered affiliate support provider (or net proceeds therefrom), excluding any assets reserved for the payment of costs and expenses of administration in the receivership, insolvency, liquidation, resolution, or similar proceeding, will be transferred or sold to the transferee in a timely manner. (g) Definitions relevant to the additional creditor protections for supported QFCs Stay period. (2) Business day. (3) Transferee. (h) Creditor protections related to FDI Act proceedings. (1) After the FDI Act stay period, if the covered affiliate credit enhancement is not transferred pursuant to 12 U.S.C. 1821(e)(9)-(e)(10) and any regulations promulgated thereunder; or (2) During the FDI Act stay period, if the default right may only be exercised so as to permit the supported party under the covered affiliate credit enhancement to suspend performance with respect to the supported party's obligations under the covered direct QFC to the same extent as the supported party would be entitled to do if the covered direct QFC were with the covered affiliate support provider and were treated in the same manner as the covered affiliate credit enhancement. (i) Prohibited terminations. (1) The party seeking to exercise a default right to bear the burden of proof that the exercise is permitted under the covered QFC; and (2) Clear and convincing evidence or a similar or higher burden of proof to exercise a default right. § 252.85 Approval of enhanced creditor protection conditions. (a) Protocol compliance. (2) A covered QFC will be deemed to be amended by the universal protocol for purposes of paragraph (a)(1) of this section notwithstanding the covered QFC being amended by one or more Country Annexes, as the term is defined in the universal protocol. (3) For purposes of paragraphs (a)(1) and (2) of this section: (i) The universal protocol means the ISDA 2015 Universal Resolution Stay Protocol, including the Securities Financing Transaction Annex and Other Agreements Annex, published by the International Swaps and Derivatives Association, Inc., as of May 3, 2016, and minor or technical amendments thereto; (ii) The U.S. protocol means a protocol that is the same as the universal protocol other than as provided in paragraphs (a)(3)(ii)(A)-(F) of this section. (A) The provisions of Section 1 of the attachment to the universal protocol may be limited in their application to covered entities and excluded banks and may be limited with respect to resolutions under the Identified Regimes, as those regimes are identified by the universal protocol; (B) The provisions of Section 2 of the attachment to the universal protocol may be limited in their application to covered entities and excluded banks; (C) The provisions of Section 4(b)(i)(A) of the attachment to the universal protocol must not apply with respect to U.S. special resolution regimes; (D) The provisions of Section 4(b) of the attachment to the universal protocol may only be effective to the extent that the covered QFCs affected by an adherent's election thereunder would continue to meet the requirements of this subpart; (E) The provisions of Section 2(k) of the attachment to the universal protocol must not apply; and (F) The U.S. protocol may include minor and technical differences from the universal protocol and differences necessary to conform the U.S. protocol to the differences described in paragraphs (a)(3)(ii)(A)-(E) of this section; (iii) Amended by the universal protocol or the U.S. protocol, with respect to covered QFCs between adherents to the protocol, includes amendments through incorporation of the terms of the protocol (by reference or otherwise) into the covered QFC; and (iv) The attachment to the universal protocol means the attachment that the universal protocol identifies as “ATTACHMENT to the ISDA 2015 UNIVERSAL RESOLUTION STAY PROTOCOL.” (b) Proposal of enhanced creditor protection conditions. (2) Enhanced creditor protection conditions means a set of limited exemptions to the requirements of § 252.84(b) that is different than that of paragraphs (d), (f), and (h) of § 252.84. (3) A covered entity making a request under paragraph (b)(1) of this section must provide: (i) An analysis of the proposal that addresses each consideration in paragraph (d) of this section; (ii) A written legal opinion verifying that proposed provisions or amendments would be valid and enforceable under applicable law of the relevant jurisdictions, including, in the case of proposed amendments, the validity and enforceability of the proposal to amend the covered QFCs; and (iii) Any other relevant information that the Board requests. (c) Board approval. (d) Considerations. (1) Whether, and the extent to which, the proposal would reduce the resiliency of such covered entities during distress or increase the impact on U.S. financial stability were one or more of the covered entities to fail; (2) Whether, and the extent to which, the proposal would materially decrease the ability of a covered entity, or an affiliate of a covered entity, to be resolved in a rapid and orderly manner in the event of the financial distress or failure of the entity that is required to submit a resolution plan; (3) Whether, and the extent to which, the set of conditions or the mechanism in which they are applied facilitates, on an industry-wide basis, contractual modifications to remove impediments to resolution and increase market certainty, transparency, and equitable treatment with respect to the default rights of non-defaulting parties to a covered QFC; (4) Whether, and the extent to which, the proposal applies to existing and future transactions; (5) Whether, and the extent to which, the proposal would apply to multiple forms of QFCs or multiple covered entities; (6) Whether the proposal would permit a party to a covered QFC that is within the scope of the proposal to adhere to the proposal with respect to only one or a subset of covered entities; (7) With respect to a supported party, the degree of assurance the proposal provides to the supported party that the material payment and delivery obligations of the covered affiliate credit enhancement and the covered direct QFC it supports will continue to be performed after the covered affiliate support provider enters a receivership, insolvency, liquidation, resolution, or similar proceeding; (8) The presence, nature, and extent of any provisions that require a covered affiliate support provider or transferee to meet conditions other than material payment or delivery obligations to its creditors; (9) The extent to which the supported party's overall credit risk to the direct party may increase if the enhanced creditor protection conditions are not met and the likelihood that the supported party's credit risk to the direct party would decrease or remain the same if the enhanced creditor protection conditions are met; and (10) Whether the proposal provides the counterparty with additional default rights or other rights. § 252.86 Foreign bank multi-branch master agreements. (a) Treatment of foreign bank multi-branch master agreements. (b) Definition of foreign bank multi-branch master agreements. § 252.87 Identification of global systemically important foreign banking organizations. (a) For purposes of this subpart, a top-tier foreign banking organization that is or controls a covered company (as defined at 12 CFR 243.2(f)) is a global systemically important foreign banking organization if any of the following conditions is met: (1) The top-tier foreign banking organization determines, pursuant to paragraph (c) of this section, that the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology; or (2) The Board, using information available to the Board, determines: (i) That the top-tier foreign banking organization would be a global systemically important banking organization under the global methodology; (ii) That the top-tier foreign banking organization, if it were subject to the Board's Regulation Q (part 217 of this chapter), would be identified as a global systemically important BHC under § 217.402 of the Board's Regulation Q; or (iii) That any U.S. intermediate holding company controlled by the top-tier foreign banking organization, if the U.S. intermediate holding company is or were subject to § 217.402 of the Board's Regulation Q, is or would be identified as a global systemically important BHC. (b) Each top-tier foreign banking organization that determines pursuant to paragraph (c) of this section that it has the characteristics of a global systemically important banking organization under the global methodology must notify the Board of the determination by January 1 of each calendar year. (c) A top-tier foreign banking organization that is or controls a covered company (as defined at 12 CFR 243.2(f)) and prepares or reports for any purpose the indicator amounts necessary to determine whether the top-tier foreign banking organization is a global systemically important banking organization under the global methodology must use the data to determine whether the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology. (d) Each top-tier foreign banking organization that controls a U.S. intermediate holding company and that meets the requirements of § 252.153(b)(5) and (6) also meets the requirements of paragraphs (b) and (c) of this section. § 252.88 Exclusion of certain QFCs. (a) Exclusion of QFCs with FMUs. (1) A CCP is party; or (2) Each party (other than the covered entity) is an FMU. (b) Exclusion of certain excluded bank QFCs. (1) The affiliate credit enhancement provider with respect to the covered QFC, then the covered entity is required to conform the credit enhancement to the requirements of this subpart but is not required to conform the direct QFC to the requirements of this subpart; or (2) The direct party to which the excluded bank is the affiliate credit enhancement provider, then the covered entity is required to conform the direct QFC to the requirements of this subpart but is not required to conform the credit enhancement to the requirements of this subpart. (c) Exclusion of certain contracts. (1) An investment advisory contract that: (i) Is with a retail customer or counterparty; (ii) Does not explicitly restrict the transfer of the contract (or any QFC entered pursuant thereto or governed thereby, or any interest or obligation in or under, or any property securing, any such QFC or the contract) from the covered entity except as necessary to comply with section 205(a)(2) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-5(a)(2)); and (iii) Does not explicitly provide a default right with respect to the contract or any QFC entered pursuant thereto or governed thereby. (2) A warrant that: (i) Evidences a right to subscribe to or otherwise acquire a security of the covered entity or an affiliate of the covered entity; and (ii) Was issued prior to November 13, 2017. (d) Exemption by order. (1) The potential impact of the exemption on the ability of the covered entity(ies), or affiliates of the covered entity(ies), to be resolved in a rapid and orderly manner in the event of the financial distress or failure of the entity that is required to submit a resolution plan; (2) The burden the exemption would relieve; and (3) Any other factor the Board deems relevant. Subparts J-L [Reserved] Subpart M—Risk Committee Requirement for Foreign Banking Organizations With Total Consolidated Assets of at Least $50 Billion but Less Than $100 Billion Source: Reg. YY, 79 FR 17323, Mar. 27, 2014, unless otherwise noted. § 252.130 [Reserved] § 252.131 Applicability. (a) General applicability. (b) Cessation of requirements. (1) Its total consolidated assets are below $50 billion for each of four consecutive calendar quarters; and (2) It becomes subject to the requirements of subpart N or subpart O of this part. [84 FR 59109, Nov. 1, 2019] § 252.132 Risk-committee requirements for foreign banking organizations with total consolidated assets of $50 billion or more but less than $100 billion. (a) U.S. risk committee certification. (1) Oversees the risk management policies of the combined U.S. operations of the foreign banking organization; and (2) Includes at least one member having experience in identifying, assessing, and managing risk exposures of large, complex firms. (b) Timing of certification. (c) Responsibilities of the foreign banking organization. (d) Noncompliance with this section. [Reg. YY, 79 FR 17323, Mar. 27, 2014, as amended at 84 FR 59109, Nov. 1, 2019] Subpart N—Enhanced Prudential Standards for Foreign Banking Organizations With Total Consolidated Assets of $100 Billion or More and Combined U.S. Assets of Less Than $100 Billion Source: Reg. YY, 79 FR 17324, Mar. 27, 2014, unless otherwise noted. § 252.140 Scope. This subpart applies to foreign banking organizations with average total consolidated assets of $100 billion or more, but average combined U.S. assets of less than $100 billion. [84 FR 59110, Nov. 1, 2019] § 252.142 Applicability. (a) General applicability. (1) Comply with the capital stress testing, risk-management and risk-committee requirements set forth in this subpart beginning no later than on the first day of the ninth quarter the date on which its average total consolidated assets equal or exceed $100 billion; and (2) Comply with the risk-based and leverage capital requirements and liquidity risk-management requirements set forth in this subpart beginning no later than on the first day of the ninth quarter following the date on which its total consolidated assets equal or exceed $250 billion; and (3) Comply with the U.S. intermediate holding company requirement set forth in § 252.147 beginning no later than on the first day of the ninth quarter following the date on which its average U.S. non-branch assets equal or exceed $50 billion. (b) Cessation of requirements Enhanced prudential standards applicable to the foreign banking organization. (ii) A foreign banking organization will remain subject to the requirements set forth in §§ 252.143 and 252.145 until its total consolidated assets are below $250 billion for each of four consecutive calendar quarters, or it becomes subject to the requirements of subpart O of this part. (2) Intermediate holding company requirement. [84 FR 59110, Nov. 1, 2019] § 252.143 Risk-based and leverage capital requirements for foreign banking organizations with total consolidated assets of $250 billion or more and combined U.S. assets of less than $100 billion. (a) General requirements. (i) For purposes of this paragraph, home-country capital adequacy standards that are consistent with the Basel Capital Framework include all minimum risk-based capital ratios, any minimum leverage ratio, and all restrictions based on any applicable capital buffers set forth in “Basel III: A global regulatory framework for more resilient banks and banking systems” (2010) (Basel III Accord), each as applicable and as implemented in accordance with the Basel III Accord, including any transitional provisions set forth therein. (ii) [Reserved] (2) In the event that a home-country supervisor has not established capital adequacy standards that are consistent with the Basel Capital Framework, the foreign banking organization must demonstrate to the satisfaction of the Board that it would meet or exceed capital adequacy standards on a consolidated basis that are consistent with the Basel Capital Framework were it subject to such standards. (b) Reporting. (c) Noncompliance with the Basel Capital Framework. [Reg. YY, 79 FR 17324, Mar. 27, 2014, as amended at 84 FR 59110, Nov. 1, 2019] § 252.144 Risk-management and risk-committee requirements for foreign banking organizations with total consolidated assets of $100 billion or more but combined U.S. assets of less than $100 billion. (a) Risk-management and risk-committee requirements for foreign banking organizations with combined U.S. assets of less than $50 billion U.S. risk committee certification. (i) Oversees the risk-management policies of the combined U.S. operations of the foreign banking organization; and (ii) Includes at least one member having experience in identifying, assessing, and managing risk exposures of large, complex firms. (2) Timing of certification. (b) Risk-management and risk-committee requirements for foreign banking organizations with combined U.S. assets of $50 billion or more but less than $100 billion U.S. risk committee General. (ii) Risk-management framework. (A) Policies and procedures establishing risk-management governance, risk-management procedures, and risk-control infrastructure for the combined U.S. operations of the foreign banking organization; and (B) Processes and systems for implementing and monitoring compliance with such policies and procedures, including: ( 1 ( 2 ( 3 ( 4 (iii) Placement of the U.S. risk committee. (B) A foreign banking organization that conducts its operations through U.S. branches or U.S. agencies (in addition to through its U.S. intermediate holding company, if any) may maintain its U.S. risk committee either: ( 1 ( 2 (iv) Corporate governance requirements. (v) Minimum member requirements. (A) Include at least one member having experience in identifying, assessing, and managing risk exposures of large, complex financial firms; and (B) Have at least one member who: ( 1 ( 2 (2) [Reserved] (c) U.S. chief risk officer General. (2) Responsibilities. (A) The measurement, aggregation, and monitoring of risks undertaken by the combined U.S. operations; (B) The implementation of and ongoing compliance with the policies and procedures for the foreign banking organization's combined U.S. operations set forth in paragraph (b)(1)(ii)(A) of this section and the development and implementation of processes and systems set forth in paragraph (b)(1)(ii)(B) of this section; and (C) The management of risks and risk controls within the parameters of the risk-control framework for the combined U.S. operations, and the monitoring and testing of such risk controls. (ii) The U.S. chief risk officer is responsible for reporting risks and risk-management deficiencies of the combined U.S. operations, and resolving such risk-management deficiencies in a timely manner. (3) Corporate governance and reporting. (i) Receive compensation and other incentives consistent with providing an objective assessment of the risks taken by the combined U.S. operations of the foreign banking organization; (ii) Be employed by and located in the U.S. branch, U.S. agency, U.S. intermediate holding company, if any, or another U.S. subsidiary; (iii) Report directly to the U.S. risk committee and the global chief risk officer or equivalent management official (or officials) of the foreign banking organization who is responsible for overseeing, on an enterprise-wide basis, the implementation of and compliance with policies and procedures relating to risk-management governance, practices, and risk controls of the foreign banking organization unless the Board approves an alternative reporting structure based on circumstances specific to the foreign banking organization; (iv) Regularly provide information to the U.S. risk committee, global chief risk officer, and the Board regarding the nature of and changes to material risks undertaken by the foreign banking organization's combined U.S. operations, including risk-management deficiencies and emerging risks, and how such risks relate to the global operations of the foreign banking organization; and (v) Meet regularly and as needed with the Board to assess compliance with the requirements of this section. (d) Responsibilities of the foreign banking organization. (e) Noncompliance with this section. [84 FR 59110, Nov. 1, 2019] § 252.145 Liquidity risk-management requirements for foreign banking organizations with total consolidated assets of $250 billion or more and combined U.S. assets of less than $100 billion. (a) A foreign banking organization subject to this subpart with average total consolidated assets of $250 billion or more must report to the Board on an annual basis the results of an internal liquidity stress test for either the consolidated operations of the foreign banking organization or the combined U.S. operations of the foreign banking organization. Such liquidity stress test must be conducted consistent with the Basel Committee principles for liquidity risk management and must incorporate 30-day, 90-day, and one-year stress-test horizons. The “Basel Committee principles for liquidity risk management” means the document titled “Principles for Sound Liquidity Risk Management and Supervision” (September 2008) as published by the Basel Committee on Banking Supervision, as supplemented and revised from time to time. (b) A foreign banking organization that does not comply with paragraph (a) of this section must limit the net aggregate amount owed by the foreign banking organization's non-U.S. offices and its non-U.S. affiliates to the combined U.S. operations to 25 percent or less of the third party liabilities of its combined U.S. operations, on a daily basis. [Reg. YY, 79 FR 17324, Mar. 27, 2014, as amended at 84 FR 59111, Nov. 1, 2019] § 252.146 Capital stress testing requirements for foreign banking organizations with total consolidated assets of $100 billion or more and combined U.S. assets of less than $100 billion. (a) Definitions. (1) Eligible asset (i) The following assets do not qualify as eligible assets: (A) Equity securities; (B) Any assets classified as loss at the preceding examination by a regulatory agency, outside accountant, or the bank's internal loan review staff; (C) Accrued income on assets classified loss, doubtful, substandard or value impaired, at the preceding examination by a regulatory agency, outside accountant, or the bank's internal loan review staff; (D) Any amounts due from the home office, other offices and affiliates, including income accrued but uncollected on such amounts; (E) The balance from time to time of any other asset or asset category disallowed at the preceding examination or by direction of the Board for any other reason until the underlying reasons for the disallowance have been removed; (F) Prepaid expenses and unamortized costs, furniture and fixtures and leasehold improvements; and (G) Any other asset that the Board determines should not qualify as an eligible asset. (ii) The following rules of valuation apply: (A) A marketable debt security is valued at its principal amount or market value, whichever is lower; (B) An asset classified doubtful or substandard at the preceding examination by a regulatory agency, outside accountant, or the bank's internal loan review staff, is valued at 50 percent and 80 percent, respectively; (C) With respect to an asset classified value impaired, the amount representing the allocated transfer risk reserve that would be required for such exposure at a domestically chartered bank is valued at 0 and the residual exposure is valued at 80 percent; and (D) Real estate located in the United States and carried on the accounting records as an asset are valued at net book value or appraised value, whichever is less. (2) Liabilities of all U.S. branches and agencies of a foreign banking organization (i) Amounts due to and other liabilities to other offices, agencies, branches and affiliates of such foreign banking organization, including its head office, including unremitted profits; and (ii) Reserves for possible loan losses and other contingencies. (3) Pre-provision net revenue (4) Stress test cycle (5) Total loan loss provisions (b) In general. (i) Be subject on a consolidated basis to a capital stress testing regime by its home-country supervisor that meets the requirements of paragraph (b)(2) of this section; and (ii) Conduct such stress tests or be subject to a supervisory stress test and meet any minimum standards set by its home-country supervisor with respect to the stress tests. (2) The capital stress testing regime of a foreign banking organization's home-country supervisor must include: (i) A supervisory capital stress test conducted by the foreign banking organization's home-country supervisor or an evaluation and review by the foreign banking organization's home-country supervisor of an internal capital adequacy stress test conducted by the foreign banking organization, according to the frequency specified in the following paragraph (b)(2)(i)(A) or (B) of this section: (A) If the foreign banking organization has average total consolidated assets of $250 billion or more, on at least an annual basis; or (B) If the foreign banking organization has average total consolidated assets of less than $250 billion, at least biennially; and (ii) Requirements for governance and controls of stress testing practices by relevant management and the board of directors (or equivalent thereof) of the foreign banking organization; (c) Additional standards. (i) Maintain eligible assets in its U.S. branches and agencies that, on a daily basis, are not less than 105 percent of the average value over each day of the previous calendar quarter of the total liabilities of all branches and agencies operated by the foreign banking organization in the United States; (ii) Conduct a stress test of its U.S. subsidiaries to determine whether those subsidiaries have the capital necessary to absorb losses as a result of adverse economic conditions, according to the frequency specified in paragraph (c)(1)(ii)(A) or (B) of this section: (A) If the foreign banking organization has average total consolidated assets of $250 billion or more, on at least an annual basis; or (B) If the foreign banking organization has average total consolidated assets of less than $250 billion, at least biennially; and (iii) Report a summary of the results of the stress test to the Board that includes a description of the types of risks included in the stress test, a description of the conditions or scenarios used in the stress test, a summary description of the methodologies used in the stress test, estimates of aggregate losses, pre-provision net revenue, total loan loss provisions, net income before taxes and pro forma regulatory capital ratios required to be computed by the home-country supervisor of the foreign banking organization and any other relevant capital ratios, and an explanation of the most significant causes for any changes in regulatory capital ratios. (2) An enterprise-wide stress test that is approved by the Board may meet the stress test requirement of paragraph (c)(1)(ii) of this section. [Reg. YY, 79 FR 17324, Mar. 27, 2014, as amended at 84 FR 59112, Nov. 1, 2019] § 252.147 U.S. intermediate holding company requirement for foreign banking organizations with combined U.S. assets of less than $100 billion and U.S. non-branch assets of $50 billion or more. (a) Requirement to form a U.S. intermediate holding company Formation. (2) Structure. (i) Organized under the laws of the United States, any one of the fifty states of the United States, or the District of Columbia; and (ii) Be governed by a board of directors or managers that is elected or appointed by the owners and that operates in an equivalent manner, and has equivalent rights, powers, privileges, duties, and responsibilities, to a board of directors of a company chartered as a corporation under the laws of the United States, any one of the fifty states of the United States, or the District of Columbia. (3) Notice. (i) A description of the U.S. intermediate holding company, including its name, location, corporate form, and organizational structure; (ii) A certification that the U.S. intermediate holding company meets the requirements of this section; and (iii) Any other information that the Board determines is appropriate. (b) Holdings and regulation of the U.S. intermediate holding company General. (2) Reporting. (3) Examinations and inspections. (4) Global systemically important banking organizations. (i) The top-tier foreign banking organization determines, pursuant to paragraph (b)(6) of this section, that the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology; or (ii) The Board, using information available to the Board, determines: (A) That the top-tier foreign banking organization would be a global systemically important banking organization under the global methodology; (B) That the top-tier foreign banking organization, if it were subject to the Board's Regulation Q, would be identified as a global systemically important BHC under 12 CFR 217.402; or (C) That the U.S. intermediate holding company, if it were subject to 12 CFR 217.402, would be identified as a global systemically important BHC. (5) Notice. (i) Notice of whether the home-country supervisor (or other appropriate home country regulatory authority) of the top-tier foreign banking organization of the U.S. intermediate holding company has adopted standards consistent with the global methodology; and (ii) Notice of whether the top-tier foreign banking organization prepares or reports the indicators used by the global methodology to identify a banking organization as a global systemically important banking organization and, if it does, whether the top-tier foreign banking organization has determined that it has the characteristics of a global systemically important banking organization under the global methodology pursuant to paragraph (b)(6) of this section. (6) Global systemically important banking organization under the global methodology. (c) Alternative organizational structure General. (2) Factors. (3) Request Contents. (ii) Timing. (4) Conditions. (d) Modifications. (e) Enhanced prudential standards for U.S. intermediate holding companies Capital requirements for a U.S. intermediate holding company. (B) A U.S. intermediate holding company may choose to comply with subpart E of 12 CFR part 217. (ii) A U.S. intermediate holding company must comply with capital adequacy standards beginning on the date it is required to established under this subpart, or if the U.S. intermediate holding company is subject to capital adequacy standards on the date that the foreign banking organization becomes subject to § 252.142(a)(3), on the date that the foreign banking organization becomes subject to this subpart. (2) Risk-management and risk-committee requirements General. (ii) Risk-management framework. (A) Policies and procedures establishing risk-management governance, risk-management procedures, and risk-control infrastructure for the U.S. intermediate holding company; and (B) Processes and systems for implementing and monitoring compliance with such policies and procedures, including: ( 1 ( 2 ( 3 ( 4 (iii) Corporate governance requirements. (iv) Minimum member requirements. (A) Include at least one member having experience in identifying, assessing, and managing risk exposures of large, complex financial firms; and (B) Have at least one member who: ( 1 ( 2 (v) The U.S. intermediate holding company must take appropriate measures to ensure that it implements the risk-management policies for the U.S. intermediate holding company and it provides sufficient information to the U.S. risk committee to enable the U.S. risk committee to carry out the responsibilities of this subpart; (vi) A U.S. intermediate holding company must comply with risk-committee and risk-management requirements beginning on the date that it is required to be established or designated under this subpart or, if the U.S. intermediate holding company is subject to risk-committee and risk-management requirements on the date that the foreign banking organization becomes subject to § 252.147(a)(3), on the date that the foreign banking organization becomes subject to this subpart. [84 FR 59112, Nov. 1, 2019] Subpart O—Enhanced Prudential Standards for Foreign Banking Organizations With Total Consolidated Assets of $100 Billion or More and Combined U.S. Assets of $100 Billion or More Source: Reg. YY, 79 FR 17326, Mar. 27, 2014, unless otherwise noted. § 252.150 Scope. This subpart applies to foreign banking organizations with average total consolidated assets of $100 billion or more and average combined U.S. assets of $100 billion or more. [84 FR 59114, Nov. 1, 2019] § 252.151 [Reserved] § 252.152 Applicability. (a) General applicability. (i) Comply with the requirements of this subpart (other than the U.S. intermediate holding company requirement set forth in § 252.153) beginning on the first day of the ninth quarter following the date on which its average combined U.S. assets equal or exceed $100 billion; and (ii) Comply with the requirement to establish or designate a U.S. intermediate holding company requirement set forth in § 252.153(a) beginning on the first day of the ninth quarter following the date on which its average U.S. non-branch assets equal or exceed $50 billion or, if the foreign banking organization has established or designated a U.S. intermediate holding company pursuant to § 252.147, beginning on the first day following the date on which the foreign banking organization's average combined U.S. assets equal or exceed $100 billion. (2) Changes in requirements following a change in category. (b) Cessation of requirements Enhanced prudential standards applicable to the foreign banking organization. (2) Intermediate holding company requirement. [84 FR 59114, Nov. 1, 2019] § 252.153 U.S. intermediate holding company requirement for foreign banking organizations with combined U.S. assets of $100 billion or more and U.S. non-branch assets of $50 billion or more. (a) Requirement to form a U.S. intermediate holding company Formation. (2) Structure. (i) Organized under the laws of the United States, any one of the fifty states of the United States, or the District of Columbia; and (ii) Be governed by a board of directors or managers that is elected or appointed by the owners and that operates in an equivalent manner, and has equivalent rights, powers, privileges, duties, and responsibilities, to a board of directors of a company chartered as a corporation under the laws of the United States, any one of the fifty states of the United States, or the District of Columbia. (3) Notice. (i) A description of the U.S. intermediate holding company, including its name, location, corporate form, and organizational structure; (ii) A certification that the U.S. intermediate holding company meets the requirements of this section; and (iii) Any other information that the Board determines is appropriate. (b) Holdings and regulation of the U.S. intermediate holding company General. (2) Reporting. (3) Examinations and inspections. (4) For purposes of this part, a top-tier foreign banking organization with U.S. non-branch assets that equal or exceed $50 billion is a global systemically important foreign banking organization if any of the following conditions are met: (i) The top-tier foreign banking organization determines, pursuant to paragraph (b)(6) of this section, that the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology; or (ii) The Board, using information available to the Board, determines: (A) That the top-tier foreign banking organization would be a global systemically important banking organization under the global methodology; (B) That the top-tier foreign banking organization, if it were subject to the Board's Regulation Q, would be identified as a global systemically important BHC under 12 CFR 217.402 of the Board's Regulation Q; or (C) That the U.S. intermediate holding company, if it were subject to 12 CFR 217.402 of the Board's Regulation Q, would be identified as a global systemically important BHC. (5) Each top-tier foreign banking organization that controls a U.S. intermediate holding company shall submit to the Board by January 1 of each calendar year through the U.S. intermediate holding company: (i) Notice of whether the home country supervisor (or other appropriate home country regulatory authority) of the top-tier foreign banking organization of the U.S. intermediate holding company has adopted standards consistent with the global methodology; and (ii) Notice of whether the top-tier foreign banking organization prepares or reports the indicators used by the global methodology to identify a banking organization as a global systemically important banking organization and, if it does, whether the top-tier foreign banking organization has determined that it has the characteristics of a global systemically important banking organization under the global methodology pursuant to paragraph (b)(6) of this section. (6) A top-tier foreign banking organization that controls a U.S. intermediate holding company and prepares or reports for any purpose the indicator amounts necessary to determine whether the top-tier foreign banking organization is a global systemically important banking organization under the global methodology must use the data to determine whether the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology. (c) Alternative organizational structure General. (2) Factors. (3) Request Contents. (ii) Timing. (4) Conditions. (ii) If the Board permits a foreign banking organization to form two or more U.S. intermediate holding companies under this section, each U.S. intermediate holding company must determine its category pursuant to § 252.5 of this part as though the U.S. intermediate holding companies were a consolidated company. (d) Modifications. (e) Enhanced prudential standards for U.S. intermediate holding companies Capital requirements for a U.S. intermediate holding company. (B) A U.S. intermediate holding company may choose to comply with subpart E of 12 CFR part 217. (ii) A U.S. intermediate holding company must comply with applicable capital adequacy standards beginning on the date that it is required to be established or designated under this subpart or, if the U.S. intermediate holding company is subject to capital adequacy standards on the date that the foreign banking organization becomes subject to paragraph (a)(1)(ii) of this section, on the date that the foreign banking organization becomes subject to this subpart. (2) Capital planning. (ii) A U.S. intermediate holding company with total consolidated assets of $100 billion or more must comply with 12 CFR 225.8 on the date prescribed in the transition provisions of 12 CFR 225.8. (3) Risk-management and risk committee requirements General. (ii) Risk-management framework. (A) Policies and procedures establishing risk-management governance, risk-management procedures, and risk-control infrastructure for the U.S. intermediate holding company; and (B) Processes and systems for implementing and monitoring compliance with such policies and procedures, including: ( 1 ( 2 ( 3 ( 4 (iii) Corporate governance requirements. (iv) Minimum member requirements. (A) Include at least one member having experience in identifying, assessing, and managing risk exposures of large, complex financial firms; and (B) Have at least one member who: ( 1 ( 2 (v) The U.S. intermediate holding company must take appropriate measures to ensure that it implements the risk-management policies for the U.S. intermediate holding company and it provides sufficient information to the U.S. risk committee to enable the U.S. risk committee to carry out the responsibilities of this subpart. (vi) A U.S. intermediate holding company must comply with risk-committee and risk-management requirements beginning on the date that it is required to be established or designated under this subpart or, if the U.S. intermediate holding company is subject to risk-committee and risk-management requirements on the date that the foreign banking organization becomes subject to § 252.153(a)(1)(ii), on the date that the foreign banking organization becomes subject to this subpart. (4) Liquidity requirements. (ii) A U.S. intermediate holding company must comply with liquidity risk-management, liquidity stress test, and liquidity buffer requirements beginning on the date that it is required to be established or designated under this subpart. (5) Stress test requirements. (B) A U.S. intermediate holding company must comply with the requirements of subpart E beginning the later of: ( 1 ( 2 (ii)(A) A Category II U.S. intermediate holding company or a Category III U.S. intermediate holding company must comply with the requirements of subpart F of this part in the same manner as a bank holding company; (B) A Category II U.S. intermediate holding company or Category III U.S. intermediate holding company must comply with the requirements of subpart F beginning the later of: ( 1 ( 2 [Reg. YY, 79 FR 17326, Mar. 27, 2014, as amended at 79 FR 64055, Oct. 27, 2014; 80 FR 70673, Nov. 16, 2015; 82 FR 8310, Jan. 24, 2017; 84 FR 59114, Nov. 1, 2019] § 252.154 Risk-based and leverage capital requirements for foreign banking organizations with combined U.S. assets of $100 billion or more. (a) General requirements. (2) In the event that a home-country supervisor has not established capital adequacy standards that are consistent with the Basel Capital Framework, the foreign banking organization must demonstrate to the satisfaction of the Board that it would meet or exceed capital adequacy standards at the consolidated level that are consistent with the Basel Capital Framework were it subject to such standards. (b) Reporting. (c) Noncompliance with the Basel Capital Framework. [Reg. YY, 79 FR 17326, Mar. 27, 2014, as amended at 84 FR 59116, Nov. 1, 2019] § 252.155 Risk-management and risk-committee requirements for foreign banking organizations with combined U.S. assets of $100 billion or more. (a) U.S. risk committee General. (2) Risk-management framework. (i) Policies and procedures establishing risk-management governance, risk-management procedures, and risk-control infrastructure for the combined U.S. operations of the foreign banking organization; and (ii) Processes and systems for implementing and monitoring compliance with such policies and procedures, including: (A) Processes and systems for identifying and reporting risks and risk-management deficiencies, including regarding emerging risks, on a combined U.S. operations basis and ensuring effective and timely implementation of actions to address emerging risks and risk-management deficiencies; (B) Processes and systems for establishing managerial and employee responsibility for risk management of the combined U.S. operations; (C) Processes and systems for ensuring the independence of the risk-management function of the combined U.S. operations; and (D) Processes and systems to integrate risk management and associated controls with management goals and the compensation structure of the combined U.S. operations. (3) Placement of the U.S. risk committee. (ii) A foreign banking organization that conducts its operations through U.S. branches or U.S. agencies (in addition to through its U.S. intermediate holding company, if any) may maintain its U.S. risk committee either: (A) As a committee of the global board of directors (or equivalent thereof), on a standalone basis or as a joint committee with its enterprise-wide risk committee (or equivalent thereof); or (B) As a committee of the board of directors of its U.S. intermediate holding company (or equivalent thereof), on a standalone basis or as a joint committee with the risk committee of its U.S. intermediate holding company required pursuant to § 252.153(e)(3). (4) Corporate governance requirements. (5) Minimum member requirements. (i) Include at least one member having experience in identifying, assessing, and managing risk exposures of large, complex financial firms; and (ii) Have at least one member who: (A) Is not an officer or employee of the foreign banking organization or its affiliates and has not been an officer or employee of the foreign banking organization or its affiliates during the previous three years; and (B) Is not a member of the immediate family, as defined in § 225.41(b)(3) of the Board's Regulation Y (12 CFR 225.41(b)(3)), of a person who is, or has been within the last three years, an executive officer, as defined in § 215.2(e)(1) of the Board's Regulation O (12 CFR 215.2(e)(1)) of the foreign banking organization or its affiliates. (b) U.S. chief risk officer General. (2) Responsibilities. (A) The measurement, aggregation, and monitoring of risks undertaken by the combined U.S. operations; (B) The implementation of and ongoing compliance with the policies and procedures for the foreign banking organization's combined U.S. operations set forth in paragraph (a)(2)(i) of this section and the development and implementation of processes and systems set forth in paragraph (a)(2)(ii) of this section; and (C) The management of risks and risk controls within the parameters of the risk-control framework for the combined U.S. operations, and the monitoring and testing of such risk controls. (ii) The U.S. chief risk officer is responsible for reporting risks and risk-management deficiencies of the combined U.S. operations, and resolving such risk-management deficiencies in a timely manner. (3) Corporate governance and reporting. (i) Receive compensation and other incentives consistent with providing an objective assessment of the risks taken by the combined U.S. operations of the foreign banking organization; (ii) Be employed by and located in the U.S. branch, U.S. agency, U.S. intermediate holding company, if any, or another U.S. subsidiary; (iii) Report directly to the U.S. risk committee and the global chief risk officer or equivalent management official (or officials) of the foreign banking organization who is responsible for overseeing, on an enterprise-wide basis, the implementation of and compliance with policies and procedures relating to risk-management governance, practices, and risk controls of the foreign banking organization, unless the Board approves an alternative reporting structure based on circumstances specific to the foreign banking organization; (iv) Regularly provide information to the U.S. risk committee, global chief risk officer, and the Board regarding the nature of and changes to material risks undertaken by the foreign banking organization's combined U.S. operations, including risk-management deficiencies and emerging risks, and how such risks relate to the global operations of the foreign banking organization; and (v) Meet regularly and as needed with the Board to assess compliance with the requirements of this section. (4) Liquidity risk-management requirements. (c) Responsibilities of the foreign banking organization. (d) Noncompliance with this section. [Reg. YY, 79 FR 17326, Mar. 27, 2014, as amended at 84 FR 59116, Nov. 1, 2019] § 252.156 Liquidity risk-management requirements for foreign banking organizations with combined U.S. assets of $100 billion or more. (a) Responsibilities of the U.S. risk committee. (i) Approve at least annually the acceptable level of liquidity risk that the foreign banking organization may assume in connection with the operating strategies for its combined U.S. operations (liquidity risk tolerance), with concurrence from the foreign banking organization's board of directors or its enterprise-wide risk committee, taking into account the capital structure, risk profile, complexity, activities, size of the foreign banking organization and its combined U.S. operations and the enterprise-wide liquidity risk tolerance of the foreign banking organization; and (ii) Receive and review information provided by the senior management of the combined U.S. operations at least semi-annually to determine whether the combined U.S. operations are operating in accordance with the established liquidity risk tolerance and to ensure that the liquidity risk tolerance for the combined U.S. operations is consistent with the enterprise-wide liquidity risk tolerance established for the foreign banking organization. (iii) Approve the contingency funding plan for the combined U.S. operations described in paragraph (e) of this section at least annually and whenever the foreign banking organization revises its contingency funding plan, and approve any material revisions to the contingency funding plan for the combined U.S. operations prior to the implementation of such revisions. (b) Responsibilities of the U.S. chief risk officer Liquidity risk. (2) Liquidity risk tolerance. (3) Business lines or products. (ii) The U.S. risk committee must review at least annually significant business lines and products offered, managed or sold through the combined U.S. operations to determine whether each business line or product creates or has created any unanticipated liquidity risk, and to determine whether the liquidity risk of each strategy or product is within the foreign banking organization's established liquidity risk tolerance for its combined U.S. operations. (4) Cash-flow projections. (5) Liquidity risk limits. (6) Liquidity stress testing. (i) Approve the liquidity stress testing practices, methodologies, and assumptions required in § 252.157(a) at least quarterly, and whenever the foreign banking organization materially revises its liquidity stress testing practices, methodologies or assumptions; (ii) Review the liquidity stress testing results produced under § 252.157(a) of this subpart at least quarterly; and (iii) Approve the size and composition of the liquidity buffer established under § 252.157(c) of this subpart at least quarterly. (c) Independent review function. (2) The independent review function must: (i) Regularly, but no less frequently than annually, review and evaluate the adequacy and effectiveness of the foreign banking organization's liquidity risk management processes within the combined U.S. operations, including its liquidity stress test processes and assumptions; (ii) Assess whether the foreign banking organization's liquidity risk-management function of its combined U.S. operations complies with applicable laws and regulations, and sound business practices; and (iii) Report material liquidity risk management issues to the U.S. risk committee and the enterprise-wide risk committee in writing for corrective action, to the extent permitted by applicable law. (d) Cash-flow projections. (2) The foreign banking organization must establish a methodology for making cash-flow projections for its combined U.S. operations that results in projections which: (i) Include cash flows arising from contractual maturities, intercompany transactions, new business, funding renewals, customer options, and other potential events that may impact liquidity; (ii) Include reasonable assumptions regarding the future behavior of assets, liabilities, and off-balance sheet exposures; (iii) Identify and quantify discrete and cumulative cash-flow mismatches over these time periods; and (iv) Include sufficient detail to reflect the capital structure, risk profile, complexity, currency exposure, activities, and size of the foreign banking organization and its combined U.S. operations, and include analyses by business line, currency, or legal entity as appropriate. (e) Contingency funding plan. (2) Components of the contingency funding plan Quantitative assessment. (A) Identify liquidity stress events that could have a significant impact on the liquidity of the foreign banking organization or its combined U.S. operations; (B) Assess the level and nature of the impact on the liquidity of the foreign banking organization and its combined U.S. operations that may occur during identified liquidity stress events; (C) Identify the circumstances in which the foreign banking organization would implement its action plan described in paragraph (e)(2)(ii)(A) of this section, which circumstances must include failure to meet any minimum liquidity requirement imposed by the Board on the foreign banking organization's combined U.S. operations; (D) Assess available funding sources and needs during the identified liquidity stress events; (E) Identify alternative funding sources that may be used during the identified liquidity stress events; and (F) Incorporate information generated by the liquidity stress testing required under § 252.157(a) of this subpart. (ii) Liquidity event management process. (A) Include an action plan that clearly describes the strategies that the foreign banking organization will use to respond to liquidity shortfalls in its combined U.S. operations for identified liquidity stress events, including the methods that the organization or the combined U.S. operations will use to access alternative funding sources; (B) Identify a liquidity stress event management team that would execute the action plan in paragraph (e)(2)(i) of this section for the combined U.S. operations; (C) Specify the process, responsibilities, and triggers for invoking the contingency funding plan, describe the decision-making process during the identified liquidity stress events, and describe the process for executing contingency measures identified in the action plan; and (D) Provide a mechanism that ensures effective reporting and communication within the combined U.S. operations of the foreign banking organization and with outside parties, including the Board and other relevant supervisors, counterparties, and other stakeholders. (iii) Monitoring. (iv) Testing. (A) The components of the contingency funding plan to assess the plan's reliability during liquidity stress events; (B) The operational elements of the contingency funding plan, including operational simulations to test communications, coordination, and decision-making by relevant management; and (C) The methods it will use to access alternative funding sources for its combined U.S. operations to determine whether these funding sources will be readily available when needed. (f) Liquidity risk limits General. (2) Liquidity risk limits established by a Category II foreign banking organization or Category III foreign banking organization. (i) Concentrations in sources of funding by instrument type, single counterparty, counterparty type, secured and unsecured funding, and as applicable, other forms of liquidity risk; (ii) The amount of liabilities that mature within various time horizons; and (iii) Off-balance sheet exposures and other exposures that could create funding needs during liquidity stress events. (g) Collateral, legal entity, and intraday liquidity risk monitoring. (1) Collateral. (i) Calculates all of the collateral positions for its combined U.S. operations according to the frequency specified in paragraph (g)(1)(i)(A) or (B) of this section or as directed by the Board, specifying the value of pledged assets relative to the amount of security required under the relevant contracts and the value of unencumbered assets available to be pledged: (A) If the foreign banking organization is not a Category IV foreign banking organization, on at least a weekly basis; or (B) If the foreign banking organization is a Category IV foreign banking organization, on at least a monthly basis; (ii) Monitors the levels of unencumbered assets available to be pledged by legal entity, jurisdiction, and currency exposure; (iii) Monitors shifts in the foreign banking organization's funding patterns, including shifts between intraday, overnight, and term pledging of collateral; and (iv) Tracks operational and timing requirements associated with accessing collateral at its physical location (for example, the custodian or securities settlement system that holds the collateral). (2) Legal entities, currencies and business lines. (3) Intraday exposure. (i) Monitor and measure expected gross daily inflows and outflows; (ii) Manage and transfer collateral to obtain intraday credit; (iii) Identify and prioritize time-specific obligations so that the foreign banking organizations can meet these obligations as expected and settle less critical obligations as soon as possible; (iv) Manage the issuance of credit to customers where necessary; and (v) Consider the amounts of collateral and liquidity needed to meet payment systems obligations when assessing the overall liquidity needs of the combined U.S. operations. [Reg. YY, 79 FR 17326, Mar. 27, 2014, as amended at 84 FR 59116, Nov. 1, 2019] § 252.157 Liquidity stress testing and buffer requirements for foreign banking organizations with combined U.S. assets of $100 billion or more. (a) Liquidity stress testing requirement General. (A) Its combined U.S. operations as a whole; (B) Its U.S. branches and agencies on an aggregate basis; and (C) Its U.S. intermediate holding company, if any. (ii) Each liquidity stress test required under this paragraph (a)(1) must use the stress scenarios described in paragraph (a)(3) of this section and take into account the current liquidity condition, risks, exposures, strategies, and activities of the combined U.S. operations. (iii) The liquidity stress tests required under this paragraph (a)(1) must take into consideration the balance sheet exposures, off-balance sheet exposures, size, risk profile, complexity, business lines, organizational structure and other characteristics of the foreign banking organization and its combined U.S. operations that affect the liquidity risk profile of the combined U.S. operations. (iv) In conducting a liquidity stress test using the scenarios described in paragraphs (a)(3)(i) and (iii) of this section, the foreign banking organization must address the potential direct adverse impact of associated market disruptions on the foreign banking organization's combined U.S. operations and the related indirect effect such impact could have on the combined U.S. operations of the foreign banking organization and incorporate the potential actions of other market participants experiencing liquidity stresses under the market disruptions that would adversely affect the foreign banking organization or its combined U.S. operations. (2) Frequency. (i) If the foreign banking organization is not a Category IV foreign banking organization, at least monthly; or (ii) If the foreign banking organization is a Category IV foreign banking organization, at least quarterly. (3) Stress scenarios. (A) A scenario reflecting adverse market conditions; (B) A scenario reflecting an idiosyncratic stress event for the U.S. branches/agencies and the U.S. intermediate holding company, if any; and (C) a scenario reflecting combined market and idiosyncratic stresses. (ii) The foreign banking organization must incorporate additional liquidity stress scenarios into its liquidity stress test as appropriate based on the financial condition, size, complexity, risk profile, scope of operations, or activities of the combined U.S. operations, the U.S. branches and agencies, and the U.S. intermediate holding company, as applicable. The Board may require the foreign banking organization to vary the underlying assumptions and stress scenarios. (4) Planning horizon. (5) Requirements for assets used as cash-flow sources in a stress test. (ii) Assets used as cash-flow sources during the planning horizon must be diversified by collateral, counterparty, borrowing capacity, or other factors associated with the liquidity risk of the assets. (iii) A line of credit does not qualify as a cash flow source for purposes of a stress test with a planning horizon of 30 days or less. A line of credit may qualify as a cash flow source for purposes of a stress test with a planning horizon that exceeds 30 days. (6) Tailoring. (7) Governance Stress test function. (ii) Controls and oversight. (iii) Management information systems. (8) Notice and response. (b) Reporting of liquidity stress tests required by home-country regulators. (c) Liquidity buffer requirement General. (2) Calculation of U.S. intermediate holding company buffer requirement. (ii) Net stressed cash-flow need. (iii) Net external stressed cash-flow need calculation. (A) The projected amount of cash-flow needs that results from transactions between the U.S. intermediate holding company and entities that are not its affiliates; and (B) The projected amount of cash-flow sources that results from transactions between the U.S. intermediate holding company and entities that are not its affiliates. (iv) Net internal stressed cash-flow need calculation General. ( 1 ( 2 (B) Daily cumulative net intragroup cash-flow need calculation. ( 1 Daily cumulative net intragroup cash-flow need. ( 2 Daily cumulative net intragroup cash flow. (C) Net intragroup cash flow. ( 1 ( 2 (D) Amounts secured by highly liquid assets. (3) Calculation of U.S. branch and agency liquidity buffer requirement. (ii) Net stressed cash-flow need. (iii) Net external stressed cash-flow need calculation. ( 1 ( 2 (iv) Net internal stressed cash-flow need calculation General. ( 1 ( 2 (B) Daily cumulative net intragroup cash-flow need calculation. ( 1 Daily cumulative net intragroup cash-flow need. ( 2 Daily cumulative net intragroup cash flow. (C) Net intragroup cash flow. ( 1 ( 2 (D) Amounts secured by highly liquid assets. (4) Location of liquidity buffer U.S. intermediate holding companies. (ii) U.S. branches and agencies. (7) Asset requirements. (i) Highly liquid assets. (A) Cash; (B) Assets that meet the criteria for high quality liquid assets as defined in 12 CFR 249.20; or (C) Any other asset that the foreign banking organization demonstrates to the satisfaction of the Board: ( 1 ( 2 ( 3 (ii) Unencumbered. (A) Is free of legal, regulatory, contractual or other restrictions on the ability of such company promptly to liquidate, sell or transfer the asset; and (B) Is either: ( 1 ( 2 (iii) Calculating the amount of a highly liquid asset. (iv) Operational requirements. (A) Establish and implement policies and procedures that require highly liquid assets comprising the liquidity buffer to be under the control of the management function in the foreign banking organization that is charged with managing liquidity risk of its combined U.S. operations; and (B) Demonstrate the capability to monetize a highly liquid asset under each scenario required under § 252.157(a)(3). (v) Diversification. [Reg. YY, 79 FR 17326, Mar. 27, 2014, as amended at 84 FR 59118, Nov. 1, 2019] § 252.158 Capital stress testing requirements for foreign banking organizations with combined U.S. assets of $100 billion or more. (a) Definitions. (1) Eligible asset (i) The following assets do not qualify as eligible assets: (A) Equity securities; (B) Any assets classified as loss at the preceding examination by a regulatory agency, outside accountant, or the bank's internal loan review staff; (C) Accrued income on assets classified loss, doubtful, substandard or value impaired, at the preceding examination by a regulatory agency, outside accountant, or the bank's internal loan review staff; (D) Any amounts due from the home office, other offices and affiliates, including income accrued but uncollected on such amounts; (E) The balance from time to time of any other asset or asset category disallowed at the preceding examination or by direction of the Board for any other reason until the underlying reasons for the disallowance have been removed; (F) Prepaid expenses and unamortized costs, furniture and fixtures and leasehold improvements; and (G) Any other asset that the Board determines should not qualify as an eligible asset. (ii) The following rules of valuation apply: (A) A marketable debt security is valued at its principal amount or market value, whichever is lower; (B) An asset classified doubtful or substandard at the preceding examination by a regulatory agency, outside accountant, or the bank's internal loan review staff, is valued at 50 percent and 80 percent, respectively; (C) With respect to an asset classified value impaired, the amount representing the allocated transfer risk reserve that would be required for such exposure at a domestically chartered bank is valued at 0 and the residual exposure is valued at 80 percent; and (D) Real estate located in the United States and carried on the accounting records as an asset are valued at net book value or appraised value, whichever is less. (2) Liabilities of all U.S. branches and agencies of a foreign banking organization (i) Amounts due to and other liabilities to other offices, agencies, branches and affiliates of such foreign banking organization, including its head office, including unremitted profits; and (ii) Reserves for possible loan losses and other contingencies. (3) Pre-provision net revenue (4) Stress test cycle (5) Total loan loss provisions (b) In general. (i) Be subject on a consolidated basis to a capital stress testing regime by its home-country supervisor that meets the requirements of paragraph (b)(2) of this section; (ii) Conduct such stress tests or be subject to a supervisory stress test and meet any minimum standards set by its home-country supervisor with respect to the stress tests; and (iii) Provide to the Board the information required under paragraph (c) of this section. (2) The capital stress testing regime of a foreign banking organization's home-country supervisor must include: (i) A supervisory capital stress test conducted by the foreign banking organization's home-country supervisor or an evaluation and review by the foreign banking organization's home-country supervisor of an internal capital adequacy stress test conducted by the foreign banking organization, according to the frequency specified in paragraph (b)(2)(A) or (B): (A) If the foreign banking organization is not a Category IV foreign banking organization, at least annually; or (B) If the foreign banking organization is a Category IV foreign banking organization, at least biennially; and (ii) Requirements for governance and controls of stress testing practices by relevant management and the board of directors (or equivalent thereof) of the foreign banking organization; (c) Information requirements In general. (i) A description of the types of risks included in the stress test; (ii) A description of the conditions or scenarios used in the stress test; (iii) A summary description of the methodologies used in the stress test; (iv) Estimates of: (A) Aggregate losses; (B) Pre-provision net revenue; (C) Total loan loss provisions; (D) Net income before taxes; and (E) Pro forma regulatory capital ratios required to be computed by the home-country supervisor of the foreign banking organization and any other relevant capital ratios; and (v) An explanation of the most significant causes for any changes in regulatory capital ratios. (2) Additional information required for foreign banking organizations in a net due from position. (i) A detailed description of the methodologies used in the stress test, including those employed to estimate losses, revenues, and changes in capital positions; (ii) Estimates of realized losses or gains on available-for-sale and held-to-maturity securities, trading and counterparty losses, if applicable; and loan losses (dollar amount and as a percentage of average portfolio balance) in the aggregate and by material sub-portfolio; and (iii) Any additional information that the Board requests. (d) Imposition of additional standards for capital stress tests. (i) Maintain eligible assets in its U.S. branches and agencies that, on a daily basis, are not less than 108 percent of the average value over each day of the previous calendar quarter of the total liabilities of all U.S. branches and agencies of the foreign banking organization; and (ii) To the extent that a foreign banking organization has not established a U.S. intermediate holding company, conduct an annual stress test of its U.S. subsidiaries to determine whether those subsidiaries have the capital necessary to absorb losses as a result of adverse economic conditions; and report to the Board on an annual basis a summary of the results of the stress test that includes the information required under paragraph (b)(1) of this section and any other information specified by the Board. (2) An enterprise-wide stress test that is approved by the Board may meet the stress test requirement of paragraph (d)(1)(ii) of this section. (3) Intragroup funding restrictions or liquidity requirements for U.S. operations. (e) Notice and response. [Reg. YY, 79 FR 17326, Mar. 27, 2014, as amended at 84 FR 59119, Nov. 1, 2019] Subpart P—Covered IHC Long-Term Debt Requirement, Covered IHC Total Loss absorbing Capacity Requirement and Buffer, and Restrictions on Corporate Practices for Intermediate Holding Companies of Global Systemically Important Foreign Banking Organizations Source: 82 FR 8311, Jan. 24, 2017, unless otherwise noted. § 252.160 Applicability. (a) General applicability. (b) Initial applicability. (1) January 1, 2019; and (2) 1095 days (three years) after the later of the date on which: (i) The U.S. non-branch assets of the global systemically important foreign banking organization that controls the Covered IHC equaled or exceeded $50 billion; and (ii) The foreign banking organization that controls the Covered IHC became a global systemically important foreign banking organization. (c) Applicability of § 252.164. [82 FR 8311, Jan. 24, 2017, as amended at 86 FR 738, Jan. 6, 2021] § 252.161 Definitions. For purposes of this subpart: Additional tier 1 capital Average total consolidated assets Common equity tier 1 capital Common equity tier 1 capital ratio Common equity tier 1 minority interest Covered IHC Covered IHC TLAC buffer Covered IHC Total loss-absorbing capacity amount Default right (i) Right of a party, whether contractual or otherwise (including rights incorporated by reference to any other contract, agreement or document, and rights afforded by statute, civil code, regulation and common law), to liquidate, terminate, cancel, rescind, or accelerate such agreement or transactions thereunder, set off or net amounts owing in respect thereto (except rights related to same-day payment netting), exercise remedies in respect of collateral or other credit support or property related thereto (including the purchase and sale of property), demand payment or delivery thereunder or in respect thereof (other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure), suspend, delay or defer payment or performance thereunder, modify the obligations of a party thereunder or any similar rights; and (ii) Right or contractual provision that alters the amount of collateral or margin that must be provided with respect to an exposure thereunder, including by altering any initial amount, threshold amount, variation margin, minimum transfer amount, the margin value of collateral or any similar amount, that entitles a party to demand the return of any collateral or margin transferred by it to the other party or a custodian or that modifies a transferee's right to reuse collateral or margin (if such right previously existed), or any similar rights, in each case, other than a right or operation of a contractual provision arising solely from a change in the value of collateral or margin or a change in the amount of an economic exposure; and (2) Does not include any right under a contract that allows a party to terminate the contract on demand or at its option at a specified time, or from time to time, without the need to show cause. Discretionary bonus payment Distribution Eligible Covered IHC debt security Eligible external debt security (1) A debt instrument that: (i) Is paid in, and issued by the Covered IHC to, and remains held by, a person that does not directly or indirectly control the Covered IHC and is not a wholly owned subsidiary; (ii) Is not secured, not guaranteed by the Covered IHC or a subsidiary of the Covered IHC, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument; (iii) Has a maturity of greater than or equal to 365 days (one year) from the date of issuance; (iv) Is governed by the laws of the United States or any State thereof; (v) Does not provide the holder of the instrument a contractual right to accelerate payment of principal or interest on the instrument, except a right that is exercisable on one or more dates that are specified in the instrument or in the event of: (A) A receivership, insolvency, liquidation, or similar proceeding of the Covered IHC; or (B) A failure of the Covered IHC to pay principal or interest on the instrument when due and payable that continues for 30 days or more; (vi) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the Covered IHC's credit quality, but may have an interest rate that is adjusted periodically independent of the Covered IHC's credit quality, in relation to general market interest rates or similar adjustments; (vii) Is not a structured note; and (viii) Does not provide that the instrument may be converted into or exchanged for equity of the covered IHC; and (2) A debt instrument issued prior to December 31, 2016 that: (i) Is paid in, and issued by the Covered IHC to, and remains held by, a person that does not directly or indirectly control the Covered IHC and is not a wholly owned subsidiary; (ii) Is not secured, not guaranteed by the Covered IHC or a subsidiary of the Covered IHC, and not subject to any other arrangement that legally or economically enhances the seniority of the instrument; (iii) Has a maturity of greater than or equal to 365 days (one year) from the date of issuance; (iv) Does not have a credit-sensitive feature, such as an interest rate that is reset periodically based in whole or in part on the Covered IHC's credit quality, but may have an interest rate that is adjusted periodically independent of the Covered IHC's credit quality, in relation to general market interest rates or similar adjustments; (v) Is not a structured note; and (vi) Does not provide that the instrument may be converted into or exchanged for equity of the Covered IHC. Eligible internal debt security (i) Is paid in, and issued by the Covered IHC; (ii) Is not secured, not guaranteed by the Covered IHC or a subsidiary of the Covered IHC, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument; (iii) Has a maturity of greater than or equal to 365 days (one year) from the date of issuance; (iv) Is governed by the laws of the United States or any State thereof; (v) Does not provide the holder of the instrument a contractual right to accelerate payment of principal or interest on the instrument, except a right that is exercisable on one or more dates that are specified in the instrument or in the event of: (A) A receivership, insolvency, liquidation, or similar proceeding of the Covered IHC; or (B) A failure of the Covered IHC to pay principal or interest on the instrument when due and payable that continues for 30 days or more; (vi) Is not a structured note; (vii) Is issued to and remains held by a company that is incorporated or organized outside of the United States, and directly or indirectly controls the Covered IHC or is a wholly owned subsidiary; and (viii) Has a contractual provision that is approved by the Board that provides for the immediate conversion or exchange of the instrument into common equity tier 1 of the Covered IHC upon issuance by the Board of an internal debt conversion order. GAAP Internal debt conversion order Non-resolution Covered IHC Outstanding eligible Covered IHC long-term debt amount Person Qualified financial contract Resolution Covered IHC Standardized total risk-weighted assets Structured note (1) Has a principal amount, redemption amount, or stated maturity that is subject to reduction based on the performance of any asset, entity, index, or embedded derivative or similar embedded feature; (2) Has an embedded derivative or other similar embedded feature that is linked to one or more equity securities, commodities, assets, or entities; (3) Does not specify a minimum principal amount that becomes due and payable upon acceleration or early termination; or (4) Is not classified as debt under GAAP, provided that an instrument is not a structured note solely because it is one or both of the following: (i) A non-dollar-denominated instrument, or (ii) An instrument whose interest payments are based on an interest rate index. Supplementary leverage ratio Tier 1 minority interest Tier 2 capital Total leverage exposure Total risk-weighted assets, U.S. non-branch assets Wholly owned subsidiary Editorial Note: At 82 FR 8311, Jan. 24, 2017, subpart P to part 252 was added, including § 252.161. The definition of Eligible internal debt security [82 FR 8311, Jan. 24, 2017, as amended at 90 FR 55291, Dec. 1, 2025] § 252.162 Covered IHC long-term debt requirement. (a) Covered IHC long-term debt requirement. (1) 6 percent of the Covered IHC's total risk-weighted assets; (2) If the Covered IHC is required to maintain a minimum supplementary leverage ratio, 2.5 percent of the Covered IHC's total leverage exposure; and (3) 3.5 percent of the Covered IHC's average total consolidated assets. (b) Outstanding eligible Covered IHC long-term debt amount. (i) One hundred (100) percent of the amount due to be paid of unpaid principal of the outstanding eligible Covered IHC debt securities issued by the Covered IHC in greater than or equal to 730 days (two years); and (ii) Fifty (50) percent of the amount due to be paid of unpaid principal of the outstanding eligible Covered IHC debt securities issued by the Covered IHC in greater than or equal to 365 days (one year) and less than 730 days (two years); and (iii) Zero (0) percent of the amount due to be paid of unpaid principal of the outstanding eligible Covered IHC debt securities issued by the Covered IHC in less than 365 days (one year). (2) For purposes of paragraph (b)(1) of this section, the date on which principal is due to be paid on an outstanding eligible Covered IHC debt security is calculated from the earlier of: (i) The date on which payment of principal is required under the terms governing the instrument, without respect to any right of the holder to accelerate payment of principal; and (ii) The date the holder of the instrument first has the contractual right to request or require payment of the amount of principal, provided that, with respect to a right that is exercisable on one or more dates that are specified in the instrument only on the occurrence of an event (other than an event of a receivership, insolvency, liquidation, or similar proceeding of the Covered IHC, or a failure of the Covered IHC to pay principal or interest on the instrument when due), the date for the outstanding eligible Covered IHC debt security under this paragraph (b)(2)(ii) will be calculated as if the event has occurred. (3) After notice and response proceedings consistent with 12 CFR part 263, subpart E, the Board may order a Covered IHC to exclude from its outstanding eligible Covered IHC long-term debt amount any debt security with one or more features that would significantly impair the ability of such debt security to take losses. (c) Redemption and repurchase. [82 FR 8311, Jan. 24, 2017, as amended at 86 FR 738, Jan. 6, 2021] § 252.163 Internal debt conversion order. (a) The Board may issue an internal debt conversion order if: (1) The Board has determined that the Covered IHC is in default or danger of default; and (2) Any of the following circumstances apply: (i) A foreign banking organization that directly or indirectly controls the Covered IHC or any subsidiary of the top-tier foreign banking organization has been placed into resolution proceedings (including the application of statutory resolution powers) in its home country; (ii) The home country supervisor of the top-tier foreign banking organization has consented or not promptly objected after notification by the Board to the conversion or exchange of the eligible internal debt securities of the Covered IHC; or (iii) The Board has made a written recommendation to the Secretary of the Treasury pursuant to 12 U.S.C. 5383(a) regarding the Covered IHC. (b) For purposes of paragraph (a) of this section, the Board will consider: (1) A Covered IHC in default or danger of default if (i) A case has been, or likely will promptly be, commenced with respect to the Covered IHC under the Bankruptcy Code (11 U.S.C. 101 et seq. (ii) The Covered IHC has incurred, or is likely to incur, losses that will deplete all or substantially all of its capital, and there is no reasonable prospect for the Covered IHC to avoid such depletion; (iii) The assets of the Covered IHC are, or are likely to be, less than its obligations to creditors and others; or (iv) The Covered IHC is, or is likely to be, unable to pay its obligations (other than those subject to a bona fide dispute) in the normal course of business; and (2) An objection by the home country supervisor to the conversion or exchange of the eligible internal debt securities to be prompt if the Board receives the objection no later than 24 hours after the Board requests such consent or non-objection from the home country supervisor. § 252.164 Identification as a resolution Covered IHC or a non-resolution Covered IHC. (a) Initial certification. (b) Certification update. (c) Identification of a resolution Covered IHC. (d) Identification of a non-resolution Covered IHC. (e) Board determination. (f) Transition. (2) A Covered IHC identified as a non-resolution Covered IHC pursuant to paragraph (b) of this section or determined by the Board to be a non-resolution Covered IHC pursuant to paragraph (e) of this section must comply with the requirements in this subpart applicable to a non-resolution Covered IHC 365 days (one year) after such identification or determination, unless such time period is extended by the Board in its discretion. § 252.165 Covered IHC total loss-absorbing capacity requirement and buffer. (a) Covered IHC total loss-absorbing capacity requirement for a resolution Covered IHC. (1) 18 percent of the resolution Covered IHC's total risk-weighted assets; (2) If the Board requires the resolution Covered IHC to maintain a minimum supplementary leverage ratio, 6.75 percent of the resolution Covered IHC's total leverage exposure; and (3) Nine (9) percent of the resolution Covered IHC's average total consolidated assets. (b) Covered IHC total loss-absorbing capacity requirement for a non-resolution Covered IHC. (1) 16 percent of the non-resolution Covered IHC's total risk-weighted assets; (2) If the Board requires the non-resolution Covered IHC to maintain a minimum supplementary leverage ratio, 6 percent of the non-resolution Covered IHC's total leverage exposure; and (3) Eight (8) percent of the non-resolution Covered IHC's average total consolidated assets. (c) Covered IHC Total loss-absorbing capacity amount. (i) The Covered IHC's common equity tier 1 capital (excluding any common equity tier 1 minority interest) held by a company that is incorporated or organized outside of the United States and that directly or indirectly controls the Covered IHC; (ii) The Covered IHC's additional tier 1 capital (excluding any tier 1 minority interest) held by a company that is incorporated or organized outside of the United States and that directly or indirectly controls the Covered IHC; and (iii) The Covered IHC's outstanding eligible Covered IHC long-term debt amount, plus 50 percent of the amount of unpaid principal of outstanding eligible Covered IHC debt securities issued by the Covered IHC due to be paid in greater than or equal to 365 days (one year) but less than 730 days (two years). (2) A resolution Covered IHC's Covered IHC total loss-absorbing capacity amount is equal to the sum of: (i) The Covered IHC's common equity tier 1 capital (excluding any common equity tier 1 minority interest); (ii) The Covered IHC's additional tier 1 capital (excluding any tier 1 minority interest); and (iii) The Covered IHC's outstanding eligible Covered IHC long-term debt amount, plus 50 percent of the amount of unpaid principal of outstanding eligible Covered IHC debt securities issued by the Covered IHC due to be paid in greater than or equal to 365 days (one year) but less than 730 days (two years). (d) Covered IHC TLAC buffer Composition of the Covered IHC TLAC buffer. (2) Definitions. (i) Eligible retained income. (A) The Covered IHC's net income, calculated in accordance with the instructions to the FR Y-9C, for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income; and (B) The average of the Covered IHC's net income, calculated in accordance with the instructions to the FR Y-9C, for the four calendar quarters preceding the current calendar quarter. (ii) Maximum Covered IHC TLAC payout ratio. (iii) Maximum Covered IHC TLAC payout amount. (3) Calculation of the Covered IHC TLAC buffer level. (A) 16 percent for a non-resolution Covered IHC, and 18 percent for a resolution Covered IHC; minus (B)( 1 ( 2 (C) The ratio (expressed as a percentage) of the Covered IHC's outstanding eligible Covered IHC long-term debt amount plus 50 percent of the amount of unpaid principal of outstanding eligible Covered IHC debt securities issued by the Covered IHC due to be paid in, as calculated in § 252.162(b)(2), greater than or equal to 365 days (one year) but less than 730 days (two years) to total risk-weighted assets. (ii)(A) Notwithstanding paragraph (d)(3)(i) of this section, with respect to a resolution Covered IHC, if the ratio (expressed as a percentage) of the resolution Covered IHC's Covered IHC total loss-absorbing capacity amount, as calculated under § 252.165(a), to the resolution Covered IHC's risk-weighted assets is less than or equal to, 18 percent, the Covered IHC's Covered IHC TLAC buffer level is zero. (B) Notwithstanding paragraph (d)(3)(i) of this section, with respect to a non-resolution Covered IHC, if the ratio (expressed as a percentage) of the non-resolution Covered IHC's Covered IHC total loss-absorbing capacity amount, as calculated under § 252.165(b), to the Covered IHC's risk-weighted assets is less than or equal to 16 percent, the non-resolution Covered IHC's Covered IHC TLAC buffer level is zero. (4) Limits on distributions and discretionary bonus payments. (ii) A Covered IHC with a Covered IHC TLAC buffer level that is greater than the Covered IHC TLAC buffer is not subject to a maximum Covered IHC TLAC payout amount. (iii) Except as provided in paragraph (d)(4)(iv) of this section, a Covered IHC may not make distributions or discretionary bonus payments during the current calendar quarter if the Covered IHC's: (A) Eligible retained income is negative; and (B) Covered IHC TLAC buffer level was less than the Covered IHC TLAC buffer as of the end of the previous calendar quarter. (iv) Notwithstanding the limitations in paragraphs (d)(4)(i) through (iii) of this section, the Board may permit a Covered IHC to make a distribution or discretionary bonus payment upon a request of the Covered IHC, if the Board determines that the distribution or discretionary bonus payment would not be contrary to the purposes of this section, or to the safety and soundness of the Covered IHC. In making such a determination, the Board will consider the nature and extent of the request and the particular circumstances giving rise to the request. Table 1 to § 252.165—Calculation of Maximum Covered IHC TLAC Payout Amount Covered IHC TLAC buffer level Maximum Covered IHC TLAC payout ratio Greater than the Covered IHC TLAC buffer No payout ratio limitation applies. Less than or equal to the Covered IHC TLAC buffer, and 60 percent. Less than or equal to 75 percent of the Covered IHC TLAC buffer, and 40 percent. Less than or equal to 50 percent of the Covered IHC TLAC buffer, and 20 percent. Less than or equal to 25 percent of the Covered IHC TLAC buffer 0 percent. (v)(A) A Covered IHC is subject to the lowest of the maximum payout amounts as determined under 12 CFR 217.11(a)(2) and the maximum Covered IHC TLAC payout amount as determined under this paragraph. (B) Additional limitations on distributions may apply to a Covered IHC under 12 CFR 225.4, 225.8, and 263.202. [82 FR 8311, Jan. 24, 2017, as amended at 85 FR 17006, Mar. 26, 2020; 86 FR 738, Jan. 6, 2021] § 252.166 Restrictions on corporate practices of intermediate holding companies of global systemically important foreign banking organizations. (a) Prohibited corporate practices. (1) Issue any debt instrument with an original maturity of less than 365 days (one year), including short term deposits and demand deposits, to any person, unless the person is an affiliate of the Covered IHC; (2) Issue any instrument, or enter into any related contract, with respect to which the holder of the instrument has a contractual right to offset debt owed by the holder or its affiliates to the Covered IHC or a subsidiary of the Covered IHC against the amount, or a portion of the amount, owed by the Covered IHC under the instrument; (3) Enter into a qualified financial contract that is not a credit enhancement with a person that is not an affiliate of the Covered IHC; (4) Enter into an agreement in which the Covered IHC guarantees a liability of an affiliate of the Covered IHC if such liability permits the exercise of a default right that is related, directly or indirectly, to the Covered IHC becoming subject to a receivership, insolvency, liquidation, resolution, or similar proceeding other than a receivership proceeding under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5381 through 5394) unless the liability is subject to requirements of the Board restricting such default rights or subject to any similar requirements of another U.S. federal banking agency; or (5) Enter into, or otherwise benefit from, any agreement that provides for its liabilities to be guaranteed by any of its subsidiaries. (b) Limit on unrelated liabilities. (2) For purposes of paragraph (b)(1) of this section, an unrelated liability includes: (i) With respect to a non-resolution Covered IHC, any non-contingent liability of the non-resolution Covered IHC owed to a person that is not an affiliate of the non-resolution Covered IHC other than those liabilities specified in paragraph (b)(3) of this section, and (ii) With respect to a resolution Covered IHC, any non-contingent liability of the resolution Covered IHC owed to a person that is not a subsidiary of the resolution Covered IHC other than those liabilities specified in paragraph (b)(3) of this section. (3)(i) The instruments that are used to satisfy the Covered IHC's Covered IHC total loss-absorbing capacity amount, as calculated under § 252.165(a); (ii) Any dividend or other liability arising from the instruments that are used to satisfy the Covered IHC's Covered IHC total loss-absorbing capacity amount, as calculated under § 252.165(c)(2); (iii) An eligible Covered IHC debt security that does not provide the holder of the instrument with a currently exercisable right to require immediate payment of the total or remaining principal amount; and (iv) A secured liability, to the extent that it is secured, or a liability that otherwise represents a claim that would be senior to eligible Covered IHC debt securities in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5390(b)) and the Bankruptcy Code (11 U.S.C. 507). (c) A Covered IHC is not subject to paragraph (b) of this section if all of the eligible Covered IHC debt securities issued by the Covered IHC would represent the most subordinated debt claim in a receivership, insolvency, liquidation, or similar proceeding of the Covered IHC. § 252.167 Disclosure requirements for resolution Covered IHCs. (a) A resolution Covered IHC that has any outstanding eligible external debt securities must publicly disclose a description of the financial consequences to unsecured debtholders of the resolution Covered IHC entering into a resolution proceeding in which the resolution Covered IHC is the only entity in the United States that would be subject to the resolution proceeding. (b) A resolution Covered IHC must provide the disclosure required by paragraph (a) of this section: (1) In the offering documents for all of its eligible external debt securities; and (2) Either: (i) On the resolution Covered IHC's Web site; or (ii) In more than one public financial report or other public regulatory reports, provided that the resolution Covered IHC publicly provides a summary table specifically indicating the location(s) of this disclosure. Subpart Q—Single-Counterparty Credit Limits Source: 83 FR 38501, Aug. 6, 2018, unless otherwise noted. § 252.170 Applicability and general provisions. (a) In general. (2) For purposes of this subpart: (i) Covered foreign entity (A) A Category II foreign banking organization; (B) A Category III foreign banking organization; (C) A foreign banking organization with total consolidated assets that equal or exceed $250 billion; (D) A Category II U.S. intermediate holding company; and (E) A Category III U.S. intermediate holding company. (ii) Major foreign banking organization (b) Credit exposure limits. (2) A covered foreign entity is required to calculate its aggregate net credit exposure, gross credit exposure, and net credit exposure to a counterparty using the methods in this subpart. (c) Applicability of this subpart Foreign banking organizations. (ii) Notwithstanding paragraph (c)(1)(i) of this section, a foreign banking organization that is a major foreign banking organization as of October 5, 2018, must comply with the requirements of this subpart, including but not limited to § 252.172, beginning on July 1, 2021, unless that time is extended by the Board in writing. (2) U.S. intermediate holding companies. (ii) [Reserved] (iii) A U.S. intermediate holding company that becomes a covered foreign entity subject to this subpart after October 5, 2018, must comply with the requirements of this subpart beginning on the first day of the ninth calendar quarter after it becomes a covered foreign entity, unless that time is accelerated or extended by the Board in writing. (d) Cessation of requirements Foreign banking organizations. (A) The covered foreign entity is not a Category II foreign banking organization; (B) The covered foreign entity is not a Category III foreign banking organization; and (C) Its total consolidated assets fall below $250 billion for each of four consecutive quarters, as reported on the covered foreign entity's FR Y-7Q, effective on the as-of date of the fourth consecutive FR Y-7Q. (ii) A foreign banking organization that is a covered foreign entity and that has ceased to be a major foreign banking organization for purposes of § 252.172(c) is no longer subject to the requirements of § 252.172(c) beginning on the first day of the calendar quarter following the reporting date on which it ceased to be a major foreign banking organization; provided that the foreign banking organization remains subject to the requirements of this subpart, unless it ceases to be a foreign banking organization that is a covered foreign entity pursuant to paragraph (d)(1)(i) of this section. (2) U.S. intermediate holding companies. (A) The covered foreign entity is not a Category II U.S. intermediate holding company; or (B) The covered foreign entity is not a Category III U.S. intermediate holding company. [84 FR 59119, Nov. 1, 2019, as amended at 85 FR 31952, May 28, 2020] § 252.171 Definitions. Unless defined in this section, terms that are set forth in § 252.2 of this part and used in this subpart have the definitions assigned in § 252.2. For purposes of this subpart: (a) Adjusted market value (1) With respect to the value of cash, securities, or other eligible collateral transferred by the covered foreign entity to a counterparty, the sum of: (i) The market value of the cash, securities, or other eligible collateral; and (ii) The product of the market value of the securities or other eligible collateral multiplied by the applicable collateral haircut in Table 1 to § 217.132 of the Board's Regulation Q (12 CFR 217.132); and (2) With respect to cash, securities, or other eligible collateral received by the covered foreign entity from a counterparty: (i) The market value of the cash, securities, or other eligible collateral; minus (ii) The market value of the securities or other eligible collateral multiplied by the applicable collateral haircut in Table 1 to § 217.132 of the Board's Regulation Q (12 CFR 217.132). (3) Prior to calculating the adjusted market value pursuant to paragraphs (1) and (2) of this section, with regard to a transaction that meets the definition of “repo-style transaction” in § 217.2 of the Board's Regulation Q (12 CFR 217.2), the covered foreign entity would first multiply the applicable collateral haircuts in Table 1 to § 217.132 of the Board's Regulation Q (12 CFR 217.132) by the square root of 1/2 (b) Affiliate (1) Any subsidiary of the company and any other company that is consolidated with the company under applicable accounting standards; or (2) For a company that is not subject to principles or standards referenced in paragraph (b)(1) of this section, any subsidiary of the company and any other company that would be consolidated with the company, if consolidation would have occurred if such principles or standards had applied. (c) Aggregate net credit exposure (d) Bank-eligible investments (e) Capital stock and surplus (1) The tier 1 capital and tier 2 capital of the U.S. intermediate holding company, as calculated under the capital adequacy guidelines applicable to that U.S. intermediate holding company under subpart O of the Board's Regulation YY (12 CFR part 252, subpart O); and (2) The excess allowance for loan and lease losses of the U.S. intermediate holding company not included in its tier 2 capital, as calculated under the capital adequacy guidelines applicable to that U.S. intermediate holding company under subpart O of the Board's Regulation YY (12 CFR part 252, subpart O). (f) Counterparty (1) With respect to a natural person: (i) The natural person; (ii) Except as provided in paragraph (f)(1)(iii) of this section, if the credit exposure of the covered foreign entity to such natural person exceeds 5 percent of tier 1 capital, the natural person and members of the person's immediate family collectively; and (iii) Until January 1, 2021, with respect to a U.S. intermediate holding company that is a covered foreign entity and that has less than $250 billion in total consolidated assets as of December 31, 2019, if the credit exposure of the U.S. intermediate holding company to such natural person exceeds 5 percent of its capital stock and surplus, the natural person and member of the person's immediately family collectively. (2) With respect to any company that is not an affiliate of the covered foreign entity, the company and its affiliates collectively; (3) With respect to a State, the State and all of its agencies, instrumentalities, and political subdivisions (including any municipalities) collectively; (4) With respect to a foreign sovereign entity that is not assigned a zero percent risk weight under the standardized approach in the Board's Regulation Q (12 CFR part 217, subpart D), other than the home country foreign sovereign entity of a foreign banking organization, the foreign sovereign entity and all of its agencies and instrumentalities (but not including any political subdivision), collectively; and (5) With respect to a political subdivision of a foreign sovereign entity such as a state, province, or municipality, any political subdivision of the foreign sovereign entity and all of such political subdivision's agencies and instrumentalities, collectively. 1 1 (g) Covered foreign entity (h) Credit derivative (i) Credit transaction (1) Any extension of credit to the counterparty, including loans, deposits, and lines of credit, but excluding uncommitted lines of credit; (2) Any repurchase agreement or reverse repurchase agreement with the counterparty; (3) Any securities lending or securities borrowing transaction with the counterparty; (4) Any guarantee, acceptance, or letter of credit (including any endorsement, confirmed letter of credit, or standby letter of credit) issued on behalf of the counterparty; (5) Any purchase of securities issued by or other investment in the counterparty; (6) Any credit exposure to the counterparty in connection with a derivative transaction between the covered foreign entity and the counterparty; (7) Any credit exposure to the counterparty in connection with a credit derivative or equity derivative between the covered foreign entity and a third party, the reference asset of which is an obligation or equity security of, or equity investment in, the counterparty; and (8) Any transaction that is the functional equivalent of the above, and any other similar transaction that the Board, by regulation, determines to be a credit transaction for purposes of this subpart. (j) Depository institution (k) Derivative transaction (l) Eligible collateral (1) Cash on deposit with the covered foreign entity or an affiliate of the covered foreign entity (including cash in foreign currency or U.S. dollars held for the covered foreign entity by a custodian or trustee, whether inside or outside of the United States); (2) Debt securities (other than mortgage- or asset-backed securities and resecuritization securities, unless those securities are issued by a U.S. government-sponsored enterprise) that are bank-eligible investments and that are investment grade, except for any debt securities issued by the covered foreign entity or any affiliate of the covered foreign entity; (3) Equity securities that are publicly traded, except for any equity securities issued by the covered foreign entity or any affiliate of the covered foreign entity; (4) Convertible bonds that are publicly traded, except for any convertible bonds issued by the covered foreign entity or any affiliate of the covered foreign entity; or (5) Gold bullion. (m) Eligible credit derivative (1) The contract meets the requirements of an eligible guarantee and has been confirmed by the protection purchaser and the protection provider; (2) Any assignment of the contract has been confirmed by all relevant parties; (3) If the credit derivative is a credit default swap, the contract includes the following credit events: (i) Failure to pay any amount due under the terms of the reference exposure, subject to any applicable minimal payment threshold that is consistent with standard market practice and with a grace period that is closely in line with the grace period of the reference exposure; and (ii) Receivership, insolvency, liquidation, conservatorship, or inability of the reference exposure issuer to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and similar events; (4) The terms and conditions dictating the manner in which the contract is to be settled are incorporated into the contract; (5) If the contract allows for cash settlement, the contract incorporates a robust valuation process to estimate loss reliably and specifies a reasonable period for obtaining post-credit event valuations of the reference exposure; (6) If the contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of at least one of the exposures that is permitted to be transferred under the contract provide that any required consent to transfer may not be unreasonably withheld; and (7) If the credit derivative is a credit default swap, the contract clearly identifies the parties responsible for determining whether a credit event has occurred, specifies that this determination is not the sole responsibility of the protection provider, and gives the protection purchaser the right to notify the protection provider of the occurrence of a credit event. (n) Eligible equity derivative (1) The derivative contract has been confirmed by all relevant parties; (2) Any assignment of the derivative contract has been confirmed by all relevant parties; and (3) The terms and conditions dictating the manner in which the derivative contract is to be settled are incorporated into the contract. (o) Eligible guarantee (p) Eligible guarantor (q) Equity derivative (r) Exempt counterparty (s) Financial entity (1)(i) A bank holding company or an affiliate thereof; a savings and loan holding company as defined in section 10(n) of the Home Owners' Loan Act (12 U.S.C. 1467a(n)); a U.S. intermediate holding company established or designated for purposes of compliance with this part; or a nonbank financial company supervised by the Board; (ii) A depository institution as defined in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)); an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States; a federal credit union or state credit union as defined in section 2 of the Federal Credit Union Act (12 U.S.C. 1752(1) and (6)); a national association, state member bank, or state nonmember bank that is not a depository institution; an institution that functions solely in a trust or fiduciary capacity as described in section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(D)); an industrial loan company, an industrial bank, or other similar institution described in section 2(c)(2)(H) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(H)); (iii) An entity that is state-licensed or registered as: (A) A credit or lending entity, including a finance company; money lender; installment lender; consumer lender or lending company; mortgage lender, broker, or bank; motor vehicle title pledge lender; payday or deferred deposit lender; premium finance company; commercial finance or lending company; or commercial mortgage company; except entities registered or licensed solely on account of financing the entity's direct sales of goods or services to customers; (B) A money services business, including a check casher; money transmitter; currency dealer or exchange; or money order or traveler's check issuer; (iv) Any person registered with the Commodity Futures Trading Commission as a swap dealer or major swap participant pursuant to the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq. et seq. (v) A securities holding company as defined in section 618 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 1850a); a broker or dealer as defined in sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)-(5)); an investment adviser as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq. (vi) A private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an entity that would be an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is deemed not to be an investment company under section 3 of the Investment Company Act of 1940 pursuant to Investment Company Act Rule 3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange Commission; (vii) A commodity pool, a commodity pool operator, or a commodity trading advisor as defined, respectively, in sections 1a(10), 1a(11), and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10), 1a(11), and 1a(12)); a floor broker, a floor trader, or introducing broker as defined, respectively, in sections 1a(22), 1a(23) and 1a(31) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined in section 1a(28) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28)); (viii) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974 (29 U.S.C. 1002); (ix) An entity that is organized as an insurance company, primarily engaged in writing insurance or reinsuring risks underwritten by insurance companies, or is subject to supervision as such by a State insurance regulator or foreign insurance regulator; (x) Any designated financial market utility, as defined in section 803 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5462); and (xi) An entity that would be a financial entity described in paragraphs (s)(1)(i) through (x) of this section, if it were organized under the laws of the United States or any State thereof; and (2) Provided that, for purposes of this subpart, “financial entity” does not include any counterparty that is a foreign sovereign entity or multilateral development bank. (t) Foreign sovereign entity (u) Gross credit exposure (v) Immediate family (w) Intraday credit exposure (x) Investment grade (y) Major counterparty (1) A U.S. bank holding company identified as a global systemically important BHC pursuant to § 217.402 of the Board's Regulation Q (12 CFR 217.402); (2) A top-tier foreign banking organization that meets the requirements of § 252.172(c)(3) through (5); or (3) Any nonbank financial company supervised by the Board. (z) Major foreign banking organization (aa) Multilateral development bank (bb) Net credit exposure (cc) Qualifying central counterparty (dd) Qualifying master netting agreement (ee) Securities financing transaction (ff) Short sale (gg) Sovereign entity (hh) Subsidiary. subsidiary (1) The company is consolidated by the other company under applicable accounting standards; or (2) For a company that is not subject to principles or standards referenced in paragraph (ii)(1) of this definition, consolidation would have occurred if such principles or standards had applied. (ii) Tier 1 capital (jj) Tier 2 capital (kk) Total consolidated assets. total consolidated assets (i) The average of the foreign banking organization's total consolidated assets in the four most recent consecutive quarters as reported quarterly on the FR Y-7Q; or (ii) If the foreign banking organization has not filed an FR Y-7Q for each of the four most recent consecutive quarters, the average of the foreign banking organization's total consolidated assets, as reported on the foreign banking organization's FR Y-7Q, for the most recent quarter or consecutive quarters, as applicable; or (iii) If the foreign banking organization has not yet filed an FR Y-7Q, as determined under applicable accounting standards. (2) A U.S. intermediate holding company's total consolidated assets (i) The average of the U.S. intermediate holding company's total consolidated assets in the four most recent consecutive quarters as reported quarterly on the FR Y-9C; or (ii) If the U.S. intermediate holding company has not filed an FR Y-9C for each of the four most recent consecutive quarters, the average of the U.S. intermediate holding company's total consolidated assets, as reported on the company's FR Y-9C, for the most recent quarter or consecutive quarters, as applicable; or (iii) If the U.S. intermediate holding company has not yet filed an FR Y-9C, as determined under applicable accounting standards. [83 FR 38501, Aug. 6, 2018, as amended at 84 FR 59120, Nov. 1, 2019] § 252.172 Credit exposure limits. (a) Transition limit on aggregate credit exposure for certain covered foreign entities. (2) Until January 1, 2021, no U.S. intermediate holding company that is a covered foreign entity and that has less than $250 billion in total consolidated assets as of December 31, 2019 may have an aggregate net credit exposure that exceeds 25 percent of the consolidated capital stock and surplus of the U.S. intermediate holding company. (b) Limit on aggregate net credit exposure for covered foreign entities. (2) No foreign banking organization that is a covered foreign entity may permit its combined U.S. operations to have aggregate net credit exposure to any counterparty that exceeds 25 percent of the tier 1 capital of the foreign banking organization. (c) Limit on aggregate net credit exposure of major foreign banking organizations to major counterparties. (1) [Reserved] (2) No major foreign banking organization may permit its combined U.S. operations to have aggregate net credit exposure to any major counterparty that exceeds 15 percent of the tier 1 capital of the major foreign banking organization. (3) For purposes of this subpart, a top-tier foreign banking organization will be a major counterparty if it meets one of the following conditions: (i) The top-tier foreign banking organization determines, pursuant to 12 CFR 252.153(b)(6), that the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology; or (ii) The Board, using information available to the Board, determines: (A) That the top-tier foreign banking organization would be a global systemically important banking organization under the global methodology; (B) That the top-tier foreign banking organization, if it were subject to the Board's Regulation Q, would be identified as a global systemically important BHC under 12 CFR 217.402 of the Board's Regulation Q; or (C) That the U.S. intermediate holding company, if it were subject to 12 CFR 217.402 of the Board's Regulation Q, would be identified as a global systemically important BHC. (4) Each top-tier foreign banking organization that controls a U.S. intermediate holding company must submit to the Board by January 1 of each calendar year through the U.S. intermediate holding company: (A) Notice of whether the home country supervisor (or other appropriate home country regulatory authority) of the top-tier foreign banking organization of the U.S. intermediate holding company has adopted standards consistent with the global methodology; and (B) Notice of whether the top-tier foreign banking organization prepares or reports the indicators used by the global methodology to identify a banking organization as a global systemically important banking organization and, if it does, whether the top-tier foreign banking organization has determined that it has the characteristics of a global systemically important banking organization under the global methodology pursuant to 12 CFR 252.153(b)(6). (5) A top-tier foreign banking organization that controls a U.S. intermediate holding company and prepares or reports for any purpose the indicator amounts necessary to determine whether the top-tier foreign banking organization is a global systemically important banking organization under the global methodology must use the data to determine whether the top-tier foreign banking organization has the characteristics of a global systemically important banking organization under the global methodology. (d) Foreign banking organizations subject on a consolidated basis to a large exposures or single-counterparty credit limit regime by its home-country supervisor. (i) For purposes of this paragraph, home-country large exposure standards that are consistent with the Basel Large Exposures Framework include single-counterparty credit limits and any restrictions set forth in “Supervisory framework for measuring and controlling large exposures” (2014) (Basel LE Standard), as implemented in accordance with the Basel LE Standard. (ii) [Reserved] (2) A foreign banking organization that is a covered foreign entity must provide to the Board reports relating to its compliance with the large exposure standards described in paragraph (d)(1) of this section concurrently with filing the FR Y-7Q or any successor report. [83 FR 38501, Aug. 6, 2018, as amended at 84 FR 59120, Nov. 1, 2019] § 252.173 Gross credit exposure. (a) Calculation of gross credit exposure. (1) A deposit of the covered foreign entity held by the counterparty, loan by a covered foreign entity to the counterparty, and lease in which the covered foreign entity is the lessor and the counterparty is the lessee, equal to the amount owed by the counterparty to the covered foreign entity under the transaction. (2) A debt security or debt investment held by the covered foreign entity that is issued by the counterparty, equal to: (i) The market value of the securities, for trading and available-for-sale securities; and (ii) The amortized purchase price of the securities or investments, for securities or investments held to maturity. (3) An equity security held by the covered foreign entity that is issued by the counterparty, equity investment in a counterparty, and other direct investments in a counterparty, equal to the market value. (4) A securities financing transaction must be valued using any of the methods that the covered foreign entity is authorized to use under the Board's Regulation Q (12 CFR part 217, subparts D and E) to value such transactions: (i)(A) As calculated for each transaction, in the case of a securities financing transaction between the covered foreign entity and the counterparty that is not subject to a bilateral netting agreement or does not meet the definition of “repo-style transaction” in § 217.2 of the Board's Regulation Q (12 CFR 217.2); or (B) As calculated for a netting set, in the case of a securities financing transaction between the covered foreign entity and the counterparty that is subject to a bilateral netting agreement with that counterparty and meets the definition of “repo-style transaction” in § 217.2 of the Board's Regulation Q (12 CFR 217.2); (ii) For purposes of paragraph (a)(4)(i) of this section, the covered foreign entity must: (A) Assign a value of zero to any security received from the counterparty that does not meet the definition of “eligible collateral” in § 252.171( l (B) Include the value of securities that are eligible collateral received by the covered foreign entity from the counterparty (including any exempt counterparty), calculated in accordance with paragraphs (a)(4)(i) through (iv) of this section, when calculating its gross credit exposure to the issuer of those securities; (iii) Notwithstanding paragraph (a)(4)(i) and (ii) of this section and with respect to each credit transaction, a covered foreign entity's gross credit exposure to a collateral issuer under this paragraph (a)(4) is limited to the covered foreign entity's gross credit exposure to the counterparty on the credit transaction; (iv) In cases where the covered foreign entity receives eligible collateral from a counterparty in addition to the cash or securities received from that counterparty, the counterparty may reduce its gross credit exposure to that counterparty in accordance with § 252.174(b). (5) A committed credit line extended by a covered foreign entity to a counterparty, equal to the face amount of the committed credit line. (6) A guarantee or letter of credit issued by a covered foreign entity on behalf of a counterparty, equal to the maximum potential loss to the covered foreign entity on the transaction. (7) A derivative transaction must be valued using any of the methods that the covered foreign entity is authorized to use under the Board's Regulation Q (12 CFR part 217, subparts D and E) to value such transactions: (i)(A) As calculated for each transaction, in the case of a derivative transaction between the covered foreign entity and the counterparty, including an equity derivative but excluding a credit derivative described in paragraph (a)(8) of this section, that is not subject to a qualifying master netting agreement; or (B) As calculated for a netting set, in the case of a derivative transaction between the covered foreign entity and the counterparty, including an equity derivative but excluding a credit derivative described in paragraph (a)(8) of this section, that is subject to a qualifying master netting agreement. (ii) In cases where a covered foreign entity is required to recognize an exposure to an eligible guarantor pursuant to § 252.174(d), the covered foreign entity must exclude the relevant derivative transaction when calculating its gross exposure to the original counterparty under this section. (8) A credit derivative between the covered foreign entity and a third party where the covered foreign entity is the protection provider and the reference asset is an obligation or debt security of the counterparty, equal to the maximum potential loss to the covered foreign entity on the transaction. (b) Investments in and exposures to securitization vehicles, investment funds, and other special purpose vehicles that are not affiliates. (1) A U.S. intermediate holding company that is a covered foreign entity and that has less than $250 billion in total consolidated assets as of December 31, 2019 is not required to comply with paragraph (b)(3) of this section until January 1, 2021. (2) Until January 1, 2021, unless the Board applies the requirements of § 252.175 to the transaction pursuant to § 252.175(d), a U.S. intermediate holding company that is a covered foreign entity and that has less than $250 billion in total consolidated assets as of December 31, 2019 must: (i) Calculate pursuant to paragraph (a) of this section its gross credit exposure due to any investment in the debt or equity of, and any credit derivative or equity derivative between the covered foreign entity and a third party where the covered foreign entity is in the protection provider and the reference asset is an obligation or equity security of, or equity investment in, a securitization vehicle, investment fund, and other special purpose vehicle that is not an affiliate of the covered foreign entity; and (ii) Attribute that gross credit exposure to the securitization vehicle, investment fund, or other special purpose vehicle for purposes of this subpart. (3) Except as provided in paragraph (b)(1) of this section, a covered foreign entity must calculate pursuant to § 252.175 its gross credit exposure due to any investment in the debt or equity of, and any credit derivative or equity derivative between the covered foreign entity and a third party where the covered foreign entity is the protection provider and the reference asset is an obligation or equity security of, or equity investment in, a securitization vehicle, investment fund, and other special purpose vehicle that is not an affiliate of the covered foreign entity. (c) Attribution rule. [83 FR 38501, Aug. 6, 2018, as amended at 84 FR 59120, Nov. 1, 2019] § 252.174 Net credit exposure. (a) In general. (b) Eligible collateral. (2) A covered foreign entity that reduces its gross credit exposure to a counterparty as required under paragraph (b)(1) of this section must include the adjusted market value of the eligible collateral when calculating its gross credit exposure to the collateral issuer. (3) Notwithstanding paragraph (b)(2) of this section, a covered foreign entity's gross credit exposure to a collateral issuer under this paragraph (b) is limited to: (i) Its gross credit exposure to the counterparty on the credit transaction, or (ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction if valued in accordance with § 252.173(a). (c) Eligible guarantees. (2) A covered foreign entity that reduces its gross credit exposure to a counterparty as required under paragraph (c)(1) of this section must include the amount of eligible guarantees when calculating its gross credit exposure to the eligible guarantor. (3) Notwithstanding paragraph (c)(2) of this section, a covered foreign entity's gross credit exposure to an eligible guarantor with respect to an eligible guarantee under this paragraph (c) is limited to: (i) Its gross credit exposure to the counterparty on the credit transaction prior to recognition of the eligible guarantee, or (ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction prior to recognition of the eligible guarantee if valued in accordance with § 252.173(a). (d) Eligible credit and equity derivatives. (i) In the case of any eligible credit derivative from an eligible guarantor, the notional amount of the eligible credit derivative; or (ii) In the case of any eligible equity derivative from an eligible guarantor, the gross credit exposure amount to the counterparty (calculated in accordance with § 252.173(a)(7)). (2)(i) A covered foreign entity that reduces its gross credit exposure to a counterparty as provided under paragraph (d)(1) of this section must include, when calculating its net credit exposure to the eligible guarantor, including in instances where the underlying credit transaction would not be subject to the credit limits of § 252.172 (for example, due to an exempt counterparty), either (A) In the case of any eligible credit derivative from an eligible guarantor, the notional amount of the eligible credit derivative; or (B) In the case of any eligible equity derivative from an eligible guarantor, the gross credit exposure amount to the counterparty (calculated in accordance with § 252.173(a)(7)). (ii) Notwithstanding paragraph (d)(2)(i) of this section, in cases where the eligible credit derivative or eligible equity derivative is used to hedge covered positions that are subject to the Board's market risk rule (12 CFR part 217, subpart F) and the counterparty on the hedged transaction is not a financial entity, the amount of credit exposure that a entity must recognize to the eligible guarantor is the amount that would be calculated pursuant to § 252.173(a). (3) Notwithstanding paragraph (d)(2) of this section, a covered foreign entity's gross credit exposure to an eligible guarantor with respect to an eligible credit derivative or an eligible equity derivative under this paragraph (d) is limited to: (i) Its gross credit exposure to the counterparty on the credit transaction prior to recognition of the eligible credit derivative or the eligible equity derivative, or (ii) In the case of an exempt counterparty, the gross credit exposure that would have been attributable to that exempt counterparty on the credit transaction prior to recognition of the eligible credit derivative or the eligible equity derivative if valued in accordance with § 252.173(a). (e) Other eligible hedges. (1) The instrument in which the covered foreign entity has a short position is junior to, or pari passu (2) The instrument in which the covered foreign entity has a short position and the instrument in which the covered foreign entity has the long position are either both treated as trading or available-for-sale exposures or both treated as held-to-maturity exposures. (f) Unused portion of certain extensions of credit. (2) To the extent that the used portion of a credit extension has been secured by eligible collateral, the covered foreign entity may reduce its gross credit exposure by the adjusted market value of any eligible collateral received from the counterparty, even if the used portion has not been fully secured by eligible collateral. (3) To qualify for the reduction in net credit exposure under this paragraph, the credit contract must specify that any used portion of the credit extension must be fully secured by the adjusted market value of any eligible collateral. (g) Credit transactions involving exempt counterparties. (2) Notwithstanding paragraph (g)(1) of this section, in cases where a covered foreign entity has a credit transaction with an exempt counterparty and the covered foreign entity has obtained eligible collateral from that exempt counterparty or an eligible guarantee or eligible credit or equity derivative from an eligible guarantor, the covered foreign entity must include (for purposes of this subpart) such exposure to the issuer of such eligible collateral or the eligible guarantor, as calculated in accordance with the rules set forth in this section, when calculating its gross credit exposure to that issuer of eligible collateral or eligible guarantor. (h) Currency mismatch adjustments. (1) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible collateral and calculating its gross credit exposure to an issuer of eligible collateral, pursuant to paragraph (b) of this section, the currency mismatch adjustment approach of § 217.37(c)(3)(ii) of the Board's Regulation Q (12 CFR 217.37(c)(3)(ii)); and (2) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible guarantee, eligible equity derivative, or eligible credit derivative from an eligible guarantor and calculating its gross credit exposure to an eligible guarantor, pursuant to paragraphs (c) and (d) of this section, the currency mismatch adjustment approach of § 217.36(f) of the Board's Regulation Q (12 CFR 217.36(f)). (i) Maturity mismatch adjustments. (1) When reducing its gross credit exposure to a counterparty resulting from any credit transaction due to any eligible collateral or any eligible guarantees, eligible equity derivatives, or eligible credit derivatives from an eligible guarantor, pursuant to paragraphs (b) through (d) of this section, and (2) In calculating its gross credit exposure to an issuer of eligible collateral, pursuant to paragraph (b) of this section, or to an eligible guarantor, pursuant to paragraphs (c) and (d) of this section; provided that (3) The eligible collateral, eligible guarantee, eligible equity derivative, or eligible credit derivative subject to paragraph (i)(1) of this section: (i) Has a shorter maturity than the credit transaction; (ii) Has an original maturity equal to or greater than one year; (iii) Has a residual maturity of not less than three months; and (iv) The adjustment approach is otherwise applicable. [83 FR 38501, Aug. 6, 2018, as amended at 83 FR 64023, Dec. 13, 2018] § 252.175 Investments in and exposures to securitization vehicles, investment funds, and other special purpose vehicles that are not affiliates of the covered foreign entity. (a) In general. (i) Until January 1, 2021, this section does not apply to a U.S. intermediate holding company that is a covered foreign entity with less than $250 billion in total consolidated assets as of December 31, 2019, provided that: (A) In order to avoid evasion of this subpart, the Board may determine, after notice to the covered foreign entity and opportunity for hearing, that a U.S. intermediate holding company with less than $250 billion in total consolidated assets must apply either the approach in this paragraph (a) or the look-through approach in paragraph (b) of this section, or must recognize exposures to a third party that has a contractual obligation to provide credit or liquidity support to a securitization vehicle, investment fund, or other special purpose vehicle that is not an affiliate of the covered foreign entity, as provided in paragraph (c) of this section; and (B) For purposes of paragraph (a)(1)(i)(A) of this section, the Board, in its discretion and as applicable, may allow a covered foreign entity to measure its capital base using the covered foreign entity's capital stock and surplus rather than its tier 1 capital. (ii) [Reserved] (2) For purposes of this section, the following definitions apply: (i) SPV (ii) SPV exposure (3)(i) A covered foreign entity must determine whether the amount of its gross credit exposure to an issuer of assets in an SPV, due to an SPV exposure, is equal to or greater than 0.25 percent of the covered foreign entity's tier 1 capital using one of the following two methods: (A) The sum of all of the issuer's assets (with each asset valued in accordance with § 252.173(a)) in the SPV; or (B) The application of the look-through approach described in paragraph (b) of this section. (ii) With respect to the determination required under paragraph (a)(3)(i) of this section, a covered foreign entity must use the same method to calculate gross credit exposure to each issuer of assets in a particular SPV. (iii) In making a determination under paragraph (a)(3)(i) of this section, the covered foreign entity must consider only the credit exposure to the issuer arising from the covered foreign entity's SPV exposure. (iv) For purposes of this paragraph (a)(3), a covered foreign entity that is unable to identify each issuer of assets in an SPV must attribute to a single unknown counterparty the amount of its gross credit exposure to all unidentified issuers and calculate such gross credit exposure using one method in either paragraph (a)(3)(i)(A) or (B) of this section. (4)(i) If a covered foreign entity determines pursuant to paragraph (a)(3) of this section that the amount of its gross credit exposure to an issuer of assets in an SPV is less than 0.25 percent of the covered foreign entity's tier 1 capital, the amount of the covered foreign entity's gross credit exposure to that issuer may be attributed to either that issuer of assets or the SPV: (A) If attributed to the issuer of assets, the issuer of assets must be identified as a counterparty, and the gross credit exposure calculated under paragraph (a)(3)(i)(A) of this section to that issuer of assets must be aggregated with any other gross credit exposures (valued in accordance with § 252.173) to that same counterparty; and (B) If attributed to the SPV, the covered foreign entity's gross credit exposure is equal to the covered foreign entity's SPV exposure, valued in accordance with § 252.173(a). (ii) If a covered foreign entity determines pursuant to paragraph (a)(3) of this section that the amount of its gross credit exposure to an issuer of assets in an SPV is equal to or greater than 0.25 percent of the covered foreign entity's tier 1 capital or the covered foreign entity is unable to determine that the amount of the gross credit exposure is less than 0.25 percent of the covered foreign entity's tier 1 capital: (A) The covered foreign entity must calculate the amount of its gross credit exposure to the issuer of assets in the SPV using the look-through approach in paragraph (b) of this section; (B) The issuer of assets in the SPV must be identified as a counterparty, and the gross credit exposure calculated in accordance with paragraph (b) must be aggregated with any other gross credit exposures (valued in accordance with § 252.173) to that same counterparty; and (C) When applying the look-through approach in paragraph (b) of this section, a covered foreign entity that is unable to identify each issuer of assets in an SPV must attribute to a single unknown counterparty the amount of its gross credit exposure, calculated in accordance with paragraph (b) of this section, to all unidentified issuers. (iii) For purposes of this section, a covered foreign entity must aggregate all gross credit exposures to unknown counterparties for all SPVs as if the exposures related to a single unknown counterparty; this single unknown counterparty is subject to the limits of § 252.172 as if it were a single counterparty. (b) Look-through approach. (1) Where all investors in the SPV rank pari passu, (2) Where all investors in the SPV do not rank pari passu, (i) The pro rata share of the covered foreign entity's investment in the tranche of the SPV; multiplied by (ii) The lesser of: (A) The market value of the tranche in which the covered foreign entity has invested, except in the case of a debt security that is held to maturity, in which case the tranche must be valued at the amortized purchase price of the securities; and (B) The value of each underlying asset attributed to the issuer in the SPV, each as calculated pursuant to § 252.173(a). (c) Exposures to third parties. (2) The amount of any gross credit exposure that is required to be recognized to a third party under paragraph (c)(1) of this section is equal to the covered foreign entity's SPV exposure, up to the maximum contractual obligation of that third party to the SPV, valued in accordance with § 252.173(a). (This gross credit exposure is in addition to the covered foreign entity's gross credit exposure to the SPV or the issuers of assets of the SPV, calculated in accordance with paragraphs (a) and (b) of this section.) (3) A covered foreign entity must aggregate the gross credit exposure to a third party recognized in accordance with paragraphs (c)(1) and (2) of this section with its other gross credit exposures to that third party (that are unrelated to the SPV) for purposes of compliance with the limits of § 252.172. [83 FR 38501, Aug. 6, 2018, as amended at 84 FR 59121, Nov. 1, 2019] § 252.176 Aggregation of exposures to more than one counterparty due to economic interdependence or control relationships. (a) In general. (i) Until January 1, 2021, paragraphs (a)(2) through (d) of this section do not apply to a U.S. intermediate holding company that is a covered foreign entity with less than $250 billion in total consolidated assets as of December 31, 2019. (ii) [Reserved] (2)(i) If a covered foreign entity has an aggregate net credit exposure to any counterparty that exceeds 5 percent of its tier 1 capital, the covered foreign entity must assess its relationship with the counterparty under paragraph (b)(2) of this section to determine whether the counterparty is economically interdependent with one or more other counterparties of the covered foreign entity and under paragraph (c)(1) of this section to determine whether the counterparty is connected by a control relationship with one or more other counterparties. (ii) If, pursuant to an assessment required under paragraph (a)(2)(i) of this section, the covered foreign entity determines that one or more of the factors of paragraph (b)(2) or (c)(1) of this section are met with respect to one or more counterparties, or the Board determines pursuant to paragraph (d) of this section that one or more other counterparties of a covered foreign entity are economically interdependent or that one or more other counterparties of a covered foreign entity are connected by a control relationship, the covered foreign entity must aggregate its net credit exposure to the counterparties for all purposes under this subpart, including, but not limited to, § 252.172. (iii) In connection with any request pursuant to paragraph (b)(3) or (c)(2) of this section, the Board may require the covered foreign entity to provide additional information. (b) Aggregation of exposures to more than one counterparty due to economic interdependence. (2) A covered foreign entity must assess whether the financial distress of one counterparty (counterparty A) would prevent the ability of the other counterparty (counterparty B) to fully and timely repay counterparty B's liabilities and whether the insolvency or default of counterparty A is likely to be associated with the insolvency or default of counterparty B and, therefore, these counterparties are economically interdependent, by evaluating the following: (i) Whether 50 percent or more of one counterparty's gross revenue is derived from, or gross expenditures are directed to, transactions with the other counterparty; (ii) Whether counterparty A has fully or partly guaranteed the credit exposure of counterparty B, or is liable by other means, in an amount that is 50 percent or more of the covered foreign entity's net credit exposure to counterparty A; (iii) Whether 25 percent or more of one counterparty's production or output is sold to the other counterparty, which cannot easily be replaced by other customers; (iv) Whether the expected source of funds to repay the loans of both counterparties is the same and neither counterparty has another independent source of income from which the loans may be serviced and fully repaid; 1 1 (v) Whether two or more counterparties rely on the same source for the majority of their funding and, in the event of the common provider's default, an alternative provider cannot be found. (3)(i) Notwithstanding paragraph (b)(2) of this section, if a covered foreign entity determines that one or more of the factors in paragraph (b)(2) is met, the covered foreign entity may request in writing a determination from the Board that those counterparties are not economically interdependent and that the covered foreign entity is not required to aggregate those counterparties. (ii) Upon a request by a covered foreign entity pursuant to paragraph (b)(3) of this section, the Board may grant temporary relief to the covered foreign entity and not require the covered foreign entity to aggregate one counterparty with another counterparty provided that the counterparty could promptly modify its business relationships, such as by reducing its reliance on the other counterparty, to address any economic interdependence concerns, and provided that such relief is in the public interest and is consistent with the purpose of this subpart and 12 U.S.C. 5365(e). (c) Aggregation of exposures to more than one counterparty due to certain control relationships. (i) Counterparty A owns, controls, or holds with the power to vote 25 percent or more of any class of voting securities of counterparty B; or (ii) Counterparty A controls in any manner the election of a majority of the directors, trustees, or general partners (or individuals exercising similar functions) of counterparty B. (2)(i) Notwithstanding paragraph (c)(1) of this section, if a covered foreign entity determines that one or more of the factors in paragraph (c)(1) is met, the covered foreign entity may request in writing a determination from the Board that counterparty A does not control counterparty B and that the covered foreign entity is not required to aggregate those counterparties. (ii) Upon a request by a covered foreign entity pursuant to paragraph (c)(2) of this section, the Board may grant temporary relief to the covered foreign entity and not require the covered foreign entity to aggregate counterparty A with counterparty B provided that, taking into account the specific facts and circumstances, such indicia of control does not result in the entities being connected by control relationships for purposes of this subpart, and provided that such relief is in the public interest and is consistent with the purpose of this subpart and 12 U.S.C. 5365(e). (d) Board determinations for aggregation of counterparties due to economic interdependence or control relationships. (1) Economically interdependent for purposes of this subpart, considering the factors in paragraph (b)(2) of this section, as well as any other indicia of economic interdependence that the Board determines in its discretion to be relevant; or (2) Connected by control relationships for purpose of this subpart, considering the factors in paragraph (c)(1) of this section and whether counterparty A: (i) Controls the power to vote 25 percent or more of any class of voting securities of Counterparty B pursuant to a voting agreement; (ii) Has significant influence on the appointment or dismissal of counterparty B's administrative, management, or governing body, or the fact that a majority of members of such body have been appointed solely as a result of the exercise of counterparty A's voting rights; or (iii) Has the power to exercise a controlling influence over the management or policies of counterparty B. (e) Board determinations for aggregation of counterparties to prevent evasion. [83 FR 38501, Aug. 6, 2018, as amended at 84 FR 59121, Nov. 1, 2019] § 252.177 Exemptions. (a) Exempted exposure categories. (1) Any direct claim on, and the portion of a claim that is directly and fully guaranteed as to principal and interest by, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, only while operating under the conservatorship or receivership of the Federal Housing Finance Agency, and any additional obligation issued by a U.S. government-sponsored entity as determined by the Board; (2) Intraday credit exposure to a counterparty; (3) Any trade exposure to a qualifying central counterparty related to the covered foreign entity's clearing activity, including potential future exposure arising from transactions cleared by the qualifying central counterparty and pre-funded default fund contributions; (4) Any credit transaction with the Bank for International Settlements, the International Monetary Fund, the International Bank for Reconstruction and Development, the International Finance Corporation, the International Development Association, the Multilateral Investment Guarantee Agency, or the International Centre for Settlement of Investment Disputes; (5) Any credit transaction with the European Commission or the European Central Bank; and (6) Any transaction that the Board exempts if the Board finds that such exemption is in the public interest and is consistent with the purpose of this subpart. (b) Additional exemptions by the Board. § 252.178 Compliance. (a) Scope of compliance. (2) Until December 31, 2020, using all available data, including any data required to be maintained or reported to the Federal Reserve under this subpart, a U.S. intermediate holding company that is a covered foreign entity with less than $250 billion in total consolidated assets as of December 31, 2019 must comply with the requirements of this subpart on a quarterly basis, unless the Board determines and notifies the entity in writing that more frequent compliance is required. (3) A covered foreign entity must report its compliance to the Federal Reserve as of the end of the quarter, unless the Board determines and notifies that entity in writing that more frequent reporting is required. (4) In reporting its compliance, a covered foreign entity must calculate and include in its gross credit exposure to an issuer of eligible collateral or eligible guarantor the amounts of eligible collateral, eligible guarantees, eligible equity derivatives, and eligible credit derivatives that were provided to the covered foreign entity in connection with credit transactions with exempt counterparties, valued in accordance with and as required by § 252.174(b) through (d) and (g). (b) Qualifying Master Netting Agreement. (c) Noncompliance. (2) A covered foreign entity may request a special temporary credit exposure limit exemption from the Board. The Board may grant approval for such exemption in cases where the Board determines that such credit transactions are necessary or appropriate to preserve the safety and soundness of the covered foreign entity or U.S. financial stability. In acting on a request for an exemption, the Board will consider the following: (i) A decrease in the covered foreign entity's capital stock and surplus or tier 1 capital, as applicable; (ii) The merger of the covered foreign entity with another covered foreign entity; (iii) A merger of two counterparties; or (iv) An unforeseen and abrupt change in the status of a counterparty as a result of which the covered foreign entity's credit exposure to the counterparty becomes limited by the requirements of this section; or (v) Any other factor(s) the Board determines, in its discretion, is appropriate. (d) Other measures. [83 FR 38501, Aug. 6, 2018, as amended at 84 FR 59121, Nov. 1, 2019] Subparts R-T [Reserved] Subpart U—Debt-to-Equity Limits for U.S. Bank Holding Companies and Foreign Banking Organizations Source: Reg. YY, 79 FR 17337, Mar. 27, 2014, unless otherwise noted. § 252.220 Debt-to-equity limits for U.S. bank holding companies. (a) Definitions Debt-to-equity ratio (2) Debt equity (b) Notice and maximum debt-to-equity ratio requirement. (c) Extension. (d) Termination. § 252.221 Debt-to-equity limits for foreign banking organizations. (a) Definitions. (1) Debt equity (2) Debt-to-equity ratio (3) Eligible assets liabilities of all U.S. branches and agencies of a foreign bank (b) Notice and maximum debt-to-equity ratio requirement. (1) The U.S. intermediate holding company, or if the foreign banking organization has not established a U.S. intermediate holding company, and any U.S. subsidiary (excluding any section 2(h)(2) company or DPC branch subsidiary, if applicable), must achieve and maintain a debt-to-equity ratio of no more than 15-to-1; and (2) The U.S. branches and agencies of the foreign banking organization must maintain eligible assets in its U.S. branches and agencies that, on a daily basis, are not less than 108 percent of the average value over each day of the previous calendar quarter of the total liabilities of all branches and agencies operated by the foreign banking organization in the United States. (c) Extension. (d) Termination. Appendix A to Part 252—Policy Statement on the Scenario Design Framework for Stress Testing 1. Background (a) The Board has imposed stress testing requirements through its regulations (stress test rules) implementing section 165(i) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or Act) and section 401(e) of the Economic Growth, Regulatory Relief, and Consumer Protection Act, and through its capital plan rule (12 CFR 225.8). Under the stress test rules, the Board conducts a supervisory stress test of each bank holding company with total consolidated assets of $100 billion or more, intermediate holding company of a foreign banking organization with total consolidated assets of $100 billion or more, and nonbank financial company that the Financial Stability Oversight Council has designated for supervision by the Board (together, covered companies). 1 2 3 1 2 3 (b) The stress test rules provide that the Board will notify covered companies by no later than February 15 of each year of the scenarios it will use to conduct its supervisory stress tests and provide, also by no later than February 15, covered companies and other financial companies subject to the final rules the set of scenarios they must use to conduct their company-run stress tests. Under the stress test rules, the Board may require certain companies to use additional components in the severely adverse scenario or additional scenarios. For example, the Board expects to require large banking organizations with significant trading activities to include a trading and counterparty component (market shock, described in the following sections) in their severely adverse scenario. The Board will provide any additional components or scenario by no later than March 1 of each year. 4 4 Id. (c) In addition, § 225.8 of the Board's Regulation Y (capital plan rule) requires covered companies to submit annual capital plans, including stress test results, to the Board in order to allow the Board to assess whether they have robust, forward-looking capital planning processes and have sufficient capital to continue operations throughout times of economic and financial stress. 5 5 See (d) Stress tests required under the stress test rules and under the capital plan rule require the Board and financial companies to calculate pro-forma capital levels—rather than “current” or actual levels—over a specified planning horizon under baseline and stressful scenarios. This approach integrates key lessons of the 2007-2009 financial crisis into the Board's supervisory framework. During the financial crisis, investor and counterparty confidence in the capitalization of financial companies eroded rapidly in the face of changes in the current and expected economic and financial conditions, and this loss in market confidence imperiled companies' ability to access funding, continue operations, serve as a credit intermediary, and meet obligations to creditors and counterparties. Importantly, such a loss in confidence occurred even when a financial institution's capital ratios were in excess of regulatory minimums. This is because the institution's capital ratios were perceived as lagging indicators of its financial condition, particularly when conditions were changing. (e) The stress tests required under the stress test rules and capital plan rule are a valuable supervisory tool that provide a forward-looking assessment of large financial companies' capital adequacy under hypothetical economic and financial market conditions. Currently, these stress tests primarily focus on credit risk and market risk—that is, risk of mark-to-market losses associated with companies' trading and counterparty positions—and not on other types of risk, such as liquidity risk. Pressures stemming from these sources are considered in separate supervisory exercises. No single supervisory tool, including the stress tests, can provide an assessment of a company's ability to withstand every potential source of risk. (f) Selecting appropriate scenarios is an especially significant consideration for stress tests required under the capital plan rule, which ties the review of a company's performance under stress scenarios to its ability to make capital distributions. More severe scenarios, all other things being equal, generally translate into larger projected declines in banks' capital. Thus, a company would need more capital today to meet its minimum capital requirements in more stressful scenarios and have the ability to continue making capital distributions, such as common dividend payments. This translation is far from mechanical, however; it will depend on factors that are specific to a given company, such as underwriting standards and the company's business model, which would also greatly affect projected revenue, losses, and capital. 2. Overview and Scope (a) This policy statement provides more detail on the characteristics of the stress test scenarios and explains the considerations and procedures that underlie the approach for formulating these scenarios. The considerations and procedures described in this policy statement apply to the Board's stress testing framework, including to the stress tests required under 12 CFR part 252, subparts B, E, and F as well as the Board's capital plan rule (12 CFR 225.8). 6 6 (b) Although the Board does not envision that the broad approach used to develop scenarios will change from year to year, the stress test scenarios will reflect changes in the outlook for economic and financial conditions and changes to specific risks or vulnerabilities that the Board, in consultation with the other federal banking agencies, determines should be considered in the annual stress tests. The stress test scenarios should not be regarded as forecasts; rather, they are hypothetical paths of economic variables that will be used to assess the strength and resilience of the companies' capital in various economic and financial environments. (c) The remainder of this policy statement is organized as follows. Section 3 provides a broad description of the baseline and severely adverse scenarios and describes the types of variables that the Board expects to include in the macroeconomic scenarios and the market shock component of the stress test scenarios applicable to companies with significant trading activity. Section 4 describes the Board's approach for developing the macroeconomic scenarios, and section 5 describes the approach for the market shocks. Section 6 describes the relationship between the macroeconomic scenario and the market shock components. Section 7 provides a timeline for the formulation and publication of the macroeconomic assumptions and market shocks. 3. Content of the Stress Test Scenarios (a) The Board will publish a minimum of two different scenarios, including baseline and severely adverse conditions, for use in stress tests required in the stress test rules. 7 7 (b) While the Board generally expects to use the same scenarios for all companies subject to the final rule, it may require a subset of companies— depending on a company's financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy—to include additional scenario components or additional scenarios that are designed to capture different effects of adverse events on revenue, losses, and capital. One example of such components is the market shock that applies only to companies with significant trading activity. Additional components or scenarios may also include other stress factors that may not necessarily be directly correlated to macroeconomic or financial assumptions but nevertheless can materially affect companies' risks, such as the unexpected default of a major counterparty. (c) Early in each stress testing cycle, the Board plans to publish the macroeconomic scenarios along with a brief narrative summary that provides a description of the economic situation underlying the scenario and explains how the scenarios have changed relative to the previous year. In addition, to assist companies in projecting the paths of additional variables in a manner consistent with the scenario, the narrative will also provide descriptions of the general path of some additional variables. These descriptions will be general—that is, they will describe developments for broad classes of variables rather than for specific variables—and will specify the intensity and direction of variable changes but not numeric magnitudes. These descriptions should provide guidance that will be useful to companies in specifying the paths of the additional variables for their company-run stress tests. Note that in practice it will not be possible for the narrative to include descriptions on all of the additional variables that companies may need for their company-run stress tests. In cases where scenarios are designed to reflect particular risks and vulnerabilities, the narrative will also explain the underlying motivation for these features of the scenario. The Board also plans to release a broad description of the market shock components. 3.1 Macroeconomic Scenarios (a) The macroeconomic scenarios will consist of the future paths of a set of economic and financial variables. 8 8 (i) Six measures of economic activity and prices: Real and nominal gross domestic product (GDP) growth, the unemployment rate of the civilian non-institutional population aged 16 and over, real and nominal disposable personal income growth, and the Consumer Price Index (CPI) inflation rate; (ii) Four measures of developments in equity and property markets: The Core Logic National House Price Index, the National Council for Real Estate Investment Fiduciaries Commercial Real Estate Price Index, the Dow Jones Total Stock Market Index, and the Chicago Board Options Exchange Market Volatility Index; and (iii) Six measures of interest rates: The rate on the 3-month Treasury bill, the yield on the 5-year Treasury bond, the yield on the 10-year Treasury bond, the yield on a 10-year BBB corporate security, the prime rate, and the interest rate associated with a conforming, conventional, fixed-rate, 30-year mortgage. (b) The international variables provided for in the 2014 supervisory scenarios included, for the euro area, the United Kingdom, developing Asia, and Japan: (i) Percent change in real GDP; (ii) Percent change in the Consumer Price Index or local equivalent; and (iii) The U.S./foreign currency exchange rate. 9 9 (c) The economic variables included in the scenarios influence key items affecting financial companies' net income, including pre-provision net revenue and credit losses on loans and securities. Moreover, these variables exhibit fairly typical trends in adverse economic climates that can have unfavorable implications for companies' net income and, thus, capital positions. (d) The economic variables included in the scenario may change over time. For example, the Board may add variables to a scenario if the international footprint of companies that are subject to the stress testing rules changed notably over time such that the variables already included in the scenario no longer sufficiently capture the material risks of these companies. Alternatively, historical relationships between macroeconomic variables could change over time such that one variable (e.g., disposable personal income growth) that previously provided a good proxy for another (e.g., light vehicle sales) in modeling companies' pre-provision net revenue or credit losses ceases to do so, resulting in the need to create a separate path, or alternative proxy, for the other variable. However, recognizing the amount of work required for companies to incorporate the scenario variables into their stress testing models, the Board expects to eliminate variables from the scenarios only in rare instances. (e) The Board expects that the company may not use all of the variables provided in the scenario, if those variables are not appropriate to the company's line of business, or may add additional variables, as appropriate. The Board expects the companies to ensure that the paths of such additional variables are consistent with the scenarios the Board provided. For example, the companies may use, as part of their internal stress test models, local-level variables, such as state-level unemployment rates or city-level house prices. While the Board does not plan to include local-level macro variables in the stress test scenarios it provides, it expects the companies to evaluate the paths of local-level macro variables as needed for their internal models, and ensure internal consistency between these variables and their aggregate, macro-economic counterparts. The Board will provide the macroeconomic scenario component of the stress test scenarios for a period that spans a minimum of 13 quarters. The scenario horizon reflects the supervisory stress test approach that the Board plans to use. Under the stress test rules, the Board will assess the effect of different scenarios on the consolidated capital of each company over a forward-looking planning horizon of at least nine quarters. 3.2 Market Shock Component (a) The market shock component of the severely adverse scenario will only apply to companies with significant trading activity and their subsidiaries. 10 e.g., e.g., 10 (b) The Board envisions that the market shocks will include shocks to a broad range of risk factors that are similar in granularity to those risk factors that trading companies use internally to produce profit and loss estimates, under stressful market scenarios, for all asset classes that are considered trading assets, including equities, credit, interest rates, foreign exchange rates, and commodities. Examples of risk factors include, but are not limited to: (i) Equity indices of all developed markets, and of developing and emerging market nations to which companies with significant trading activity may have exposure, along with term structures of implied volatilities; (ii) Cross-currency FX rates of all major and many minor currencies, along term structures of implied volatilities; (iii) Term structures of government rates (e.g., U.S. Treasuries), interbank rates (e.g., swap rates) and other key rates (e.g., commercial paper) for all developed markets and for developing and emerging market nations to which companies may have exposure; (iv) Term structures of implied volatilities that are key inputs to the pricing of interest rate derivatives; (v) Term structures of futures prices for energy products including crude oil (differentiated by country of origin), natural gas, and power; (vi) Term structures of futures prices for metals and agricultural commodities; (vii) “Value-drivers” (credit spreads or instrument prices themselves) for credit-sensitive product segments including: Corporate bonds, credit default swaps, and collateralized debt obligations by risk; non-agency residential mortgage-backed securities and commercial mortgage-backed securities by risk and vintage; sovereign debt; and, municipal bonds; and (viii) Shocks to the values of private equity positions. 4. Approach for Formulating the Macroeconomic Assumptions for Scenarios (a) This section describes the Board's approach for formulating macroeconomic assumptions for each scenario. The methodologies for formulating this part of each scenario differ by scenario, so these methodologies for the baseline and severely adverse scenarios are described separately in each of the following subsections. (b) In general, the baseline scenario will reflect the most recently available consensus views of the macroeconomic outlook expressed by professional forecasters, government agencies, and other public-sector organizations as of the beginning of the stress-test cycle. The severely adverse scenario will consist of a set of economic and financial conditions that reflect the conditions of post-war U.S. recessions. (c) Each of these scenarios is described further in sections below as follows: Baseline (subsection 4.1) and severely adverse (subsection 4.2) 4.1 Approach for Formulating Macroeconomic Assumptions in the Baseline Scenario (a) The stress test rules define the baseline scenario as a set of conditions that affect the U.S. economy or the financial condition of a banking organization, and that reflect the consensus views of the economic and financial outlook. Projections under a baseline scenario are used to evaluate how companies would perform in more likely economic and financial conditions. The baseline serves also as a point of comparison to the severely adverse scenario, giving some sense of how much of the company's capital decline could be ascribed to the scenario as opposed to the company's capital adequacy under expected conditions. (b) The baseline scenario will be developed around a macroeconomic projection that captures the prevailing views of private-sector forecasters (e.g., Blue Chip Consensus Forecasts and the Survey of Professional Forecasters), government agencies, and other public-sector organizations (e.g., the International Monetary Fund and the Organization for Economic Co-operation and Development) near the beginning of the annual stress-test cycle. The baseline scenario is designed to represent a consensus expectation of certain economic variables over the time period of the tests and it is not the Board's internal forecast for those economic variables. For example, the baseline path of short-term interest rates is constructed from consensus forecasts and may differ from that implied by the FOMC's Summary of Economic Projections. (c) For some scenario variables—such as U.S. real GDP growth, the unemployment rate, and the consumer price index—there will be a large number of different forecasts available to project the paths of these variables in the baseline scenario. For others, a more limited number of forecasts will be available. If available forecasts diverge notably, the baseline scenario will reflect an assessment of the forecast that is deemed to be most plausible. In setting the paths of variables in the baseline scenario, particular care will be taken to ensure that, together, the paths present a coherent and plausible outlook for the U.S. and global economy, given the economic climate in which they are formulated. 4.2 Approach for Formulating the Macroeconomic Assumptions in the Severely Adverse Scenario The stress test rules define a severely adverse scenario as a set of conditions that affect the U.S. economy or the financial condition of a financial company and that overall are significantly more severe than those associated with the baseline scenario. The financial company will be required to publicly disclose a summary of the results of its stress test under the severely adverse scenario, and the Board intends to publicly disclose the results of its analysis of the financial company under the severely adverse scenario. 4.2.1 General Approach: The Recession Approach (a) The Board intends to use a recession approach to develop the severely adverse scenario. In the recession approach, the Board will specify the future paths of variables to reflect conditions that characterize post-war U.S. recessions, generating either a typical or specific recreation of a post-war U.S. recession. The Board chose this approach because it has observed that the conditions that typically occur in recessions—such as increasing unemployment, declining asset prices, and contracting loan demand—can put significant stress on companies' balance sheets. This stress can occur through a variety of channels, including higher loss provisions due to increased delinquencies and defaults; losses on trading positions through sharp moves in market prices; and lower bank income through reduced loan originations. For these reasons, the Board believes that the paths of economic and financial variables in the severely adverse scenario should, at a minimum, resemble the paths of those variables observed during a recession. (b) This approach requires consideration of the type of recession to feature. All post-war U.S. recessions have not been identical: Some recessions have been associated with very elevated interest rates, some have been associated with sizable asset price declines, and some have been relatively more global. The most common features of recessions, however, are increases in the unemployment rate and contractions in aggregate incomes and economic activity. For this and the following reasons, the Board intends to use the unemployment rate as the primary basis for specifying the severely adverse scenario. First, the unemployment rate is likely the most representative single summary indicator of adverse economic conditions. Second, in comparison to GDP, labor market data have traditionally featured more prominently than GDP in the set of indicators that the National Bureau of Economic Research reviews to inform its recession dates. 11 severe 12 11 12 3/4 (c) The Board believes that the severely adverse scenario should also reflect a housing recession. The house prices path set in the severely adverse scenario will reflect developments that have been observed in post-war U.S. housing recessions, measuring severity by the absolute level of and relative decrease in the house prices. (d) The Board will specify the paths of most other macroeconomic variables based on the paths of unemployment, income, house prices, and activity. Some of these other variables, however, have taken wildly divergent paths in previous recessions (e.g., foreign GDP), requiring the Board to use its informed judgment in selecting appropriate paths for these variables. In general, the path for these other variables will be based on their underlying structure at the time that the scenario is designed (e.g., economic or financial-system vulnerabilities in other countries). (e) The Board considered alternative methods for scenario design of the severely adverse scenario, including a probabilistic approach. The probabilistic approach constructs a baseline forecast from a large-scale macroeconomic model and identifies a scenario that would have a specific probabilistic likelihood given the baseline forecast. The Board believes that, at this time, the recession approach is better suited for developing the severely adverse scenario than a probabilistic approach because it guarantees a recession of some specified severity. In contrast, the probabilistic approach requires the choice of an extreme tail outcome—relative to baseline—to characterize the severely adverse scenario (e.g., a 5 percent or a 1 percent tail outcome). In practice, this choice is difficult as adverse economic outcomes are typically thought of in terms of how variables evolve in an absolute sense rather than how far away they lie in the probability space away from the baseline. In this sense, a scenario featuring a recession may be somewhat clearer and more straightforward to communicate. Finally, the probabilistic approach relies on estimates of uncertainty around the baseline scenario and such estimates are in practice model-dependent. 4.2.2 Setting the Unemployment Rate Under the Severely Adverse Scenario (a) The Board anticipates that the severely adverse scenario will feature an unemployment rate that increases between 3 to 5 percentage points from its initial level over the course of 6 to 8 calendar quarters. 13 13 (b) This methodology is intended to generate scenarios that feature stressful outcomes but do not induce greater procyclicality in the financial system and macroeconomy. When the economy is in the early stages of a recovery, the unemployment rate in a baseline scenario generally trends downward, resulting in a larger difference between the path of the unemployment rate in the severely adverse scenario and the baseline scenario and a severely adverse scenario that is relatively more intense. Conversely, in a sustained strong expansion—when the unemployment rate may be below the level consistent with full employment—the unemployment in a baseline scenario generally trends upward, resulting in a smaller difference between the path of the unemployment rate in the severely adverse scenario and the baseline scenario and a severely adverse scenario that is relatively less intense. Historically, a 3 to 5 percentage point increase in unemployment rate is reflective of stressful conditions. As illustrated in Table 1, over the last half-century, the U.S. economy has experienced four severe post-war recessions. In all four of these recessions, the unemployment rate increased 3 to 5 percentage points and in the three most recent of these recessions, the unemployment rate reached a level between 9 percent and 11 percent. (c) Under this method, if the initial unemployment rate was low—as it would be after a sustained long expansion—the unemployment rate in the scenario would increase to a level as high as what has been seen in past severe recessions. However, if the initial unemployment rate was already high—as would be the case in the early stages of a recovery—the unemployment rate would exhibit a change as large as what has been seen in past severe recessions. (d) The Board believes that the typical increase in the unemployment rate in the severely adverse scenario will be about 4 percentage points. However, the Board will calibrate the increase in unemployment based on its views of the status of cyclical systemic risk. The Board intends to set the unemployment rate at the higher end of the range if the Board believes that cyclical systemic risks are high (as it would be after a sustained long expansion), and to the lower end of the range if cyclical systemic risks are low (as it would be in the earlier stages of a recovery). This may result in a scenario that is slightly more intense than normal if the Board believed that cyclical systemic risks were increasing in a period of robust expansion. 14 15 14 15 (e) As indicated previously, if a 3 to 5 percentage point increase in the unemployment rate does not raise the level of the unemployment rate to 10 percent—the average level to which it has increased in the most recent three severe recessions—the path of the unemployment rate will be specified so as to raise the unemployment rate to 10 percent. Setting a floor for the unemployment rate at 10 percent recognizes the fact that not only do cyclical systemic risks build up at financial intermediaries during robust expansions but that these risks are also easily obscured by the buoyant environment. (f) In setting the increase in the unemployment rate, the Board will consider the extent to which analysis by economists, supervisors, and financial market experts finds cyclical systemic risks to be elevated (but difficult to be captured more precisely in one of the scenario's other variables). In addition, the Board—in light of impending shocks to the economy and financial system—will also take into consideration the extent to which a scenario of some increased severity might be necessary for the results of the stress test and the associated supervisory actions to sustain confidence in financial institutions. (g) While the approach to specifying the severely adverse scenario is designed to avoid adding sources of procyclicality to the financial system, it is not designed to explicitly offset any existing procyclical tendencies in the financial system. The purpose of the stress test scenarios is to make sure that the companies are properly capitalized to withstand severe economic and financial conditions, not to serve as an explicit countercyclical offset to the financial system. (h) In developing the approach to the unemployment rate, the Board also considered a method that would increase the unemployment rate to some fairly elevated fixed level over the course of 6 to 8 quarters. This would result in scenarios being more severe in robust expansions (when the unemployment rate is low) and less severe in the early stages of a recovery (when the unemployment rate is high) and so would not result in pro-cyclicality. Depending on the initial level of the unemployment rate, this approach could lead to only a very modest increase in the unemployment rate—or even a decline. As a result, this approach—while not procyclical—could result in scenarios not featuring stressful macroeconomic outcomes. 4.2.3 Setting the Other Variables in the Severely Adverse Scenario (a) Generally, all other variables in the severely adverse scenario will be specified to be consistent with the increase in the unemployment rate. The approach for specifying the paths of these variables in the scenario will be a combination of (1) how economic models suggest that these variables should evolve given the path of the unemployment rate, (2) how these variables have typically evolved in past U.S. recessions, and (3) evaluation of these and other factors. (b) Economic models—such as medium-scale macroeconomic models—should be able to generate plausible paths consistent with the unemployment rate for a number of scenario variables, such as real GDP growth, CPI inflation and short-term interest rates, which have relatively stable (direct or indirect) relationships with the unemployment rate (e.g., Okun's Law, the Phillips Curve, and interest rate feedback rules). For some other variables, specifying their paths will require a case-by-case consideration. (c) Declining house prices, which are an important source of stress to a company's balance sheet, are not a steadfast feature of recessions, and the historical relationship of house prices with the unemployment rate is not strong. Simply adopting their typical path in a severe recession would likely underestimate risks stemming from the housing sector. In specifying the path for nominal house prices, the Board will consider the ratio of the nominal house price index (HPI) to nominal, per capita, disposable income (DPI). The Board believes that the typical decline in the HPI-DPI ratio will be at a minimum 25 percent from its starting value, or enough to bring the ratio down to its Great Recession trough. As illustrated in Table 2, housing recessions have on average featured HPI-DPI ratio declines of about 25 percent and the HPI-DPI ratio fell to its Great Recession trough. 16 16 (d) In addition, judgment is necessary in projecting the path of a scenario's international variables. Recessions that occur simultaneously across countries are an important source of stress to the balance sheets of companies with notable international exposures but are not an invariable feature of the international economy. As a result, simply adopting the typical path of international variables in a severe U.S. recession would likely underestimate the risks stemming from the international economy. Consequently, an approach that uses both judgment and economic models informs the path of international variables. 4.2.4 Adding Salient Risks to the Severely Adverse Scenario (a) The severely adverse scenario will be developed to reflect specific risks to the economic and financial outlook that are especially salient but will feature minimally in the scenario if the Board were only to use approaches that looked to past recessions or relied on historical relationships between variables. (b) There are some important instances when it will be appropriate to augment the recession approach with salient risks. For example, if an asset price were especially elevated and thus potentially vulnerable to an abrupt and potentially destabilizing decline, it would be appropriate to include such a decline in the scenario even if such a large drop were not typical in a severe recession. Likewise, if economic developments abroad were particularly unfavorable, assuming a weakening in international conditions larger than what typically occurs in severe U.S. recessions would likely also be appropriate. (c) Clearly, while the recession component of the severely adverse scenario is within some predictable range, the salient risk aspect of the scenario is far less so, and therefore, needs an annual assessment. Each year, the Board will identify the risks to the financial system and the domestic and international economic outlooks that appear more elevated than usual, using its internal analysis and supervisory information and in consultation with the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC). Using the same information, the Board will then calibrate the paths of the macroeconomic and financial variables in the scenario to reflect these risks. (d) Detecting risks that have the potential to weaken the banking sector is particularly difficult when economic conditions are buoyant, as a boom can obscure the weaknesses present in the system. In sustained robust expansions, therefore, the selection of salient risks to augment the scenario will err on the side of including risks of uncertain significance. (e) The Board will factor in particular risks to the domestic and international macroeconomic outlook identified by its economists, bank supervisors, and financial market experts and make appropriate adjustments to the paths of specific economic variables. These adjustments will not be reflected in the general severity of the recession and, thus, all macroeconomic variables; rather, the adjustments will apply to a subset of variables to reflect co-movements in these variables that are historically less typical. The Board plans to discuss the motivation for the adjustments that it makes to variables to highlight systemic risks in the narrative describing the scenarios. 17 17 5. Approach for Formulating the Market Shock Component (a) This section discusses the approach the Board proposes to adopt for developing the market shock component of the severely adverse scenario appropriate for companies with significant trading activities. The design and specification of the market shock component differs from that of the macroeconomic scenarios because profits and losses from trading are measured in mark-to-market terms, while revenues and losses from traditional banking are generally measured using the accrual method. As noted above, another critical difference is the time-evolution of the market shock component. The market shock component consists of an instantaneous “shock” to a large number of risk factors that determine the mark-to-market value of trading positions, while the macroeconomic scenarios supply a projected path of economic variables that affect traditional banking activities over the entire planning period. (b) The development of the market shock component that are detailed in this section are as follows: Baseline (subsection 5.1) and severely adverse (subsection 5.2). 5.1 Approach for Formulating the Market Shock Component Under the Baseline Scenario By definition, market shocks are large, previously unanticipated moves in asset prices and rates. Because asset prices should, broadly speaking, reflect consensus opinions about the future evolution of the economy, large price movements, as envisioned in the market shock, should not occur along the baseline path. As a result, the market shock will not be included in the baseline scenario. 5.2 Approach for Formulating the Market Shock Component Under the Severely Adverse Scenario This section addresses possible approaches to designing the market shock component in the severely adverse scenario, including important considerations for scenario design, possible approaches to designing scenarios, and a development strategy for implementing the preferred approach. 5.2.1 Design Considerations for Market Shocks (a) The general market practice for stressing a trading portfolio is to specify market shocks either in terms of extreme moves in observable, broad market indicators and risk factors or directly as large changes to the mark-to-market values of financial instruments. These moves can be specified either in relative terms or absolute terms. Supplying values of risk factors after a “shock” is roughly equivalent to the macroeconomic scenarios, which supply values for a set of economic and financial variables; however, trading stress testing differs from macroeconomic stress testing in several critical ways. (b) In the past, the Board used one of two approaches to specify market shocks. During SCAP and CCAR in 2011, the Board used a very general approach to market shocks and required companies to stress their trading positions using changes in market prices and rates experienced during the second half of 2008, without specifying risk factor shocks. This broad guidance resulted in inconsistency across companies both in terms of the severity and the application of shocks. In certain areas, companies were permitted to use their own experience during the second half of 2008 to define shocks. This resulted in significant variation in shock severity across companies. (c) To enhance the consistency and comparability in market shocks for the stress tests in 2012 and 2013, the Board provided to each trading company more than 35,000 specific risk factor shocks, primarily based on market moves in the second half of 2008. While the number of risk factors used in companies' pricing and stress-testing models still typically exceed that provided in the Board's scenarios, the greater specificity resulted in more consistency in the scenario across companies. The benefit of the comprehensiveness of risk factor shocks is at least partly offset by the potential difficulty in creating shocks that are coherent and internally consistent, particularly as the framework for developing market shocks deviates from historical events. (d) Also importantly, the ultimate losses associated with a given market shock will depend on a company's trading positions, which can make it difficult to rank order, ex ante, (e) The instantaneous nature of market shocks and the immediate recognition of mark-to-market losses add another element to the design of market shocks, and to determining the appropriate severity of shocks. For instance, in previous stress tests, the Board assumed that market moves that occurred over the six-month period in late 2008 would occur instantaneously. The design of the market shocks must factor in appropriate assumptions around the period of time during which market events will unfold and any associated market responses. 5.2.2 Approaches to Market Shock Design (a) As an additional component of the severely adverse scenario, the Board plans to use a standardized set of market shocks that apply to all companies with significant trading activity. The market shocks could be based on a single historical episode, multiple historical periods, hypothetical (but plausible) events, or some combination of historical episodes and hypothetical events (hybrid approach). Depending on the type of hypothetical events, a scenario based on such events may result in changes in risk factors that were not previously observed. In the supervisory scenarios for 2012 and 2013, the shocks were largely based on relative moves in asset prices and rates during the second half of 2008, but also included some additional considerations to factor in the widening of spreads for European sovereigns and financial companies based on actual observation during the latter part of 2011. (b) For the market shock component in the severely adverse scenario, the Board plans to use the hybrid approach to develop shocks. The hybrid approach allows the Board to maintain certain core elements of consistency in market shocks each year while providing flexibility to add hypothetical elements based on market conditions at the time of the stress tests. In addition, this approach will help ensure internal consistency in the scenario because of its basis in historical episodes; however, combining the historical episode and hypothetical events may require small adjustments to ensure mutual consistency of the joint moves. In general, the hybrid approach provides considerable flexibility in developing scenarios that are relevant each year, and by introducing variations in the scenario, the approach will also reduce the ability of companies with significant trading activity to modify or shift their portfolios to minimize expected losses in the severely adverse market shock. (c) The Board has considered a number of alternative approaches for the design of market shocks. For example, the Board explored an option of providing tailored market shocks for each trading company, using information on the companies' portfolio gathered through ongoing supervision, or other means. By specifically targeting known or potential vulnerabilities in a company's trading position, the tailored approach would be useful in assessing each company's capital adequacy as it relates to the company's idiosyncratic risk. However, the Board does not believe this approach to be well-suited for the stress tests required by regulation. Consistency and comparability are key features of annual supervisory stress tests and annual company-run stress tests required in the stress test rules. It would be difficult to use the information on the companies' portfolios to design a common set of shocks that are universally stressful for all covered companies. As a result, this approach would be better suited to more customized, tailored stress tests that are part of the company's internal capital planning process or to other supervisory efforts outside of the stress tests conducted under the capital rule and the stress test rules. 5.2.3 Development of the Market Shock (a) Consistent with the approach described above, the market shock component for the severely adverse scenario will incorporate key elements of market developments during the second half of 2008, but will also incorporate observations from other periods or price and rate movements in certain markets that the Board deems to be plausible, though such movements may not have been observed historically. Over time, the Board also expects to rely less on market events of the second half of 2008 and more on hypothetical events or other historical episodes to develop the market shock. (b) The developments in the credit markets during the second half of 2008 were unprecedented, providing a reasonable basis for market shocks in the severely adverse scenario. During this period, key risk factors in virtually all asset classes experienced extremely large shocks; the collective breadth and intensity of the moves have no parallels in modern financial history and, on that basis, it seems likely that this episode will continue to be the most relevant historical scenario, although experience during other historical episodes may also guide the severity of the market shock component of the severely adverse scenario. Moreover, the risk factor moves during this episode are directly consistent with the “recession” approach that underlies the macroeconomic assumptions. However, market shocks based only on historical events could become stale and less relevant over time as the company's positions change, particularly if more salient features are not added each year. (c) While the market shocks based on the second half of 2008 are of unparalleled magnitude, the shocks may become less relevant over time as the companies' trading positions change. In addition, more recent events could highlight the companies' vulnerability to certain market events. For example, in 2011, Eurozone credit spreads in the sovereign and financial sectors surpassed those observed during the second half of 2008, necessitating the modification of the severely adverse market shock in 2012 and 2013 to reflect a salient source of stress to trading positions. As a result, it is important to incorporate both historical and hypothetical outcomes into market shocks for the severely adverse scenario. For the time being, the development of market shocks in the severely adverse scenario will begin with the risk factor movements in a particular historical period, such as the second half of 2008. The Board will then consider hypothetical but plausible outcomes, based on financial stability reports, supervisory information, and internal and external assessments of market risks and potential flash points. The hypothetical outcomes could originate from major geopolitical, economic, or financial market events with potentially significant impacts on market risk factors. The severity of these hypothetical moves will likely be guided by similar historical events, assumptions embedded in the companies' internal stress tests or market participants, and other available information. (d) Once broad market scenarios are agreed upon, specific risk factor groups will be targeted as the source of the trading stress. For example, a scenario involving the failure of a large, interconnected globally active financial institution could begin with a sharp increase in credit default swap spreads and a precipitous decline in asset prices across multiple markets, as investors become more risk averse and market liquidity evaporates. These broad market movements will be extrapolated to the granular level for all risk factors by examining transmission channels and the historical relationships between variables, though in some cases, the movement in particular risk factors may be amplified based on theoretical relationships, market observations, or the saliency to company trading books. If there is a disagreement between the risk factor movements in the historical event used in the scenario and the hypothetical event, the Board will reconcile the differences by assessing a priori 6. Consistency Between the Macroeconomic Scenarios and the Market Shock (a) As discussed earlier, the market shock comprises a set of movements in a very large number of risk factors that are realized instantaneously. Among the risk factors specified in the market shock are several variables also specified in the macroeconomic scenarios, such as short- and long-maturity interest rates on Treasury and corporate debt, the level and volatility of U.S. stock prices, and exchange rates. (b) The market shock component is an add-on to the macroeconomic scenarios that is applied to a subset of companies, with no assumed effect on other aspects of the stress tests such as balances, revenues, or other losses. As a result, the market shock component may not be always directionally consistent with the macroeconomic scenario. Because the market shock is designed, in part, to mimic the effects of a sudden market dislocation, while the macroeconomic scenarios are designed to provide a description of the evolution of the real economy over two or more years, assumed economic conditions can move in significantly different ways. In effect, the market shock can simulate a market panic, during which financial asset prices move rapidly in unexpected directions, and the macroeconomic assumptions can simulate the severe recession that follows. Indeed, the pattern of a financial crisis, characterized by a short period of wild swings in asset prices followed by a prolonged period of moribund activity, and a subsequent severe recession is familiar and plausible. (c) As discussed in section 4.2.4, the Board may feature a particularly salient risk in the macroeconomic assumptions for the severely adverse scenario, such as a fall in an elevated asset price. In such instances, the Board may also seek to reflect the same risk in one of the market shocks. For example, if the macroeconomic scenario were to feature a substantial decline in house prices, it may seem plausible for the market shock to also feature a significant decline in market values of any securities that are closely tied to the housing sector or residential mortgages. 7. Timeline for Scenario Publication (a) The Board will provide a description of the macroeconomic scenarios by no later than February 15. During the period immediately preceding the publication of the scenarios, the Board will collect and consider information from academics, professional forecasters, international organizations, domestic and foreign supervisors, and other private-sector analysts that regularly conduct stress tests based on U.S. and global economic and financial scenarios, including analysts at the covered companies. In addition, the Board will consult with the FDIC and the OCC on the salient risks to be considered in the scenarios. The Board expects to conduct this process in October and November of each year and to update the scenarios, based on incoming macroeconomic data releases and other information, through the end of January. (b) The Board expects to provide a broad overview of the market shock component along with the macroeconomic scenarios. The Board will publish the market shock templates by no later than March 1 of each year, and intends to publish the market shock earlier in the stress test and capital plan cycles to allow companies more time to conduct their stress tests. Table 1—Classification of U.S. Recessions Peak Trough Severity Duration Decline in Change in the Total change 1957Q3 1958Q2 Severe 4 (Medium) −3.6 3.2 3.2 1960Q2 1961Q1 Moderate 4 (Medium) −1.0 1.6 1.8 1969Q4 1970Q4 Moderate 5 (Medium) −0.2 2.2 2.4 1973Q4 1975Q1 Severe 6 (Long) −3.1 3.4 4.1 1980Q1 1980Q3 Moderate 3 (Short) −2.2 1.4 1.4 1981Q3 1982Q4 Severe 6 (Long) −2.8 3.3 3.3 1990Q3 1991Q1 Mild 3 (Short) −1.3 0.9 1.9 2001Q1 2001Q4 Mild 4 (Medium) 0.2 1.3 2.0 2007Q4 2009Q2 Severe 7 (Long) −4.3 4.5 5.1 Average Severe 6 −3.5 3.7 3.9 Average Moderate 4 −1.1 1.8 1.8 Average Mild 3 −0.6 1.1 1.9 Source: Table 2—House Prices in Housing Recessions Peak Trough Severity Duration %-change %-change HPI-DPI 1980Q2 1985Q2 Moderate 20 (long) 26.6 −15.9 102.1 1989Q4 1997Q1 Moderate 29 (long) 10.5 −17.0 94.9 2005Q4 2012Q1 Severe 25 (long) −29.6 −41.3 86.9 Average 24.7 2.5 −24.7 94.6 Source: Note: The date-ranges of housing recessions listed in Table 2 are based on the timing of house-price retrenchments. [84 FR 6655, Feb. 28, 2019, as amended at 84 FR 59121, Nov. 1, 2019] Appendix B to Part 252—Stress Testing Policy Statement This Policy Statement describes the principles, policies, and procedures that guide the development, implementation, and validation of models used in the Federal Reserve's supervisory stress test. 1. Principles of Supervisory Stress Testing The system of models used in the supervisory stress test is designed to result in projections that are (i) from an independent supervisory perspective; (ii) forward-looking; (iii) consistent and comparable across covered companies; (iv) generated from simpler and more transparent approaches, where appropriate; (v) robust and stable; (vi) conservative; and (vii) able to capture the impact of economic stress. These principles are further explained below. 1.1. Independence (a) In the supervisory stress test, the Federal Reserve uses supervisory models that are developed internally and independently ( i.e., (b) The Federal Reserve's stress testing framework is unique among regulators in its use of independent estimates of losses and revenues under stress. These estimates provide a perspective that is not formed in consultation with covered companies or influenced by firm-provided estimates and that is useful to the public in its evaluation of covered companies' capital adequacy. This perspective is also valuable to covered companies, who may benefit from external assessments of their own losses and revenues under stress, and from the degree of credibility that independence confers upon supervisory stress test results. (c) The independence of the supervisory stress test allows stress test projections to adhere to the other key principles described in the Policy Statement. The use of independent models allows for consistent treatment across firms. Losses and revenues under stress are estimated using the same modeling assumptions for all covered companies, enabling comparisons across supervisory stress test results. Differences in covered companies' results reflect differences in firm-specific risks and input data instead of differences in modeling assumptions. The use of independent models also ensures that stress test results are produced by stress-focused models, designed to project the performance of covered companies in adverse economic conditions. (d) In instances in which it is not possible or appropriate to create a supervisory model for use in the stress test, including when supervisory data are insufficient to support a modeled estimate of losses or revenues, the Federal Reserve may use firm-provided estimates or third-party models or data. For example, in order to project trading and counterparty losses, sensitivities to risk factors and other information generated by covered companies' internal models are used. In the cases where firm-provided or third-party model estimates are used, the Federal Reserve monitors the quality and performance of the estimates through targeted examination, additional data collection, or benchmarking. The Board releases a list of the providers of third-party models or data used in the stress test exercise in the annual disclosure of quantitative results. 1.2. Forward-Looking (a) The Federal Reserve has designed the supervisory stress test to be forward-looking. Supervisory models are tools for producing projections of potential losses and revenue effects based on each covered company's portfolio and circumstances. (b) While supervisory models are specified using historical data, they should generally avoid relying solely on extrapolation of past trends in order to make projections, and instead should be able to incorporate events or outcomes that have not occurred. As described in Section 2.4, the Federal Reserve implements several supervisory modeling policies to limit reliance on past outcomes in its projections of losses and revenues. The incorporation of the macroeconomic scenario and global market shock component also introduces elements outside of the realm of historical experience into the supervisory stress test. 1.3. Consistency and Comparability The Federal Reserve uses the same set of models and assumptions to produce loss projections for all covered companies participating in the supervisory stress test. A standard set of scenarios, assumptions, and models promotes equitable treatment of firms participating in the supervisory stress test and comparability of results, supporting cross-firm analysis and providing valuable information to supervisors and to the public. Adhering to a consistent modeling approach across covered companies means that differences in projected results are due to differences in input data, such as instrument type or portfolio risk characteristics, rather than differences in firm-specific assumptions made by the Federal Reserve. 1.4. Simplicity The Federal Reserve uses simple approaches in supervisory modeling, where possible. Given a range of modeling approaches that are equally conceptually sound, the Federal Reserve will select the least complex modeling approach. In assessing simplicity, the Federal Reserve favors those modeling approaches that allow for a more straightforward interpretation of the drivers of model results and that minimize operational challenges for model implementation. 1.5. Robustness and Stability The Federal Reserve maintains supervisory models that aim to be robust and stable, such that changes in model projections over time reflect underlying risk factors, scenarios, and model enhancements, rather than transitory factors. The estimates of post-stress capital produced by the supervisory stress test provide information regarding a covered company's capital adequacy to market participants, covered companies, and the public. Adherence to this principle helps to ensure that changes in these model projections over time are not driven by temporary variations in model performance or inputs. Supervisory models are recalibrated with newly available input data each year. These data affect supervisory model projections, particularly in times of evolving risks. However, these changes generally should not be the principal driver of a change in results, year over year. 1.6. Conservatism Given a reasonable set of assumptions or approaches, all else equal, the Federal Reserve will opt to use those that result in larger losses or lower revenue. For example, given a lack of information about the true risk of a portfolio, the Federal Reserve will compensate for the lack of data by using a high percentile loss rate. 1.7. Focus on the Ability To Evaluate the Impact of Severe Economic Stress In evaluating whether supervisory models are appropriate for use in a stress testing exercise, the Federal Reserve places particular emphasis on supervisory models' abilities to project outcomes in stressed economic environments. In the supervisory stress test, the Federal Reserve also seeks to capture risks to capital that arise specifically in times of economic stress, and that would not be prevalent in more typical economic environments. For example, the Federal Reserve includes losses stemming from the default of a covered company's largest counterparty in its projections of post-stress capital for firms with substantial trading or processing and custodian operations. The default of a company's largest counterparty is more likely to occur in times of severe economic stress than in normal economic conditions. 2. Supervisory Stress Test Model Policies To be consistent with the seven principles outlined in Section 1, the Federal Reserve has established policies and procedures to guide the development, implementation, and use of all models used in supervisory stress test projections, described in more detail below. Each policy facilitates adherence to at least one of the modeling principles that govern the supervisory stress test, and in most cases facilitates adherence to several modeling principles. 2.1. Soundness in Model Design (a) During development, the Federal Reserve (i) subjects supervisory models to extensive review of model theory and logic and general conceptual soundness; (ii) examines and evaluates justifications for modeling assumptions; and (iii) tests models to establish the accuracy and stability of the estimates and forecasts that they produce. (b) After development, the Federal Reserve continues to subject supervisory models to scrutiny during implementation to ensure that the models remain appropriate for use in the stress test exercise. The Federal Reserve monitors changes in the economic environment, the structure of covered companies and their portfolios, and the structure of the stress testing exercise, if applicable, to verify that a model in use continues to serve the purposes for which it was designed. Generally, the same principles, rigor, and standards for evaluating the suitability of supervisory models that apply in model development and design will apply in ongoing monitoring of supervisory models. 2.2. Disclosure of Information Related to the Supervisory Stress Test (a) In general, the Board does not disclose information related to the supervisory stress test or firm-specific results to covered companies if that information is not also publicly disclosed. (b) The Board has increased the breadth of its public disclosure since the inception of the supervisory stress test to include more information about model changes and key risk drivers, in addition to more detail on different components of projected net revenues and losses. Increasing public disclosure can help the public understand and interpret the results of the supervisory stress test, particularly with respect to the condition and capital adequacy of participating firms. Providing additional information about the supervisory stress test allows the public to make an evaluation of the quality of the Board's assessment. This policy also promotes consistent and equitable treatment of covered companies by ensuring that institutions do not have access to information about the supervisory stress test that is not also accessible publicly, corresponding to the principle of consistency and comparability. 2.3. Phasing in of Highly Material Model Changes (a) The Federal Reserve may revise its supervisory stress test models to include advances in modeling techniques, enhancements in response to model validation findings, incorporation of richer and more detailed data, public comment, and identification of models with improved performance, particularly under adverse economic conditions. Revisions to supervisory stress models may at times have material impact on modeled outcomes. (b) In order to mitigate sudden and unexpected changes to the supervisory stress test results, the Federal Reserve follows a general policy of phasing highly material model changes into the supervisory stress test over two years. The Federal Reserve assesses whether a model change would have a highly significant impact on the projections of losses, components of revenue, or post-stress capital ratios for covered companies. In these instances, in the first year when the model change is first implemented, estimates produced by the enhanced model are averaged with estimates produced by the model used in the previous stress test exercise. In the second and subsequent years, the supervisory stress test exercise will reflect only estimates produced by the enhanced model. This policy contributes to the stability of the results of the supervisory stress test. By implementing highly material model changes over the course of two stress test cycles, the Federal Reserve seeks to ensure that changes in model projections primarily reflect changes in underlying risk factors and scenarios, year over year. (c) In general, phase-in thresholds for highly material model changes apply only to conceptual changes to models. Model changes related to changes in accounting or regulatory capital rules and model parameter re-estimation based on newly available data are implemented with immediate effect. (d) In assessing the materiality of a model change, the Federal Reserve calculates the impact of using an enhanced model on post-stress capital ratios using data and scenarios from prior years' supervisory stress test exercises. The use of an enhanced model is considered a highly material change if its use results in a change in the CET1 ratio of 50 basis points or more for one or more firms, relative to the model used in prior years' supervisory exercises. 2.4. Limiting Reliance on Past Outcomes (a) Models should not place undue emphasis on historical outcomes in predicting future outcomes. The Federal Reserve aims to produce supervisory stress test results that reflect likely outcomes under the supervisory scenarios. The supervisory scenarios may potentially incorporate events that have not occurred historically. It is not necessarily consistent with the purpose of a stress testing exercise to assume that the future will be like the past. (b) In order to model potential outcomes outside the realm of historical experience, the Federal Reserve generally does not include variables that would capture unobserved historical patterns in supervisory models. The use of industry-level models, restricted use of firm-specific fixed effects (described below), and minimized use of dummy variables indicating a loan vintage or a specific year, ensure that the outcomes of the supervisory models are forward-looking, consistent and comparable across firms, and robust and stable. (c) Firm-specific fixed effects are variables that identify a specific firm and capture unobserved differences in the revenues, expenses or losses between firms. Firm-specific fixed effects are generally not incorporated in supervisory models in order to avoid the assumption that unobserved firm-specific historical patterns will continue in the future. Exceptions to this policy are made where appropriate. For example, if granular portfolio-level data on key drivers of a covered company's performance are limited or unavailable, and firm-specific fixed effects are more predictive of a covered company's future performance than are industry-level variables, then supervisory models may be specified with firm-specific fixed effects. (d) Models used in the supervisory stress test are developed according to an industry-level approach, calibrated using data from many institutions. In adhering to an industry-level approach, the Federal Reserve models the response of specific portfolios and instruments to variations in macroeconomic and financial scenario variables. In this way, the Federal Reserve ensures that differences across firms are driven by differences in firm-specific input data, as opposed to differences in model parameters or specifications. The industry approach to modeling is also forward-looking, as the Federal Reserve does not assume that historical patterns will necessarily continue into the future for individual firms. By modeling a portfolio or instrument's response to changes in economic or financial conditions at the industry level, the Federal Reserve ensures that projected future losses are a function of that portfolio or instrument's own characteristics, rather than the historical experience of the covered company. This policy helps to ensure that two firms with the same portfolio receive the same results for that portfolio in the supervisory stress test. (e) The Federal Reserve minimizes the use of vintage or year-specific fixed effects when estimating models and producing supervisory projections. In general, these types of variables are employed only when there are significant structural market shifts or other unusual factors for which supervisory models cannot otherwise account. Similar to the firm-specific fixed effects policy, and consistent with the forward-looking principle, this vintage indicator policy is in place so that projections of future performance under stress do not incorporate assumptions that patterns in unmeasured factors from brief historical time periods persist. For example, the loans originated in a particular year should not be assumed to continue to default at a higher rate in the future because they did so in the past. 2.5. Treatment of Global Market Shock and Counterparty Default Component (a) Both the global market shock and counterparty default components are exogenous components of the supervisory stress scenarios that are independent of the macroeconomic and financial market environment specified in those scenarios, and do not affect projections of risk-weighted assets or balances. The global market shock, which specifies movements in numerous market factors, 14 14 See (b) Counterparty credit risk on derivatives and repo-style activities is incorporated in supervisory modeling in part by assuming the default of the single counterparty to which the covered firm would be most exposed in the global market shock event. 15 15 (c) The full effect of the global market shock and counterparty default components is realized in net income in the first quarter of the projection horizon in the supervisory stress test. The Board expects covered companies with material trading and counterparty exposures to be sufficiently capitalized to absorb losses stemming from these exposures that could occur during times of general macroeconomic stress. 2.6. [Reserved] 2.7. Credit Supply Maintenance (a) The supervisory stress test incorporates the assumption that aggregate credit supply does not contract during the stress period. The aim of supervisory stress testing is to assess whether firms are sufficiently capitalized to absorb losses during times of economic stress, while also meeting obligations and continuing to lend to households and businesses. The assumption that a balance sheet of consistent magnitude is maintained allows supervisors to evaluate the health of the banking sector assuming firms continue to lend during times of stress. (b) In order to implement this policy, the Federal Reserve must make assumptions about new loan balances. To predict losses on new originations over the planning horizon, newly originated loans are assumed to have the same risk characteristics as the existing portfolio, where applicable, with the exception of loan age and delinquency status. These newly originated loans would be part of a covered company's normal business, even in a stressed economic environment. While an individual firm may assume that it reacts to rising losses by sharply restricting its lending ( e.g., (c) In projecting the denominator for the calculation of the leverage ratio, the Federal Reserve will account for the effect of changes associated with the calculation of regulatory capital or changes to the Board's regulations. 2.8. Firm-Specific Overlays and Additional Firm-Provided Data (a) The Federal Reserve does not make firm-specific overlays to model results used in the supervisory stress test. This policy ensures that the supervisory stress test results are determined solely by the industry-level supervisory models and by firm-specific input data. The Federal Reserve has instituted a policy of not using additional input data submitted by one or some of the covered companies unless comparable data can be collected from all the firms that have material exposure in a given area. Input data necessary to produce supervisory stress test estimates is collected via the FR Y-14 information collection. The Federal Reserve may request additional information from covered companies, but otherwise will not incorporate additional information provided as part of a firm's CCAR submission or obtained through other channels into stress test projections. (b) This policy curbs the use of data only from firms that have incentives to provide it, as in cases in which additional data would support the estimation of a lower loss rate or a higher revenue rate, and promotes consistency across the stress test results of covered companies. 2.9. Treatment of Missing or Erroneous Data (a) Missing data, or data with deficiencies significant enough to preclude the use of supervisory models, create uncertainty around estimates of losses or components of revenue. If data that are direct inputs to supervisory models are not provided as required by the FR Y-14 information collection or are reported erroneously, then a conservative value will be assigned to the specific data based on all available data reported by covered companies, depending on the extent of data deficiency. If the data deficiency is severe enough that a modeled estimate cannot be produced for a portfolio segment or portfolio, then the Federal Reserve may assign a conservative rate (e.g., 10th or 90th percentile PPNR or loss rate, respectively) to that segment or portfolio. (b) This policy promotes the principle of conservatism, given a lack of information sufficient to produce a risk-sensitive estimate of losses or revenue components using information on the true characteristics of certain positions. This policy ensures consistent treatment for all covered companies that report data deemed insufficient to produce a modeled estimate. Finally, this policy is simple and transparent. 2.10. Treatment of Immaterial Portfolio Data (a) The Federal Reserve makes a distinction between insufficient data reported by covered companies for material portfolios and immaterial portfolios. To limit regulatory burden, the Federal Reserve allows covered companies not to report detailed loan-level or portfolio-level data for loan types that are not material as defined in the FR Y-14 reporting instructions. In these cases, a loss rate representing the median rates among covered companies for whom the rate is calculated will be applied to the immaterial portfolio. This approach is consistent across covered companies, simple, and transparent, and promotes the principles of consistency and comparability and simplicity. 3. Principles and Policies of Supervisory Model Validation (a) Independent and comprehensive model validation is key to the credibility of supervisory stress tests. An independent unit of validation staff within the Federal Reserve, with input from an advisory council of academic experts not affiliated with the Federal Reserve, ensures that stress test models are subject to effective challenge, defined as critical analysis by objective, informed parties that can identify model limitations and recommend appropriate changes. (b) The Federal Reserve's supervisory model validation program, built upon the principles of independence, technical competence, and stature, is able to subject models to effective challenge, expanding upon efforts made by supervisory modeling teams to manage model risk and confirming that supervisory models are appropriate for their intended uses. The supervisory model validation program produces reviews that are consistent, thorough, and comprehensive. Its structure ensures independence from the Federal Reserve's model development function, and its prominent role in communicating the state of model risk to the Board of Governors assures its stature within the Federal Reserve. 3.1. Structural Independence (a) The management and staff of the internal model validation program are structurally independent from the model development teams. Validators do not report to model developers, and vice versa. This ensures that model validation is conducted and overseen by objective parties. Validation staff's performance criteria include an ability to review all aspects of the models rigorously, thoroughly, and objectively, and to provide meaningful and clear feedback to model developers and users. (b) In addition, the Model Validation Council, a council of external academic experts, provides independent advice on the Federal Reserve's process to assess models used in the supervisory stress test. In biannual meetings with Federal Reserve officials, members of the council discuss selective supervisory models, after being provided with detailed model documentation for and non-public information about those models. The documentation and discussions enable the council to assess the effectiveness of the models used in the supervisory stress tests and of the overarching model validation program. 3.2. Technical Competence of Validation Staff (a) The model validation program is designed to provide thorough, high-quality reviews that are consistent across supervisory models. (b) First, the model validation program employs technically expert staff with knowledge across model types. Second, reviews for every supervisory model follow the same set of review guidelines, and take place on an ongoing basis. The model validation program is comprehensive, in the sense that validators assess all models currently in use, expand the scope of validation beyond basic model use, and cover both model soundness and performance. (c) The model validation program covers three main areas of validation: (1) Conceptual soundness; (2) ongoing monitoring; and (3) outcomes analysis. Validation staff evaluates all aspects of model development, implementation, and use, including but not limited to theory, design, methodology, input data, testing, performance, documentation standards, implementation controls (including access and change controls), and code verification. 3.3. Stature of Validation Function (a) The validation program informs the Board of Governors about the state of model risk in the overall stress testing program, along with ongoing practices to control and mitigate model risk. (b) The model validation program communicates its findings and recommendations regarding model risk to relevant parties within the Federal Reserve System. Validators provide detailed feedback to model developers and provide thematic feedback or observations on the overall system of models to the management of the modeling teams. Model validation feedback is also communicated to the users of supervisory model output for use in their deliberations and decisions about supervisory stress testing. In addition, the Director of the Division of Supervision and Regulation approves all models used in the supervisory stress test in advance of each exercise, based on validators' recommendations, development responses, and suggestions for risk mitigants. In several cases, models have been modified or implemented differently based on validators' feedback. The Model Validation Council also contributes to the stature of the Federal Reserve's validation program, by providing an external point of view on modifications to supervisory models and on validation program governance. 3.4. Simple approach for projecting risk-weighted assets (a) In projecting risk-weighted assets, the Federal Reserve will generally assume that a covered company's risk-weighted assets remain unchanged over the planning horizon. This assumption allows the Federal Reserve to independently project the risk-weighted assets of covered companies in line with the goal of simplicity (Principle 1.4). In addition, this approach is forward-looking (Principle 1.2), as this assumption removes reliance on historical data and past outcomes from the projection of risk-weighted assets. (b) In projecting a firm's risk-weighted assets, the Federal Reserve will account for the effect of changes associated with the calculation of regulatory capital or changes to the Board's regulations in the calculation of risk-weighted assets. [84 FR 6668, Feb. 28, 2019, as amended at 85 FR 15605, Mar. 18, 2020; 86 FR 7949, Feb. 3, 2021]

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