OCC 2006-9
OCC Bulletin

    Subject:  Risk-Based Capital--Securities Borrowing Transactions
Description:  Final Rule

       Date:  February 23, 2006

TO:  Chief Executive Officers of National Banks, Department and
     Division Heads, Examining Personnel and Other Interested
     Parties

PURPOSE

This bulletin transmits a final rule on the risk-based capital
treatment of securities borrowing transactions in which the
borrower of the security posts cash collateral.  This rule
applies only to banks that have implemented the market risk
amendment to the risk-based capital rules (12 CFR 3, appendix B).
The final rule was published in the Federal Register on February
22, 2006.

SUMMARY

The interagency final rule makes permanent and expands the scope
of an interim rule issued in 2000.  Specifically, the final rule
permits banks subject to the market risk amendment to include in
risk-weighted assets an amount that is based on the difference
between the amount of cash collateral posted and the market value
of the borrowed security, subject to certain conditions.  The
final rule modifies one of the conditions of the interim rule to
permit securities borrowing transactions with counterparties that
are not eligible for certain exemptions from U.S. federal
bankruptcy treatment or receivership law to qualify for this
capital treatment.

Under the final rule, a securities borrowing transaction must
meet all the following requirements to qualify for recognition of
the net exposure in risk-weighted assets:

*    The  transaction must be based on securities includable  in
     the trading book that are liquid and readily marketable;
     
*   The transaction must be marked to market daily;

*   The transaction must be subject to daily margin maintenance
     requirements; and

*   The transaction must meet one of the two following criteria:

     A.   The transaction must be a securities contract for the
     purposes of section 555 of the Bankruptcy Code (11 USC 555), a
     qualified financial contract for the purpose of section 11(e)(8)
     of the Federal Deposit Insurance Act (12 USC 1821(e)(8)), or a
     netting contract between or among financial institutions for the
     purposes of sections 401-407 of the Federal Deposit Insurance
     Corporation Improvement Act of 1991 (12 USC 4401-4407), or the
     Federal Reserve Board's Regulation EE (12 CFR 231), or

     B.   If the transaction does not meet the criteria of (A), then
     either:

     i)   The banking organization has conducted sufficient legal
       review to reach a well-founded conclusion that (1) the securities
       borrowing agreement executed in connection with the transaction
       provides the banking organization the right to accelerate,
       terminate, and close-out, on a net basis, all transactions under
       the agreement and to liquidate or set off collateral promptly
       upon an event of counterparty default, including in a bankruptcy,
       insolvency, or other similar proceeding of the counterparty and
       (2) under applicable law of the relevant jurisdiction, its rights
       under the agreement are legal, valid, binding, and enforceable
       and any exercise of rights under the agreement will not be stayed
       or avoided; or

     ii)  The transaction is either overnight or unconditionally
       cancelable at any time by the banking organization, and the
       banking organization has conducted sufficient legal review to
       reach a well-founded conclusion that (1) the securities borrowing
       agreement executed in connection with the transaction provides
       the banking organization the right to accelerate, terminate, and
       close-out, on a net basis, all transactions under the agreement
       and to liquidate or set off collateral promptly upon an event of
       counterparty default and (2) under the law governing the
       agreement, its rights under the agreement are legal, valid,
       binding, and enforceable.
       
The final rule revises the fourth condition to expand the ways in
which a securities borrowing transaction can qualify for the
capital treatment of the rule.  As in the interim rule, the final
rule allows for netting of transactions with counterparties that
meet the bankruptcy requirements.  The final rule also allows for
netting of transactions with counterparties that are not covered
by U.S federal bankruptcy or receivership law, provided the bank
has conducted a legal review and concluded that it has similar
protections in the event of counterparty bankruptcy.
Additionally, if the securities borrowing transaction is
overnight or unconditionally cancelable, it can qualify for
netting as long as the bank has conducted a legal review and
concluded that it has the ability to close out or net its
position promptly upon the event of a counterparty default.

If these conditions are met, only the net exposure (i.e., cash
collateral less the value of the borrowed security) rather than
the gross exposure, must be incorporated into the risk-based
capital calculation.  The capital treatment of this final rule is
effective upon its publication in the Federal Register.

FOR FURTHER INFORMATION, CONTACT:

Margot Schwadron, risk expert, Capital Policy Division at (202)
874-6022; or Carl Kaminski, attorney, Legislative and Regulatory
Activities Division at (202) 874-5090.


Emory W. Rushton
Senior Deputy Comptroller and
Chief National Bank Examiner


Attachment - 71 FR 8932
        [http://www.occ.treas.gov/fr/fedregister/71fr8932.pdf]