(a) Terms set forth
in section 217.2 and used in this subpart have the definitions assigned
thereto in section 217.2.
(b) For the purposes
of this subpart, the following terms are defined as follows:
Backtesting means the comparison of a Board-regulated
institution’s internal estimates with actual outcomes during a sample
period not used in model development. For purposes of this subpart,
backtesting is one form of out-of-sample testing.
Commodity position means a position for which price risk arises
from changes in the price of a commodity.
Corporate
debt position means a debt position that is an exposure to a company
that is not a sovereign entity, the Bank for International Settlements,
the European Central Bank, the European Commission, the International
Monetary Fund, the European Stability Mechanism, the European Financial
Stability Facility, a multilateral development bank, a depository
institution, a foreign bank, a credit union, a public sector entity,
a GSE, or a securitization.
Correlation trading
position means:
(1) A securitization position for which
all or substantially all of the value of the underlying exposures
is based on the credit quality of a single company for which a two-way
market exists, or on commonly traded indices based on such exposures
for which a two-way market exists on the indices; or
(2) A position that is not a securitization
position and that hedges a position described in paragraph (1) of
this definition; and
(3) A correlation trading position does not include:
(i) A resecuritization
position;
(ii) A
derivative of a securitization position that does not provide a pro
rata share in the proceeds of a securitization tranche; or
(iii) A securitization position
for which the underlying assets or reference exposures are retail
exposures, residential mortgage exposures, or commercial mortgage
exposures.
Covered position means the following positions:
(1) A trading asset or trading liability
(whether on- or off-balance sheet),
32 as reported on Schedule RC-D
of the Call Report or Schedule HC-D of the FR Y-9C (any savings and
loan holding companies that does not file the FR Y-9C should follow
the instructions to the FR Y-9C), that meets the following conditions:
(i) The position is a trading position or hedges another covered
position;
33 and
(ii) The position is free of any restrictive
covenants on its tradability or the Board-regulated institution is
able to hedge the material risk elements of the position in a two-way
market;
(2) A foreign exchange or commodity position, regardless of whether
the position is a trading asset or trading liability (excluding any
structural foreign currency positions that the Board-regulated institution
chooses to exclude with prior supervisory approval); and
(3) Notwithstanding paragraphs
(1) and (2) of this definition, a covered position does not include:
(i) An intangible asset, including any servicing asset;
(ii) Any hedge of a trading
position that the Board determines to be outside the scope of the
Board-regulated institution’s hedging strategy required in paragraph
(a)(2) of section 217.203;
(iii) Any position that, in form or
substance, acts as a liquidity facility that provides support to asset-backed
commercial paper;
(iv) A credit derivative the Board-regulated institution recognizes
as a guarantee for risk-weighted asset amount calculation purposes
under subpart D or subpart E of this part;
(v) Any position that is recognized
as a credit valuation adjustment hedge under section 217.132(e)(5)
or section 217.132(e)(6), except as provided in section 217.132(e)(6)(vii);
(vi) Any equity position
that is not publicly traded, other than a derivative that references
a publicly traded equity and other than a position in an investment
company as defined in and registered with the SEC under the Investment
Company Act of 1940 (15 U.S.C. 80a-1 et seq.), provided that
all the underlying equities held by the investment company are publicly
traded;
(vii) Any
equity position that is not publicly traded, other than a derivative
that references a publicly traded equity and other than a position
in an entity not domiciled in the United States (or a political subdivision
thereof) that is supervised and regulated in a manner similar to entities
described in paragraph (3)(vi) of this definition;
(viii) Any position a Board-regulated
institution holds with the intent to securitize; or
(ix) Any direct real estate holding.
Debt position means
a covered position that is not a securitization position or a correlation
trading position and that has a value that reacts primarily to changes
in interest rates or credit spreads.
Default
by a sovereign entity has the same meaning as the term sovereign
default under section 217.2.
Equity position means a covered position that is not a securitization position or
a correlation trading position and that has a value that reacts primarily
to changes in equity prices.
Event risk means
the risk of loss on equity or hybrid equity positions as a result
of a financial event, such as the announcement or occurrence of a
company merger, acquisition, spin-off, or dissolution.
Foreign exchange position means a position for
which price risk arises from changes in foreign exchange rates.
General market risk means the risk of loss
that could result from broad market movements, such as changes in
the general level of interest rates, credit spreads, equity prices,
foreign exchange rates, or commodity prices.
Hedge means a position or positions that offset all, or substantially
all, of one or more material risk factors of another position.
Idiosyncratic risk means the risk of loss
in the value of a position that arises from changes in risk factors
unique to that position.
Incremental risk means the default risk and credit migration risk of a position.
Default risk means the risk of loss on a position that could result
from the failure of an obligor to make timely payments of principal
or interest on its debt obligation, and the risk of loss that could
result from bankruptcy, insolvency, or similar proceeding. Credit
migration risk means the price risk that arises from significant changes
in the underlying credit quality of the position.
Market risk means the risk of loss on a position that could
result from movements in market prices.
Resecuritization
position means a covered position that is:
(1) An on- or off-balance sheet exposure
to a resecuritization; or
(2) An exposure that directly or indirectly references a resecuritization
exposure in paragraph (1) of this definition.
Securitization means a transaction in which:
(1) All or a portion of the
credit risk of one or more underlying exposures is transferred to
one or more third parties;
(2) The credit risk associated with the underlying exposures has
been separated into at least two tranches that reflect different levels
of seniority;
(3) Performance
of the securitization exposures depends upon the performance of the
underlying exposures;
(4) All or substantially all of the underlying exposures are financial
exposures (such as loans, commitments, credit derivatives, guarantees,
receivables, asset-backed securities, mortgage-backed securities,
other debt securities, or equity securities);
(5) For non-synthetic securitizations,
the underlying exposures are not owned by an operating company;
(6) The underlying exposures
are not owned by a small business investment company described in
section 302 of the Small Business Investment Act;
(7) The underlying exposures are not owned
by a firm an investment in which qualifies as a community development
investment under section 24 (Eleventh) of the National Bank Act;
(8) The Board may determine
that a transaction in which the underlying exposures are owned by
an investment firm that exercises substantially unfettered control
over the size and composition of its assets, liabilities, and off-balance
sheet exposures is not a securitization based on the transaction’s
leverage, risk profile, or economic substance;
(9) The Board may deem an exposure to a
transaction that meets the definition of a securitization, notwithstanding
paragraph (5), (6), or (7) of this definition, to be a securitization
based on the transaction’s leverage, risk profile, or economic substance;
and
(10) The transaction
is not:
(i) An investment fund;
(ii) A collective investment fund (as
defined in 12 CFR 208.34);
(iii) An employee benefit plan as defined
in paragraphs (3) and (32) of section 3 of ERISA, a “governmental
plan” (as defined in 29 U.S.C. 1002(32)) that complies with the tax
deferral qualification requirements provided in the Internal Revenue
Code, or any similar employee benefit plan established under the laws of
a foreign jurisdiction; or
(iv) Registered with the SEC under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or
foreign equivalents thereof.
Securitization position means a covered position that is:
(1) An on-balance sheet or off-balance
sheet credit exposure (including credit-enhancing representations
and warranties) that arises from a securitization (including a resecuritization);
or
(2) An exposure that
directly or indirectly references a securitization exposure described
in paragraph (1) of this definition.
Sovereign debt position means a direct exposure to a sovereign
entity.
Specific risk means the risk of
loss on a position that could result from factors other than broad
market movements and includes event risk, default risk, and idiosyncratic
risk.
Structural position in a foreign currency means a position that is not a trading position and that is:
(1) Subordinated debt, equity,
or minority interest in a consolidated subsidiary that is denominated
in a foreign currency;
(2) Capital assigned to foreign branches that is denominated in a
foreign currency;
(3)
A position related to an unconsolidated subsidiary or another item
that is denominated in a foreign currency and that is deducted from
the Board-regulated institution’s tier 1 or tier 2 capital; or
(4) A position designed
to hedge a Board-regulated institution’s capital ratios or earnings
against the effect on paragraphs (1), (2), or (3) of this definition
of adverse exchange rate movements.
Term repo-style transaction means a repo-style transaction that
has an original maturity in excess of one business day.
Trading position means a position that is held
by the Board-regulated institution for the purpose of short-term resale
or with the intent of benefiting from actual or expected short-term
price movements, or to lock in arbitrage profits.
Two-way market means a market where there are independent
bona fide offers to buy and sell so that a price reasonably related
to the last sales price or current bona fide competitive bid and offer
quotations can be determined within one day and settled at that price
within a relatively short time frame conforming to trade custom.
Value-at-Risk (VaR) means the estimate of
the maximum amount that the value of one or more positions could decline
due to market price or rate movements during a fixed holding period
within a stated confidence interval.
