81 FR 63428 - Industrial and Commercial Metals

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency

Federal Register Volume 81, Issue 179 (September 15, 2016)

Page Range		63428-63433
FR Document		2016-22017
The OCC is proposing to prohibit national banks and federal savings associations from dealing and investing in industrial and commercial metal.
Federal Register, Volume 81 Issue 179 (Thursday, September 15, 2016)
[Federal Register Volume 81, Number 179 (Thursday, September 15, 2016)]
[Proposed Rules]
[Pages 63428-63433]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-22017]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 81, No. 179 / Thursday, September 15, 2016 / 
Proposed Rules

[[Page 63428]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 7

[Docket ID OCC-2016-0022]
RIN 1557-AD93


Industrial and Commercial Metals

AGENCY: Office of the Comptroller of the Currency (OCC), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The OCC is proposing to prohibit national banks and federal 
savings associations from dealing and investing in industrial and 
commercial metal.

DATES: You must submit comments by November 14, 2016.

ADDRESSES: Because paper mail in the Washington, DC area and at the OCC 
is subject to delay, commenters are encouraged to submit comments 
through the Federal eRulemaking Portal or email, if possible. Please 
use the title ``Industrial and Commercial Metals'' to facilitate the 
organization and distribution of the comments. You may submit comments 
by any of the following methods:
     Federal eRulemaking Portal--``Regulations.gov'': Go to 
www.regulations.gov. Enter ``Docket ID OCC-2016-0022'' in the Search 
Box and click ``Search.'' Click on ``Comment Now'' to submit public 
comments.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting public comments.
     Email: [email protected].
     Mail: Legislative and Regulatory Activities Division, 
Office of the Comptroller of the Currency, 400 7th Street SW., suite 
3E-218, mail stop 9W-11, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW., Suite 3E-218, 
mail stop 9W-11, Washington, DC 20219.
     Fax: (571) 465-4326.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2016-0022'' in your comment. In general, the OCC will 
enter all comments received into the docket and publish them on the 
Regulations.gov Web site without change, including any business or 
personal information that you provide such as name and address 
information, email addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not include any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this rulemaking action by any of the following methods:
     Viewing Comments Electronically: Go to 
www.regulations.gov. Enter ``Docket ID OCC-2016-0022'' in the Search 
box and click ``Search.'' Click on ``Open Docket Folder'' on the right 
side of the screen and then ``Comments.'' Comments can be filtered by 
clicking on ``View All'' and then using the filtering tools on the left 
side of the screen.
     Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov. Supporting materials may 
be viewed by clicking on ``Open Docket Folder'' and then clicking on 
``Supporting Documents.'' The docket may be viewed after the close of 
the comment period in the same manner as during the comment period.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 400 7th Street SW., Washington, DC. 
For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 649-
6700 or, for persons who are deaf or hard of hearing, TTY, (202) 649-
5597. Upon arrival, visitors will be required to present valid 
government-issued photo identification and submit to security screening 
in order to inspect and photocopy comments.

FOR FURTHER INFORMATION CONTACT: Casey Scott Laxton, Counsel, Beth 
Kirby, Assistant Director, or Ted Dowd, Director, Securities and 
Corporate Practices Division, (202) 649-5510; Carl Kaminski, Special 
Counsel, Legislative and Regulatory Activities Division, (202) 649-
5490.

SUPPLEMENTARY INFORMATION:

I. Background

    A national bank may engage in activities that are part of, or 
incidental to, the business of banking under 12 U.S.C. 24(Seventh). 
Section 24(Seventh) lists several activities that are part of the 
business of banking; for example, it expressly provides that national 
banks may buy and sell exchange, coin, and bullion.
    In addition to these enumerated powers, section 24(Seventh) 
authorizes national banks to exercise all such incidental powers as 
shall be necessary to carry on the business of banking. National banks 
also are authorized to engage in any other activities not expressly 
enumerated in the statute that the Comptroller of the Currency 
reasonably determines are part of the business of banking.\1\
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    \1\ NationsBank of N.C., N.A. v. Var. Ann. Life. Ins. Co., 
(VALIC) 513 U.S. 251, 258-59 (1995).
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    In Interpretive Letter 693,\2\ issued approximately twenty years 
ago, the OCC authorized national banks to buy and sell copper on the 
grounds that trading copper was becoming increasingly similar to 
trading gold, silver, platinum, and palladium. The letter observed that 
copper was traded in liquid markets; that it was traded in a form 
standardized as to weight and purity; and that the bank seeking 
authority to engage in the activity traded copper under policies and 
procedures similar to those that governed trading precious metals. The 
letter concluded that national banks could buy and sell copper under 
the express authority to buy and sell coin and bullion and as part of 
or incidental to the business of banking. The scope of the 
authorization in Interpretive Letter 693 was sufficiently broad to 
permit national banks to buy and sell copper in the form of cathodes, 
which are used for industrial purposes.
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    \2\ 1995 WL 788816 (Nov. 14, 1995).
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    In this notice of proposed rulemaking, the OCC proposes to prohibit 
national banks from dealing and investing in a metal (or alloy), 
including copper, in a form primarily suited to industrial or 
commercial use (industrial or

[[Page 63429]]

commercial metal).\3\ The proposal: (i) Excludes industrial and 
commercial metals from the terms ``exchange,'' ``coin,'' and 
``bullion'' in 12 U.S.C. 24(Seventh); and (ii) provides that dealing or 
investing in them is not part of, or incidental to, the business of 
banking. Examples of metals and alloys in a form primarily suited for 
industrial or commercial use include copper cathodes, aluminum T-bars, 
and gold jewelry. The OCC does not believe that dealing or investing in 
these metals is appropriate for national banks. The proposed rule would 
supersede Interpretive Letter 693.\4\
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    \3\ The OCC considers the definition of industrial or commercial 
metal to include a warehouse receipt for such metal.
    \4\ See Nat'l Cable & Telecomms. Ass'n v. Brand X Internet 
Servs., 545 U.S. 967, 981-82 (2005) (agency reconsiderations of 
prior interpretations entitled to judicial deference so long as the 
agency adequately explains the reasons for the change).
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    The proposed rule also applies to federal savings associations 
(FSA). The Home Owners' Loan Act does not expressly authorize FSAs to 
buy or sell exchange, coin, and bullion.\5\ FSAs do have incidental 
authority to buy and sell precious metals in certain cases and to sell 
gold and silver coins minted by the U.S. Treasury.\6\ However, the OCC 
is not aware of any precedent authorizing FSAs to buy and sell any 
industrial or commercial metal. The OCC does not interpret FSAs' 
incidental powers to buy and sell metals to be broader than those of 
national banks. To avoid doubt, and to further integrate national bank 
and FSA regulations, the proposed rule prohibits FSAs from dealing and 
investing in industrial or commercial metal.\7\
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    \5\ See 12 U.S.C. 1464(c).
    \6\ See, e.g., OTS Op. Ch. Couns. P-2006-1 (Mar. 6, 2006), 2006 
WL 6195026 (engaging in precious metal transactions on behalf of 
customers); Gold Bullion Coin Transactions, 51 FR 34950 (Oct. 1, 
1986); Letter from Jack D. Smith, Deputy General Counsel, Federal 
Home Loan Bank Board, 1988 WL 1021651 (May 18, 1988). All precedents 
(orders, resolutions, determinations, agreements, regulations, 
interpretive rules, interpretations, guidelines, procedures, and 
other advisory materials) made, prescribed, or allowed to become 
effective by the former Office of Thrift Supervision or its Director 
that apply to FSAs remain effective until the OCC modifies, 
terminates, sets aside, or supersedes those precedents. 12 U.S.C. 
5414(b).
    \7\ The proposed rule indirectly applies to federal branches and 
agencies of foreign banks because they operate with the same rights 
and privileges (and subject to the same duties, restrictions, 
penalties, liabilities, conditions, and limitations) as national 
banks. 12 CFR 28.13(a)(1). The proposed rule also indirectly applies 
to insured state banks and state savings associations. See 12 U.S.C. 
1831a, 1831e.
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II. Description of the Proposed Rule

A. Industrial or Commercial Metal Is Not ``Exchange, Coin, and 
Bullion''

    As noted above, the National Bank Act authorizes national banks to 
buy and sell exchange, coin, and bullion. In this notice of proposed 
rulemaking, the OCC is proposing to exclude from the scope of these 
terms metals in a form primarily suited to industrial or commercial 
use.
    Banking Circular 58 (BC-58) \8\ sets forth general guidelines that 
apply to national banks' coin and bullion activities. It defines 
``coin'' as ``coins held for their metallic value which are minted by a 
government, or exact restrikes of such coins minted at a later date by 
or under the authority of the issuing government.'' Contemporaneous OCC 
interpretive letters elaborated that ``coin'' referred only to media of 
exchange.\9\ BC-58 defines ``bullion'' as ``uncoined gold or silver in 
bar or ingot form.'' These definitions do not encompass industrial or 
commercial metal.
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    \8\ BC-58 (Rev.) (Nov. 3, 1981). The OCC published the original 
version in 1974.
    \9\ Interpretive Letter 326 (Jan. 17, 1985), 1985 WL 202590; 
Interpretive Letter 252 (Oct. 26, 1982), 1982 WL 54157; Letter from 
Peter Liebesman, Assistant Director, Legal Advisory Services 
Division (Feb. 18, 1982), 1982 WL 170844. But see Letter from 
Richard V. Fitzgerald, Deputy Chief Counsel (Nov. 4, 1983), 1983 WL 
145720 (concluding that national banks could purchase and sell the 
Department of Treasury's commemorative Olympic coins based on their 
metallic value even though it was unlikely that the coins would be 
used as a medium of exchange).
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    Interpretive letters published after BC-58 interpreted national 
banks' authority to buy coin and bullion to include other precious 
metals, namely platinum and palladium. Consistent with BC-58's 
definition of ``coin,'' the OCC in 1987 found that legal tender 
platinum coins held for their metallic value were ``coin.'' \10\ That 
same letter prohibited dealing in platinum bars. However, in 1991, the 
OCC concluded that market developments warranted treating platinum bars 
as bullion.\11\ The OCC also found trading in platinum bars to be 
incidental to trading in platinum coins.\12\ For similar reasons, the 
OCC concluded palladium was coin and bullion and national banks could 
trade and deal in palladium as part of the business of banking.\13\ In 
support of its position, the OCC noted that the London Platinum and 
Palladium Market had linked platinum and palladium for market making 
and regulatory purposes and that most of the Market's members were 
banks.
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    \10\ Letter from William J. Stolte, Chief National Bank Examiner 
(July 29, 1987), 1987 WL 149775.
    \11\ Interpretive Letter 553 (May 2, 1991), 1991 WL 340660 
(noting that (i) the financial press considered platinum coins and 
bars to be bullion and (ii) a state statute defined ``bullion'' to 
include platinum).
    \12\ Id.
    \13\ Interpretive Letter 685 (Aug. 4, 1995), 1995 WL 550220.
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    However, other interpretive letters recognized that not every 
precious metal is coin or bullion. Jewelry, the OCC determined, is 
not.\14\
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    \14\ See No-Objection Letter 88-8 (May 26, 1988), 1988 WL 284872 
(selling gold and silver jewelry is impermissible general 
merchandising); Letter from Madonna K. Starr, Attorney (Oct. 3, 
1986), 1986 WL 144029 (limited design jewelry is not exchange, coin, 
or bullion).
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    The OCC proposes to conclude that ``exchange, coin, and bullion'' 
does not encompass industrial or commercial metal. The OCC believes 
this conclusion is consistent with the National Bank Act and current 
market practice. For example, in the mid-19th century, when Congress 
passed the National Bank Act, ``bullion'' meant metal suitable for 
coining, not metal suitable for making wires.\15\ The contemporary 
understanding of ``bullion'' is broader--most currency is no longer 
made of precious metal--but the contemporary understanding does 
distinguish bullion from industrial or commercial metal. For example, 
modern bullion markets trade precious metals by the kilogram.\16\ By 
contrast, industrial and commercial metals markets trade base metals in 
quantities suitable for industrial or commercial use.\17\ The following 
table illustrates trading differences between bullion markets and 
industrial or commercial metal markets.
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    \15\ See Act of June 22, 1874, 18 Stat. 202 (authorizing the 
transfer from the U.S. bullion fund of refined gold bars bearing the 
United States stamp of fineness, weight, and value, or bars from any 
melt of foreign coin or bullion of standard equal to or above that 
of the United States); Act of Feb. 12, 1873 Sec.  31, 17 Stat. 429 
(The bullion thus placed in the hands of the melter and refiner 
shall be subjected to the several processes which may be necessary 
to form it into ingots of the legal standard, and of a quality 
suitable for coinage.)
    \16\ See, e.g., London Bullion Market Association, The Good 
Delivery Rules for Gold and Silver Bars 11 (Mar. 2015), available at 
http://www.lbma.org.uk/assets/market/gdl/GD_Rules_15_Final%2020160512.pdf; London Platinum & Palladium 
Market, ``The London/Zurich Good Delivery List,'' http://www.lppm.com/good-delivery/ (visited July 19, 2016).
    \17\ The London Metal Exchange (LME) describes itself as the 
``world centre for the trading of industrial metals--more than three 
quarters of all non-ferrous metal futures business is transacted on 
[its] platforms.'' LME, ``About us,'' http://www.lme.com/about-us 
(visited July 19, 2016). The LME trades aluminum, aluminum alloys, 
copper, lead, nickel, tin, and zinc. LME, ``Metals,'' http://www.lme.com/metals (visited July 19, 2016).

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                 Contract                           Contract size
------------------------------------------------------------------------
                   Industrial/Commercial Metal Markets
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LME physical copper.......................  25,000 kg.

[[Page 63430]]

 
LME copper future.........................  25,000 kg.
COMEX copper future.......................  25,000 lbs. (about 11,340
                                             kg).
SHFE copper future........................  5,000 kg.
LME physical aluminum.....................  25,000 kg.
LME aluminum future.......................  25,000 kg.
COMEX aluminum future.....................  25,000 kg.
SHFE aluminum future......................  5,000 kg.
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                             Bullion Markets
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LBMA physical gold........................  350-430 troy oz. (about 11-
                                             13 kg).
LBMA physical silver......................  750-1100 troy oz. (about 23-
                                             34 kg).
LPPM physical platinum....................  1-6 kg.
LPPM physical palladium...................  1-6 kg.
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Key:
LME: London Metals Exchange.
COMEX: Commodity Exchange.
SHFE: Shanghai Futures Exchange.
LBMA: London Bullion Market Association.
LPPM: London Platinum & Palladium Market.

    In general, gold, silver, platinum, and palladium are bullion today 
because they:
     Trade in troy ounces or grams rather than metric tons; 
\18\
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    \18\ See, e.g., Bloomberg, ``Gold, Silver, and Industrial Metals 
Prices,'' http://www.bloomberg.com/markets/commodities/futures/metals.
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     Trade in pure forms; \19\
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    \19\ See, e.g., London Bullion Market Association, The Good 
Delivery Rules for Gold and Silver Bars 6 (Mar. 2015) (minimum 
fineness for gold is 99.5 percent and for silver is 99.9 percent); 
London Platinum & Palladium Market, ``The London/Zurich Good 
Delivery List,'' http://www.lppm.com/good-delivery/ (minimum 
fineness for platinum and palladium is 99.95 percent).
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     Trade in a form suitable for coining;
     Trade as precious metals in the world's major organized 
markets, including the London bullion markets; and
     Are considered currency by the International Organization 
for Standardization.\20\
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    \20\ ISO 4217 (Aug. 1, 2015), available at http://www.currency-iso.org/dam/downloads/lists/list_one.xls.
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    Gold, silver, platinum, and palladium in industrial or commercial 
form are not exchange, coin, or bullion.

B. Dealing and Investing in Industrial or Commercial Metal Is Neither 
Part of, Nor Incidental to, the Business of Banking

    Interpretive Letter 693 concluded that national banks could buy and 
sell copper (including industrial copper) as a part of or incidental to 
the business of banking. The OCC has reviewed the bases for the 
conclusion in Interpretive Letter 693 that buying and selling 
industrial copper is part of the business of banking, including 
developments in copper markets that followed this letter. For the 
following reasons, the OCC now believes that buying and selling 
copper--or any other metal--in industrial or commercial form for the 
purpose of dealing or investing in that metal is not part of the 
business of banking.
    When the OCC issued Interpretive Letter 693 in 1995, the agency 
noted increasing similarity between transactions involving copper and 
those transactions already conducted by national banks with respect to 
gold, silver, platinum and palladium (precious metals). This increasing 
similarity informed the OCC's view at that time that buying and selling 
copper, including dealing and investing, was part of the business of 
banking. However, copper markets have not increased in similarity to 
precious metal markets.\21\ Instead, as noted in detail above, copper 
is generally traded as a base metal.\22\
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    \21\ Events subsequent to Interpretive Letter 693 have confirmed 
copper's status as a base metal. In 2000, the LME introduced a 
future on a base metal index containing copper, aluminum, lead, 
nickel, tin, and zinc. Then, in 2006, it introduced ``mini'' futures 
for copper, aluminum, and zinc. Similarly, many firms have launched 
exchange-traded funds (ETFs) that invest solely in gold, silver, 
palladium, platinum, or some combination thereof, indicating a 
widespread belief that these metals are a store of value. However, 
there is no copper ETF. Finally, the OCC understands that national 
banks that trade copper treat it as a base metal and trade it 
alongside aluminum and zinc rather than gold and silver.
    \22\ See generally U.S. Senate Permanent Subcommittee on 
Investigations, Wall Street Bank Involvement with Physical 
Commodities 364 (2014) (identifying banks, trading firms, analysts, 
and exchanges that treat copper as a base metal for trading and risk 
management purposes).
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    The OCC believes that dealing and investing in industrial or 
commercial metals, including base and precious metals in this form, is 
not the functional equivalent of dealing and investing in coin and 
bullion. The paradigmatic example of functional equivalence is that a 
lease is in economic substance a secured loan.\23\ But the significant 
differences between dealing in industrial or commercial metals and 
dealing in coin and bullion demonstrate that the former is not, in 
economic substance, the same as the latter. Most importantly, 
industrial and commercial metals trade in base metal markets by the ton 
in cathode or other industrial form, while coin and bullion trade in 
precious metal markets by the troy ounce or kilogram in bar or ingot 
form. In addition, banks' risk management systems distinguish between 
precious metals and base metals.
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    \23\ See M&M Leasing Corp. v. Seattle First Nat'l Bank, 563 F.2d 
1377 (9th Cir. 1977).
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    The OCC has also considered other factors identified in relevant 
precedent for determining whether dealing in or investing in industrial 
or commercial metal is part of the business of banking.\24\ The OCC 
does not believe that analysis under these factors supports a 
conclusion at this time that this activity is part of the business of 
banking. For example, the OCC has not seen evidence that this activity 
strengthens a bank by benefiting its customers or its business.\25\ Nor 
is the OCC aware of any state-chartered banks dealing in or investing 
in industrial or commercial metal.\26\ Indeed, the OCC has not 
identified any precedent authorizing that activity for state banks.
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    \24\ See, e.g., Merchants' Nat'l Bank v. State Nat'l Bank, 77 
U.S. 604, 648 (1871) (holding that national banks could certify 
checks because the activity had ``grown out of the business needs of 
the country.'').
    \25\ Currently, national banks' dealing and investments in 
industrial or commercial metal are limited, suggesting that the 
business needs of the United States economy are not meaningfully 
affected by national banks' dealing in industrial or commercial 
metal. Nor is there evidence that the amount of revenue from 
industrial or commercial metal dealing and investing meaningfully 
improve national banks' financial strength. In any case, the 
prospect for additional revenue alone is not sufficient to deem an 
activity to be part of the business of banking. See VALIC, 513 U.S. 
at 258 n.2. See also No-objection Letter 88-8 (May 26, 1988), 1988 
WL 284872 (concluding that it is impermissible for a national bank 
to make substantial profits from the sale of merchandise).
    \26\ See Colorado Nat'l Bank v. Bedford, 310 U.S. 41, 49-50 
(1940).
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    As described above, under 12 U.S.C. 24 (Seventh), a national bank 
has the power to exercise all such incidental powers as shall be 
necessary to carry on the business of banking. An activity is 
incidental to the business of banking if it is convenient or useful to 
an activity that is part of the business of banking.\27\
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    \27\ Interpretive Letter 1071 (Sept. 6, 2006), 26 OCC Q.J. 46, 
2007 WL 5122909 (citing Arnold Tours, Inc. v. Camp, 472 F.2d 427, 
431-32 (1st Cir. 1972)).
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    The OCC believes that dealing and investing in industrial or 
commercial metal is not incidental to the business of banking. Some 
customers may wish to trade industrial or commercial metal with 
national banks. However, because few banks buy or sell industrial or 
commercial metal in the ordinary course of business, it does not appear 
that dealing or investing in industrial or commercial metal 
significantly enhances national banks' ability to offer banking 
products and services, including those related to precious metals. 
Moreover, dealing and investing in industrial or commercial metal does 
not appear to enable national banks to use capacity acquired for 
banking operations or otherwise avoid economic

[[Page 63431]]

loss or waste. Therefore, the OCC concludes national banks may not deal 
or invest in industrial or commercial metal under their incidental 
powers.

C. Transactions in Industrial or Commercial Metal That May Be 
Permissible

    National banks do have incidental authority to buy and sell 
industrial or commercial metal in limited cases. Buying or selling 
industrial or commercial metal could be incidental to lending 
activities. For example, a mining company could post a copper cathode 
as collateral for a loan. Pursuant to the national bank's authority to 
acquire property in satisfaction of debt previously contracted, the 
bank could seize and then sell the copper to mitigate loan losses if 
the borrower defaulted.\28\ National banks also have incidental 
authority to buy and sell nominal amounts of industrial or commercial 
metal to hedge customer-driven commodity derivatives.\29\ The proposed 
rule would not prohibit these purchases and sales because they are not 
dealing or investing.\30\
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    \28\ Cf. Cooper v. Hill, 94 F. 582 (8th Cir. 1899) (foreclosure 
of a mine); First Nat'l Bank of Parker v. Peavy Elevator Co., 10 
S.D. 167, 170 (1897) (foreclosure of grain seed and subsequent 
sale).
    \29\ Interpretive Letter 684 (Aug. 4, 1995), 1995 WL 550219; OCC 
Bulletin 2015-35, Quantitative Limits on Physical Commodity 
Transactions (Aug. 4, 2015) (explaining that ``nominal'' means 5 
percent of the bank's short positions in a particular commodity).
    \30\ Cf. First Nat'l Bank v. Nat'l Exch. Bank, 92 U.S. 122, 128 
(1875) (``In the honest exercise of the power to compromise a 
doubtful debt owing to a bank, it can hardly be doubted that stocks 
may be accepted in payment and satisfaction, with a view to their 
subsequent sale or conversion into money so as to make good or 
reduce an anticipated loss. Such a transaction would not amount to a 
dealing in stocks. It was, in effect, so decided in Fleckner v. Bank 
U.S., 8 Wheat. 351 [22 U.S. 338 (1823)], where it was held that a 
prohibition against trading and dealing was nothing more than a 
prohibition against engaging in the ordinary business of buying and 
selling for profit, and did not include purchases resulting from 
ordinary banking transactions.'').
    Similarly, national banks may buy and sell industrial or 
commercial metal as part of their leasing business. 12 U.S.C. 24 
(Seventh); 12 U.S.C. 24 (Tenth); 12 CFR 23.4. A car, for example, 
contains metal in a commercial form, but buying a car to lease it is 
not dealing or investing in commercial metal. Rather, a lease, like 
a reverse repurchase transaction, is a secured loan in a different 
form. National banks may also buy and sell industrial or commercial 
metals to install pipes and electrical wiring in their physical 
premises. 12 U.S.C. 29 (First); 12 CFR 7.1000. This activity is 
clearly not dealing or investing in industrial or commercial metal.
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    The OCC views national banks' lending authority \31\ as including 
buying and selling industrial or commercial metal under reverse 
repurchase agreements that are the functional and economic equivalent 
of secured loans. As described below, a standard reverse repurchase 
agreement for metal used to provide financing to a bank customer 
ordinarily does not indicate dealing or investing in the metal. 
However, the OCC notes that the facts and circumstances of a particular 
transaction may warrant a different conclusion. For example, to the 
extent a reverse repurchase agreement or related activity is structured 
in a way that causes a bank to incur commodity price risk or indicates 
market speculation, the OCC may view the transaction to be dealing or 
investing in the metal.
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    \31\ See 12 U.S.C. 24 (Seventh) (stating that discounting and 
negotiating promissory notes, drafts, bills of exchange, and other 
evidences of debt and loaning money on personal security are part of 
the business of banking).
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    In a reverse repurchase agreement, a bank extends credit by 
simultaneously buying collateral from a client and agreeing to sell the 
collateral back to the client at a future date. The difference between 
the sale and purchase price is effectively the interest the client pays 
for the extension of credit. If the reverse repurchase agreement 
counterparty defaults, the bank can mitigate its losses by selling the 
collateral without first foreclosing on it. Financing customer 
inventory is a traditional bank activity; using reverse repurchase 
agreements rather than loans to provide the financing is merely a 
different way of providing financing.\32\ Financing customer inventory 
using reverse repurchase agreements in itself does not indicate dealing 
or investing in the metal. However, pledging, selling, or 
rehypothecating metal acquired under reverse repurchase agreements 
suggests dealing or investing activity. So, too, does assuming 
commodity price risk. For example, an agreement in which the 
counterparty sells a metal at a certain price to the bank and then 
repurchases the metal at a price that depends on the metal's then-
current market price indicates dealing or investing activity: The bank 
is assuming the metal's price risk. On the other hand, setting the 
repurchase price at the sale price plus a spread based on the time 
value of money is equivalent to a secured loan.
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    \32\ Under the National Bank Act, credit exposures from 
repurchase and reverse repurchase agreements are loans and 
extensions of credit subject to a national bank's lending limits. 12 
U.S.C. 84(b)(1)(C). See also Letter from Charles F. Byrd, Assistant 
Director, Legal Advisory Services Division, [1978-1979 Transfer 
Binder] Fed. Banking L. Rep. (CCH) ] 85,020 (Aug. 30, 1977) 
(repurchase and reverse repurchase agreements are extensions of 
credit subject to 12 U.S.C. 82 (repealed by Garn-St. Germain 
Depository Institutions Act of 1982, Pub. L. 97-320, 402)).
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    The OCC invites comment on the treatment of reverse repurchase 
agreements under the proposed rule. In particular, the OCC seeks 
comment on whether reverse repurchase agreements that do not present 
commodity price risk for a bank and do not indicate market speculation 
are appropriately viewed to not indicate dealing or investing in metal. 
The OCC also seeks comment on whether there are forms of reverse 
purchase agreements or related activities that warrant a determination 
that the activity is dealing or investing in metal. If so, should the 
OCC include such agreements in the final rule's dealing or investing 
prohibition?
    The proposal does not prohibit national banks from buying and 
selling metal through transitory title transfers entered into as part 
of a customer-driven financial intermediation business.\33\ Metal owned 
through a transitory title transfer typically does not entail physical 
possession of a commodity; the ownership occurs solely to facilitate 
the underlying transaction and lasts only for a moment in time. For 
these reasons, the OCC does not consider transitory title transfers to 
be dealing or investing in industrial or commercial metal for purposes 
of this proposal. Interpretive Letter 1073 \34\ provides that national 
banks may hedge metal derivative transactions on a portfolio basis with 
over-the-counter derivative transactions that settle in cash or 
transitory title transfer. Interpretive Letter 1073 also provides that 
a national bank may engage in transitory title transfers in metals for 
the accommodation of customers. The OCC concluded in Interpretive 
Letter 1073 that transitory title transfers involving metals do not 
entail the physical possession of commodities.\35\ The OCC's analysis 
in this letter noted that transitory title transfers do not involve the 
customary activities relating to, or risks attendant to, commodity 
ownership, such as storage costs, insurance, and environmental 
protection. The OCC continues to believe that transitory title 
transfers do not constitute physical possession of commodities and 
therefore does not consider transitory

[[Page 63432]]

title transfers to be dealing or investing in industrial or commercial 
metal for purposes of this proposal.\36\
---------------------------------------------------------------------------

    \33\ For purposes of this proposal, the OCC considers a 
transitory title transfer to be back-to-back contracts providing for 
the receipt and immediate transfer of title to the metal. This means 
that a bank holds title to the metal for no more than a legal 
instant. See Interpretive Letter 962 (Apr. 21, 2003), 2003 WL 
21283155 (``[T]ransitory title transfers preclude actual delivery by 
passing title down the chain from the initial seller to the ultimate 
buyer in a series of instantaneous back-to-back transactions. Each 
party in the chain has title for an instant but does not take actual 
physical delivery (other than the ultimate buyer which, in no case, 
will be the Bank.'')).
    \34\ 26 OCC Q.J. 46, 2007 WL 5122911 (Oct. 19, 2006).
    \35\ See also OCC Bulletin 2015-3 (Aug. 4, 2015) (noting that a 
physical commodity that a bank acquired and then immediately sold by 
transitory title transfer would not be included in the bank's 
physical inventory of that commodity).
    \36\ In contrast to transitory title transfers, the OCC 
considers a commodity held by warehouse receipt for more than a 
legal instant to entail physical possession of the commodity. See 
OCC Bulletin 2015-3 (``[A] bank that satisfies certain conditions 
may engage in physical commodity transactions (for example, by 
buying or selling title to a commodity via a warehouse receipt or 
bill of lading) to manage the risks of commodity derivatives.'')); 
Interpretive Letter 684 (August 4, 1995), 1995 WL 550219 
(recognizing physical possession of a commodity by warehouse 
receipt). The OCC notes that the customary activities relating to, 
or risks attendant to, commodity ownership by warehouse receipt are 
distinguishable from those involving transitory title transfer. For 
example, Interpretive Letter 684 provides that the OCC expects a 
bank engaged in physical commodity hedging, either through warehouse 
receipt or ``pass-through'' delivery, to adopt and maintain 
``safeguards designed to manage the risks associated with storing, 
transporting, and disposing of commodities of which the bank has 
taken delivery, including policies and procedures designed to ensure 
that the bank has adequate levels of insurance (including insurance 
for environmental liabilities) which, after deductions, are 
commensurate with the risks assumed.''
---------------------------------------------------------------------------

    Notwithstanding the above, the OCC may consider alternative 
approaches for transitory title transfers in the final rule if it 
determines that these transactions present risks similar to holding 
physical metal. The OCC invites comment on whether it should continue 
to view transitory title transfers as transactions that do not entail 
physical possession of a commodity. In particular, the OCC seeks 
comment on whether transitory title transfers involving metals present 
risks that warrant treating such transactions as physical holdings. If 
so, then the prohibition on dealing and investing in industrial or 
commercial metal would apply to metals bought or sold by transitory 
title transfer.\37\
---------------------------------------------------------------------------

    \37\ The OCC notes that even if it determines that a transitory 
title transfer entails physical possession of a commodity, national 
banks engaged in a customer-driven financial intermediation business 
could still enter into such transactions under the proposal, 
provided the transaction is a hedge and is nominal.
---------------------------------------------------------------------------

III. Request for Comment

    The OCC invites comment on all aspects of this proposal, including 
the questions in part II.C of this Supplementary Information.
    In addition, the OCC requests comment on the appropriate treatment 
of existing holdings of industrial or commercial metal. In other 
contexts, the OCC provides five years to divest nonconforming assets, 
with the possibility of a five-year extension. Are there reasons a 
similar approach would not work here? Are there compelling reasons to 
grandfather existing holdings indefinitely?

IV. Regulatory Analysis

Paperwork Reduction Act

    Under the Paperwork Reduction Act, 44 U.S.C. 3501-3520, the OCC may 
not conduct or sponsor, and a person is not required to respond to, an 
information collection unless the information collection displays a 
valid Office of Management and Budget (OMB) control number. This notice 
of proposed rulemaking does not introduce any new collections of 
information, therefore, it does not require a submission to OMB.

Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA), 
requires an agency, in connection with a proposed rule, to prepare an 
Initial Regulatory Flexibility Analysis describing the impact of the 
proposed rule on small entities (defined by the Small Business 
Administration (SBA) for purposes of the RFA to include banking 
entities with total assets of $550 million or less) or to certify that 
the proposed rule would not have a significant economic impact on a 
substantial number of small entities.
    As of December 31, 2015, the OCC supervised 1,032 small 
entities.\38\ Although the rule applies to all OCC-supervised small 
entities, and thus affects a substantial number of small entities, no 
small entities supervised by the OCC currently buy or sell metal in a 
physical form primarily suited to commercial or industrial use for the 
purpose of dealing or investing in that metal. Thus, the rule will not 
have a substantial impact on any OCC-supervised small entities.
---------------------------------------------------------------------------

    \38\ The OCC calculated the number of small entities using the 
SBA's size thresholds for commercial banks and savings institutions, 
and trust companies, which are $550 million and $38.5 million, 
respectively. Consistent with the General Principles of Affiliation, 
13 CFR 121.103(a), the OCC counted the assets of affiliated 
financial institutions when determining whether to classify a 
national bank or federal savings association as a small entity. The 
OCC used December 31, 2015, to determine size because a ``financial 
institution's assets are determined by averaging the assets reported 
on its four quarterly financial statements for the preceding year.'' 
See footnote 8 of the SBA's Table of Size Standards.
---------------------------------------------------------------------------

    Therefore, the OCC certifies that the proposed rule would not have 
a significant economic impact on a substantial number of OCC-supervised 
small entities.

Unfunded Mandates Reform Act of 1995 Determination

    The OCC analyzed the proposed rule under the factors set forth in 
the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1532). Under this 
analysis, the OCC considered whether the proposed rule includes a 
federal mandate that may result in the expenditure by state, local, and 
Tribal governments, in the aggregate, or by the private sector, of $100 
million or more in any one year (adjusted annually for inflation).
    Although the proposed rule would apply to all OCC-supervised 
institutions, very few of these institutions are currently involved in 
activities involving dealing or investing in copper or other metals in 
a physical form primarily suited to commercial or industrial use.
    While the proposed rule may prevent OCC-supervised institutions 
from realizing potential gains from prohibited investments in physical 
metals, the proposed rule also may protect them from realizing 
potential losses from investments in physical metals. The OCC is not 
able to estimate these potential gains or losses because they will 
depend on future fluctuations in the prices of the various physical 
metals. However, the OCC does expect OCC-supervised institutions to be 
able to achieve comparable returns in alternative non-prohibited 
investment opportunities. Thus, the OCC estimates that the opportunity 
cost of the proposed rule will be near zero.
    The proposed rule may impose one-time costs on affected 
institutions with respect to the disposal of current physical metal 
inventory that a bank may not deal in or invest in under the rule. This 
cost will depend to some extent on the amount of physical metal 
inventory that affected institutions must dispose of. However, a 
gradual sell-off should not affect market prices and the affected 
institutions would receive fair value for their metals. Under these 
circumstances, the OCC estimates that the disposal costs will also be 
minimal.
    Finally, by establishing that buying and selling physical metal in 
commercial or industrial form is generally not part of the business of 
banking, the rule implies that customers of OCC-supervised institutions 
will have to identify another reliable source of supply of physical 
metals and that OCC-supervised institutions will be less able to 
compete with non-bank metals dealers. Given how technology has made the 
physical metals markets more accessible, the OCC expects bank customers 
will face minimal costs associated with identifying another supplier of 
physical metals. The OCC also expects that losing the ability to 
compete with non-bank metal dealers will not significantly detract from 
the strength of OCC-supervised institutions, especially given that the 
proposed rule would recognize several business-of-

[[Page 63433]]

banking exceptions to the prohibition on buying and selling physical 
metal.
    For the reasons described above, the OCC has determined that the 
proposed rule would not result in expenditures by state, local, and 
Tribal governments, or by the private sector, of $100 million or more. 
Accordingly, the OCC has not prepared a written statement to accompany 
the proposed rule.

List of subjects in 12 CFR Part 7

    Banks, banking, Computer technology, Credit, Federal savings 
associations, Insurance, Investments, Metals, National banks, Reporting 
and recordkeeping requirements, Securities, Surety bonds.

    For the reasons set forth in the preamble, OCC proposes to amend 12 
CFR part 7 as follows:

PART 7--BANK ACTIVITIES AND OPERATIONS

0
1. The authority citation for part 7 is amended to read as follows:

    Authority:  12 U.S.C. 1 et seq., 25b, 71, 71a, 92, 92a, 93, 93a, 
371, 371a, 481, 484, 1463, 1464, 1818, and 5412(b)(2)(B).

0
2. Add Sec.  7.1022 to subpart A to read as follows:


Sec.  7.1022  National bank authority to buy and sell exchange, coin, 
and bullion.

    (a) In this section, industrial or commercial metal means metal 
(including an alloy) in a physical form primarily suited to industrial 
or commercial use, for example, copper cathodes.
    (b) Scope of authorization. Section 24 (Seventh) of the National 
Bank Act authorizes national banks to buy and sell exchange, coin, and 
bullion. Industrial or commercial metal is not exchange, coin, and 
bullion within the meaning of this authorization.
    (c) Buying and selling metal as part of or incidental to the 
business of banking. Section 24 (Seventh) authorizes national banks to 
engage in activities that are part of, or incidental to, the business 
of banking. Buying and selling industrial or commercial metal for the 
purpose of dealing or investing in that metal is not part of or 
incidental to the business of banking pursuant to section 24 (Seventh).
    (d) Other authorities not affected. This section shall not be 
construed to preclude a national bank from acquiring or selling metal 
in connection with its incidental authority to foreclose on loan 
collateral, compromise doubtful claims, or avoid loss in connection 
with a debt previously contracted. This section also shall not be 
construed to preclude a national bank from buying and selling physical 
metal to hedge a derivative for which that metal is the reference asset 
so long as the amount of the physical metal used for hedging purposes 
is nominal.
0
3. Add Sec.  7.1023 to subpart A to read as follows:


Sec.  7.1023  Federal savings associations, prohibition on industrial 
or commercial metal dealing or investing.

    (a) In this section, industrial or commercial metal means metal 
(including an alloy) in a physical form primarily suited to industrial 
or commercial use, for example, copper cathodes.
    (b) Federal savings associations may not deal or invest in 
industrial or commercial metal. Federal savings associations may not 
buy or sell industrial or commercial metal if the purchase or sale is 
impermissible for a national bank.

    Dated: September 7, 2016
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2016-22017 Filed 9-14-16; 8:45 am]
 BILLING CODE 4810-33-P
63430 Federal Register / Vol. 81, No. 179 / Thursday, September 15, 2016 / Proposed Rules

Contract Contract size bases for the conclusion in Interpretive systems distinguish between precious
Letter 693 that buying and selling metals and base metals.
LME copper future .... 25,000 kg. industrial copper is part of the business The OCC has also considered other
COMEX copper future 25,000 lbs. (about of banking, including developments in factors identified in relevant precedent
11,340 kg). copper markets that followed this letter. for determining whether dealing in or
SHFE copper future .. 5,000 kg. For the following reasons, the OCC now investing in industrial or commercial
LME physical alu- 25,000 kg. believes that buying and selling metal is part of the business of
minum.
LME aluminum future 25,000 kg.
copper—or any other metal—in banking.24 The OCC does not believe
COMEX aluminum fu- 25,000 kg. industrial or commercial form for the that analysis under these factors
ture. purpose of dealing or investing in that supports a conclusion at this time that
SHFE aluminum fu- 5,000 kg. metal is not part of the business of this activity is part of the business of
ture. banking. banking. For example, the OCC has not
When the OCC issued Interpretive seen evidence that this activity
Bullion Markets Letter 693 in 1995, the agency noted strengthens a bank by benefiting its
increasing similarity between customers or its business.25 Nor is the
LBMA physical gold .. 350–430 troy oz. transactions involving copper and those
(about 11–13 kg).
OCC aware of any state-chartered banks
LBMA physical silver 750–1100 troy oz.
transactions already conducted by dealing in or investing in industrial or
(about 23–34 kg). national banks with respect to gold, commercial metal.26 Indeed, the OCC
LPPM physical plat- 1–6 kg. silver, platinum and palladium has not identified any precedent
inum. (precious metals). This increasing authorizing that activity for state banks.
LPPM physical palla- 1–6 kg. similarity informed the OCC’s view at As described above, under 12 U.S.C.
dium. that time that buying and selling copper, 24 (Seventh), a national bank has the
including dealing and investing, was power to exercise all such incidental
Key:
LME: London Metals Exchange. part of the business of banking. powers as shall be necessary to carry on
COMEX: Commodity Exchange. However, copper markets have not the business of banking. An activity is
SHFE: Shanghai Futures Exchange. increased in similarity to precious metal incidental to the business of banking if
LBMA: London Bullion Market Association. markets.21 Instead, as noted in detail
LPPM: London Platinum & Palladium it is convenient or useful to an activity
Market. above, copper is generally traded as a that is part of the business of banking.27
base metal.22 The OCC believes that dealing and
In general, gold, silver, platinum, and The OCC believes that dealing and investing in industrial or commercial
palladium are bullion today because investing in industrial or commercial metal is not incidental to the business
they: metals, including base and precious of banking. Some customers may wish
• Trade in troy ounces or grams metals in this form, is not the functional to trade industrial or commercial metal
rather than metric tons; 18 equivalent of dealing and investing in
• Trade in pure forms; 19 with national banks. However, because
coin and bullion. The paradigmatic few banks buy or sell industrial or
• Trade in a form suitable for coining; example of functional equivalence is
• Trade as precious metals in the commercial metal in the ordinary course
that a lease is in economic substance a of business, it does not appear that
world’s major organized markets, secured loan.23 But the significant
including the London bullion markets; dealing or investing in industrial or
differences between dealing in commercial metal significantly
and industrial or commercial metals and
• Are considered currency by the enhances national banks’ ability to offer
dealing in coin and bullion demonstrate banking products and services,
International Organization for that the former is not, in economic
Standardization.20 including those related to precious
substance, the same as the latter. Most metals. Moreover, dealing and investing
Gold, silver, platinum, and palladium
importantly, industrial and commercial in industrial or commercial metal does
in industrial or commercial form are not
metals trade in base metal markets by not appear to enable national banks to
exchange, coin, or bullion.
the ton in cathode or other industrial use capacity acquired for banking
B. Dealing and Investing in Industrial or form, while coin and bullion trade in operations or otherwise avoid economic
Commercial Metal Is Neither Part of, precious metal markets by the troy
Nor Incidental to, the Business of ounce or kilogram in bar or ingot form. 24 See, e.g., Merchants’ Nat’l Bank v. State Nat’l

Banking In addition, banks’ risk management Bank, 77 U.S. 604, 648 (1871) (holding that national
banks could certify checks because the activity had
Interpretive Letter 693 concluded that 21 Events subsequent to Interpretive Letter 693 ‘‘grown out of the business needs of the country.’’).
national banks could buy and sell have confirmed copper’s status as a base metal. In 25 Currently, national banks’ dealing and

copper (including industrial copper) as 2000, the LME introduced a future on a base metal investments in industrial or commercial metal are
a part of or incidental to the business of index containing copper, aluminum, lead, nickel, limited, suggesting that the business needs of the
tin, and zinc. Then, in 2006, it introduced ‘‘mini’’ United States economy are not meaningfully
banking. The OCC has reviewed the affected by national banks’ dealing in industrial or
futures for copper, aluminum, and zinc. Similarly,
many firms have launched exchange-traded funds commercial metal. Nor is there evidence that the
18 See, e.g., Bloomberg, ‘‘Gold, Silver, and amount of revenue from industrial or commercial
(ETFs) that invest solely in gold, silver, palladium,
Industrial Metals Prices,’’ http:// platinum, or some combination thereof, indicating metal dealing and investing meaningfully improve
www.bloomberg.com/markets/commodities/futures/ a widespread belief that these metals are a store of national banks’ financial strength. In any case, the
metals. value. However, there is no copper ETF. Finally, the prospect for additional revenue alone is not
19 See, e.g., London Bullion Market Association, OCC understands that national banks that trade sufficient to deem an activity to be part of the
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The Good Delivery Rules for Gold and Silver Bars copper treat it as a base metal and trade it alongside business of banking. See VALIC, 513 U.S. at 258
6 (Mar. 2015) (minimum fineness for gold is 99.5 aluminum and zinc rather than gold and silver. n.2. See also No-objection Letter 88–8 (May 26,
percent and for silver is 99.9 percent); London 22 See generally U.S. Senate Permanent 1988), 1988 WL 284872 (concluding that it is
Platinum & Palladium Market, ‘‘The London/Zurich Subcommittee on Investigations, Wall Street Bank impermissible for a national bank to make
Good Delivery List,’’ http://www.lppm.com/good- Involvement with Physical Commodities 364 (2014) substantial profits from the sale of merchandise).
delivery/ (minimum fineness for platinum and (identifying banks, trading firms, analysts, and 26 See Colorado Nat’l Bank v. Bedford, 310 U.S.

palladium is 99.95 percent). exchanges that treat copper as a base metal for 41, 49–50 (1940).
20 ISO 4217 (Aug. 1, 2015), available at http:// trading and risk management purposes). 27 Interpretive Letter 1071 (Sept. 6, 2006), 26 OCC

www.currency-iso.org/dam/downloads/lists/list_ 23 See M&M Leasing Corp. v. Seattle First Nat’l Q.J. 46, 2007 WL 5122909 (citing Arnold Tours, Inc.
one.xls. Bank, 563 F.2d 1377 (9th Cir. 1977). v. Camp, 472 F.2d 427, 431–32 (1st Cir. 1972)).

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Federal Register / Vol. 81, No. 179 / Thursday, September 15, 2016 / Proposed Rules 63431

loss or waste. Therefore, the OCC agreements that are the functional and that do not present commodity price
concludes national banks may not deal economic equivalent of secured loans. risk for a bank and do not indicate
or invest in industrial or commercial As described below, a standard reverse market speculation are appropriately
metal under their incidental powers. repurchase agreement for metal used to viewed to not indicate dealing or
provide financing to a bank customer investing in metal. The OCC also seeks
C. Transactions in Industrial or
ordinarily does not indicate dealing or comment on whether there are forms of
Commercial Metal That May Be
investing in the metal. However, the reverse purchase agreements or related
Permissible
OCC notes that the facts and activities that warrant a determination
National banks do have incidental circumstances of a particular transaction that the activity is dealing or investing
authority to buy and sell industrial or may warrant a different conclusion. For in metal. If so, should the OCC include
commercial metal in limited cases. example, to the extent a reverse such agreements in the final rule’s
Buying or selling industrial or repurchase agreement or related activity dealing or investing prohibition?
commercial metal could be incidental to is structured in a way that causes a bank The proposal does not prohibit
lending activities. For example, a to incur commodity price risk or national banks from buying and selling
mining company could post a copper indicates market speculation, the OCC metal through transitory title transfers
cathode as collateral for a loan. Pursuant may view the transaction to be dealing entered into as part of a customer-driven
to the national bank’s authority to or investing in the metal. financial intermediation business.33
acquire property in satisfaction of debt In a reverse repurchase agreement, a Metal owned through a transitory title
previously contracted, the bank could bank extends credit by simultaneously transfer typically does not entail
seize and then sell the copper to buying collateral from a client and physical possession of a commodity; the
mitigate loan losses if the borrower agreeing to sell the collateral back to the ownership occurs solely to facilitate the
defaulted.28 National banks also have client at a future date. The difference underlying transaction and lasts only for
incidental authority to buy and sell between the sale and purchase price is a moment in time. For these reasons, the
nominal amounts of industrial or effectively the interest the client pays OCC does not consider transitory title
commercial metal to hedge customer- for the extension of credit. If the reverse transfers to be dealing or investing in
driven commodity derivatives.29 The repurchase agreement counterparty industrial or commercial metal for
proposed rule would not prohibit these defaults, the bank can mitigate its losses purposes of this proposal. Interpretive
purchases and sales because they are by selling the collateral without first Letter 1073 34 provides that national
not dealing or investing.30 foreclosing on it. Financing customer banks may hedge metal derivative
The OCC views national banks’ inventory is a traditional bank activity; transactions on a portfolio basis with
lending authority 31 as including buying using reverse repurchase agreements over-the-counter derivative transactions
and selling industrial or commercial rather than loans to provide the that settle in cash or transitory title
metal under reverse repurchase financing is merely a different way of transfer. Interpretive Letter 1073 also
providing financing.32 Financing provides that a national bank may
28 Cf. Cooper v. Hill, 94 F. 582 (8th Cir. 1899)
customer inventory using reverse engage in transitory title transfers in
(foreclosure of a mine); First Nat’l Bank of Parker
v. Peavy Elevator Co., 10 S.D. 167, 170 (1897)
repurchase agreements in itself does not metals for the accommodation of
(foreclosure of grain seed and subsequent sale). indicate dealing or investing in the customers. The OCC concluded in
29 Interpretive Letter 684 (Aug. 4, 1995), 1995 WL metal. However, pledging, selling, or Interpretive Letter 1073 that transitory
550219; OCC Bulletin 2015–35, Quantitative Limits rehypothecating metal acquired under title transfers involving metals do not
on Physical Commodity Transactions (Aug. 4, 2015) reverse repurchase agreements suggests entail the physical possession of
(explaining that ‘‘nominal’’ means 5 percent of the
bank’s short positions in a particular commodity). dealing or investing activity. So, too, commodities.35 The OCC’s analysis in
30 Cf. First Nat’l Bank v. Nat’l Exch. Bank, 92 U.S. does assuming commodity price risk. this letter noted that transitory title
122, 128 (1875) (‘‘In the honest exercise of the For example, an agreement in which the transfers do not involve the customary
power to compromise a doubtful debt owing to a counterparty sells a metal at a certain activities relating to, or risks attendant
bank, it can hardly be doubted that stocks may be
accepted in payment and satisfaction, with a view price to the bank and then repurchases to, commodity ownership, such as
to their subsequent sale or conversion into money the metal at a price that depends on the storage costs, insurance, and
so as to make good or reduce an anticipated loss. metal’s then-current market price environmental protection. The OCC
Such a transaction would not amount to a dealing indicates dealing or investing activity: continues to believe that transitory title
in stocks. It was, in effect, so decided in Fleckner
v. Bank U.S., 8 Wheat. 351 [22 U.S. 338 (1823)], The bank is assuming the metal’s price transfers do not constitute physical
where it was held that a prohibition against trading risk. On the other hand, setting the possession of commodities and
and dealing was nothing more than a prohibition repurchase price at the sale price plus therefore does not consider transitory
against engaging in the ordinary business of buying a spread based on the time value of
and selling for profit, and did not include purchases 33 For purposes of this proposal, the OCC
resulting from ordinary banking transactions.’’). money is equivalent to a secured loan.
The OCC invites comment on the considers a transitory title transfer to be back-to-
Similarly, national banks may buy and sell back contracts providing for the receipt and
industrial or commercial metal as part of their treatment of reverse repurchase immediate transfer of title to the metal. This means
leasing business. 12 U.S.C. 24 (Seventh); 12 U.S.C. agreements under the proposed rule. In that a bank holds title to the metal for no more than
24 (Tenth); 12 CFR 23.4. A car, for example, a legal instant. See Interpretive Letter 962 (Apr. 21,
contains metal in a commercial form, but buying a
particular, the OCC seeks comment on
2003), 2003 WL 21283155 (‘‘[T]ransitory title
car to lease it is not dealing or investing in whether reverse repurchase agreements transfers preclude actual delivery by passing title
commercial metal. Rather, a lease, like a reverse down the chain from the initial seller to the
repurchase transaction, is a secured loan in a 32 Under the National Bank Act, credit exposures ultimate buyer in a series of instantaneous back-to-
different form. National banks may also buy and from repurchase and reverse repurchase agreements back transactions. Each party in the chain has title
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sell industrial or commercial metals to install pipes are loans and extensions of credit subject to a for an instant but does not take actual physical
and electrical wiring in their physical premises. 12 national bank’s lending limits. 12 U.S.C. 84(b)(1)(C). delivery (other than the ultimate buyer which, in
U.S.C. 29 (First); 12 CFR 7.1000. This activity is See also Letter from Charles F. Byrd, Assistant no case, will be the Bank.’’)).
clearly not dealing or investing in industrial or Director, Legal Advisory Services Division, [1978– 34 26 OCC Q.J. 46, 2007 WL 5122911 (Oct. 19,
commercial metal. 1979 Transfer Binder] Fed. Banking L. Rep. (CCH) 2006).
31 See 12 U.S.C. 24 (Seventh) (stating that ¶ 85,020 (Aug. 30, 1977) (repurchase and reverse 35 See also OCC Bulletin 2015–3 (Aug. 4, 2015)

discounting and negotiating promissory notes, repurchase agreements are extensions of credit (noting that a physical commodity that a bank
drafts, bills of exchange, and other evidences of subject to 12 U.S.C. 82 (repealed by Garn–St. acquired and then immediately sold by transitory
debt and loaning money on personal security are Germain Depository Institutions Act of 1982, Pub. title transfer would not be included in the bank’s
part of the business of banking). L. 97–320, 402)). physical inventory of that commodity).

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63432 Federal Register / Vol. 81, No. 179 / Thursday, September 15, 2016 / Proposed Rules

title transfers to be dealing or investing IV. Regulatory Analysis rule includes a federal mandate that
in industrial or commercial metal for may result in the expenditure by state,
Paperwork Reduction Act
purposes of this proposal.36 local, and Tribal governments, in the
Under the Paperwork Reduction Act, aggregate, or by the private sector, of
Notwithstanding the above, the OCC 44 U.S.C. 3501–3520, the OCC may not
may consider alternative approaches for $100 million or more in any one year
conduct or sponsor, and a person is not (adjusted annually for inflation).
transitory title transfers in the final rule required to respond to, an information
if it determines that these transactions Although the proposed rule would
collection unless the information apply to all OCC-supervised
present risks similar to holding physical collection displays a valid Office of
metal. The OCC invites comment on institutions, very few of these
Management and Budget (OMB) control institutions are currently involved in
whether it should continue to view number. This notice of proposed activities involving dealing or investing
transitory title transfers as transactions rulemaking does not introduce any new in copper or other metals in a physical
that do not entail physical possession of collections of information, therefore, it form primarily suited to commercial or
a commodity. In particular, the OCC does not require a submission to OMB. industrial use.
seeks comment on whether transitory
Regulatory Flexibility Act While the proposed rule may prevent
title transfers involving metals present
The Regulatory Flexibility Act, 5 OCC-supervised institutions from
risks that warrant treating such
U.S.C. 601 et seq. (RFA), requires an realizing potential gains from prohibited
transactions as physical holdings. If so,
agency, in connection with a proposed investments in physical metals, the
then the prohibition on dealing and proposed rule also may protect them
investing in industrial or commercial rule, to prepare an Initial Regulatory
Flexibility Analysis describing the from realizing potential losses from
metal would apply to metals bought or investments in physical metals. The
sold by transitory title transfer.37 impact of the proposed rule on small
entities (defined by the Small Business OCC is not able to estimate these
III. Request for Comment Administration (SBA) for purposes of potential gains or losses because they
the RFA to include banking entities will depend on future fluctuations in
The OCC invites comment on all with total assets of $550 million or less) the prices of the various physical
aspects of this proposal, including the or to certify that the proposed rule metals. However, the OCC does expect
questions in part II.C of this would not have a significant economic OCC-supervised institutions to be able
Supplementary Information. impact on a substantial number of small to achieve comparable returns in
In addition, the OCC requests entities. alternative non-prohibited investment
comment on the appropriate treatment As of December 31, 2015, the OCC opportunities. Thus, the OCC estimates
of existing holdings of industrial or supervised 1,032 small entities.38 that the opportunity cost of the
commercial metal. In other contexts, the Although the rule applies to all OCC- proposed rule will be near zero.
OCC provides five years to divest supervised small entities, and thus The proposed rule may impose one-
nonconforming assets, with the affects a substantial number of small time costs on affected institutions with
possibility of a five-year extension. Are entities, no small entities supervised by respect to the disposal of current
there reasons a similar approach would the OCC currently buy or sell metal in physical metal inventory that a bank
not work here? Are there compelling a physical form primarily suited to may not deal in or invest in under the
reasons to grandfather existing holdings commercial or industrial use for the rule. This cost will depend to some
purpose of dealing or investing in that extent on the amount of physical metal
indefinitely?
metal. Thus, the rule will not have a inventory that affected institutions must
36 In contrast to transitory title transfers, the OCC substantial impact on any OCC- dispose of. However, a gradual sell-off
considers a commodity held by warehouse receipt supervised small entities. should not affect market prices and the
for more than a legal instant to entail physical Therefore, the OCC certifies that the affected institutions would receive fair
possession of the commodity. See OCC Bulletin proposed rule would not have a value for their metals. Under these
2015–3 (‘‘[A] bank that satisfies certain conditions circumstances, the OCC estimates that
may engage in physical commodity transactions (for
significant economic impact on a
example, by buying or selling title to a commodity substantial number of OCC-supervised the disposal costs will also be minimal.
via a warehouse receipt or bill of lading) to manage small entities. Finally, by establishing that buying
the risks of commodity derivatives.’’)); Interpretive and selling physical metal in
Letter 684 (August 4, 1995), 1995 WL 550219 Unfunded Mandates Reform Act of 1995
commercial or industrial form is
(recognizing physical possession of a commodity by Determination
warehouse receipt). The OCC notes that the generally not part of the business of
customary activities relating to, or risks attendant The OCC analyzed the proposed rule banking, the rule implies that customers
to, commodity ownership by warehouse receipt are under the factors set forth in the of OCC-supervised institutions will
distinguishable from those involving transitory title Unfunded Mandates Reform Act of 1995 have to identify another reliable source
transfer. For example, Interpretive Letter 684
provides that the OCC expects a bank engaged in
(2 U.S.C. 1532). Under this analysis, the of supply of physical metals and that
physical commodity hedging, either through OCC considered whether the proposed OCC-supervised institutions will be less
warehouse receipt or ‘‘pass-through’’ delivery, to able to compete with non-bank metals
adopt and maintain ‘‘safeguards designed to manage 38 The OCC calculated the number of small
dealers. Given how technology has
the risks associated with storing, transporting, and entities using the SBA’s size thresholds for
disposing of commodities of which the bank has commercial banks and savings institutions, and
made the physical metals markets more
taken delivery, including policies and procedures trust companies, which are $550 million and $38.5 accessible, the OCC expects bank
designed to ensure that the bank has adequate million, respectively. Consistent with the General customers will face minimal costs
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levels of insurance (including insurance for Principles of Affiliation, 13 CFR 121.103(a), the associated with identifying another
environmental liabilities) which, after deductions, OCC counted the assets of affiliated financial
are commensurate with the risks assumed.’’ institutions when determining whether to classify
supplier of physical metals. The OCC
37 The OCC notes that even if it determines that a national bank or federal savings association as a also expects that losing the ability to
a transitory title transfer entails physical possession small entity. The OCC used December 31, 2015, to compete with non-bank metal dealers
of a commodity, national banks engaged in a determine size because a ‘‘financial institution’s will not significantly detract from the
customer-driven financial intermediation business assets are determined by averaging the assets
could still enter into such transactions under the reported on its four quarterly financial statements
strength of OCC-supervised institutions,
proposal, provided the transaction is a hedge and for the preceding year.’’ See footnote 8 of the SBA’s especially given that the proposed rule
is nominal. Table of Size Standards. would recognize several business-of-

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Federal Register / Vol. 81, No. 179 / Thursday, September 15, 2016 / Proposed Rules 63433

banking exceptions to the prohibition physical metal to hedge a derivative for DATES: We must receive comments on
on buying and selling physical metal. which that metal is the reference asset this proposed AD by October 31, 2016.
For the reasons described above, the so long as the amount of the physical ADDRESSES: You may send comments,
OCC has determined that the proposed metal used for hedging purposes is using the procedures found in 14 CFR
rule would not result in expenditures by nominal. 11.43 and 11.45, by any of the following
state, local, and Tribal governments, or ■ 3. Add § 7.1023 to subpart A to read methods:
by the private sector, of $100 million or as follows: • Federal eRulemaking Portal: Go to
more. Accordingly, the OCC has not http://www.regulations.gov. Follow the
§ 7.1023 Federal savings associations,
prepared a written statement to prohibition on industrial or commercial instructions for submitting comments.
accompany the proposed rule. metal dealing or investing. • Fax: 202–493–2251.
List of subjects in 12 CFR Part 7 (a) In this section, industrial or • Mail: U.S. Department of
commercial metal means metal Transportation, Docket Operations, M–
Banks, banking, Computer 30, West Building Ground Floor, Room
technology, Credit, Federal savings (including an alloy) in a physical form
primarily suited to industrial or W12–140, 1200 New Jersey Avenue SE.,
associations, Insurance, Investments, Washington, DC 20590.
Metals, National banks, Reporting and commercial use, for example, copper
cathodes. • Hand Delivery: Deliver to Mail
recordkeeping requirements, Securities, address above between 9 a.m. and 5
(b) Federal savings associations may
Surety bonds. p.m., Monday through Friday, except
not deal or invest in industrial or
For the reasons set forth in the commercial metal. Federal savings Federal holidays.
preamble, OCC proposes to amend 12 associations may not buy or sell For service information identified in
CFR part 7 as follows: industrial or commercial metal if the this NPRM, contact Boeing Commercial
purchase or sale is impermissible for a Airplanes, Attention: Data & Services
PART 7—BANK ACTIVITIES AND Management, P.O. Box 3707, MC 2H–65,
national bank.
OPERATIONS Seattle, WA 98124–2207; telephone
Dated: September 7, 2016
■1. The authority citation for part 7 is Thomas J. Curry,
206–544–5000, extension 1; fax 206–
amended to read as follows: 766–5680; Internet https://
Comptroller of the Currency.
www.myboeingfleet.com. You may view
Authority: 12 U.S.C. 1 et seq., 25b, 71, 71a, [FR Doc. 2016–22017 Filed 9–14–16; 8:45 am]
this referenced service information at
92, 92a, 93, 93a, 371, 371a, 481, 484, 1463, BILLING CODE 4810–33–P
1464, 1818, and 5412(b)(2)(B).
the FAA, Transport Airplane
Directorate, 1601 Lind Avenue SW.,
■ 2. Add § 7.1022 to subpart A to read Renton, WA. For information on the
as follows: DEPARTMENT OF TRANSPORTATION availability of this material at the FAA,
§ 7.1022 National bank authority to buy call 425–227–1221. It is also available
Federal Aviation Administration on the internet at http://
and sell exchange, coin, and bullion.
(a) In this section, industrial or www.regulations.gov by searching for
14 CFR Part 39
commercial metal means metal and locating Docket No. FAA–2016–
(including an alloy) in a physical form [Docket No. FAA–2016–9075; Directorate 9075.
Identifier 2016–NM–082–AD]
primarily suited to industrial or Examining the AD Docket
commercial use, for example, copper RIN 2120–AA64
You may examine the AD docket on
cathodes.
(b) Scope of authorization. Section 24 Airworthiness Directives; The Boeing the Internet at http://
(Seventh) of the National Bank Act Company Airplanes www.regulations.gov by searching for
authorizes national banks to buy and and locating Docket No. FAA–2016–
AGENCY: Federal Aviation 9075; or in person at the Docket
sell exchange, coin, and bullion. Administration (FAA), DOT.
Industrial or commercial metal is not Management Facility between 9 a.m.
ACTION: Notice of proposed rulemaking and 5 p.m., Monday through Friday,
exchange, coin, and bullion within the (NPRM).
meaning of this authorization. except Federal holidays. The AD docket
(c) Buying and selling metal as part of SUMMARY: We propose to adopt a new contains this proposed AD, the
or incidental to the business of banking. airworthiness directive (AD) for certain regulatory evaluation, any comments
Section 24 (Seventh) authorizes national The Boeing Company Model 787–8 and received, and other information. The
banks to engage in activities that are 787–9 airplanes. This proposed AD was street address for the Docket Office
part of, or incidental to, the business of prompted by a report indicating that a (phone: 800–647–5527) is in the
banking. Buying and selling industrial ADDRESSES section. Comments will be
portion of the sealant above the engine
or commercial metal for the purpose of pylon between the wing skin and the available in the AD docket shortly after
dealing or investing in that metal is not vapor barrier may have been omitted. receipt.
part of or incidental to the business of This proposed AD would require an FOR FURTHER INFORMATION CONTACT:
banking pursuant to section 24 inspection for missing sealant in the Sherry Vevea, Aerospace Engineer,
(Seventh). seam on the outside and inside of the Propulsion Branch, ANM–140S, FAA,
(d) Other authorities not affected. engine struts, and corrective actions if Seattle Aircraft Certification Office
This section shall not be construed to necessary. We are proposing this AD to (ACO), 1601 Lind Avenue SW., Renton,
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preclude a national bank from acquiring detect and correct missing sealant above WA 98057–3356; phone: 425–917–6514;
or selling metal in connection with its the engine pylon between the wing skin fax: 425–917–6590; email:
incidental authority to foreclose on loan and the vapor barrier, which can create sherry.vevea@faa.gov.
collateral, compromise doubtful claims, an unintended leak path for fuel, SUPPLEMENTARY INFORMATION:
or avoid loss in connection with a debt potentially draining onto the aft fairing
previously contracted. This section also heat shield above the engine and onto Comments Invited
shall not be construed to preclude a hot engine parts or brakes, which could We invite you to send any written
national bank from buying and selling lead to a major ground fire. relevant data, views, or arguments about

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Document Created: 2018-02-09 13:18:32
Document Modified: 2018-02-09 13:18:32
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Proposed Rules
Action		Notice of proposed rulemaking.
Dates		You must submit comments by November 14, 2016.
Contact		Casey Scott Laxton, Counsel, Beth Kirby, Assistant Director, or Ted Dowd, Director, Securities and Corporate Practices Division, (202) 649-5510; Carl Kaminski, Special Counsel, Legislative and Regulatory Activities Division, (202) 649- 5490.
FR Citation		81 FR 63428
RIN Number		1557-AD93
CFR Associated		Banks; Banking; Computer Technology; Credit; Federal Savings Associations; Insurance; Investments; Metals; National Banks; Reporting and Recordkeeping Requirements; Securities and Surety Bonds
81 FR 63428 - Industrial and Commercial Metals

DEPARTMENT OF THE TREASURYOffice of the Comptroller of the Currency

Federal Register Volume 81, Issue 179 (September 15, 2016)

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
