81_FR_67410 81 FR 67220 - Regulations Q and Y; Risk-Based Capital and Other Regulatory Requirements for Activities of Financial Holding Companies Related to Physical Commodities and Risk-Based Capital Requirements for Merchant Banking Investments

81 FR 67220 - Regulations Q and Y; Risk-Based Capital and Other Regulatory Requirements for Activities of Financial Holding Companies Related to Physical Commodities and Risk-Based Capital Requirements for Merchant Banking Investments

FEDERAL RESERVE SYSTEM

Federal Register Volume 81, Issue 190 (September 30, 2016)

Page Range67220-67239
FR Document2016-23349

The Board is seeking comment on a proposal to adopt additional limitations on physical commodity trading activities conducted by financial holding companies under complementary authority granted pursuant to section 4(k) of the Bank Holding Company Act and clarify certain existing limitations on those activities; amend the Board's risk-based capital requirements to better reflect the risks associated with a financial holding company's physical commodity activities; rescind the findings underlying the Board orders authorizing certain financial holding companies to engage in energy management services and energy tolling; remove copper from the list of metals that bank holding companies are permitted to own and store as an activity closely related to banking; and increase transparency regarding physical commodity activities of financial holding companies through more comprehensive regulatory reporting.

Federal Register, Volume 81 Issue 190 (Friday, September 30, 2016)
[Federal Register Volume 81, Number 190 (Friday, September 30, 2016)]
[Proposed Rules]
[Pages 67220-67239]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-23349]


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FEDERAL RESERVE SYSTEM

12 CFR Parts 217 and 225

[Docket No. R-1547]
 RIN 7100 AE-58


Regulations Q and Y; Risk-Based Capital and Other Regulatory 
Requirements for Activities of Financial Holding Companies Related to 
Physical Commodities and Risk-Based Capital Requirements for Merchant 
Banking Investments

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Board is seeking comment on a proposal to adopt additional 
limitations on physical commodity trading activities conducted by 
financial holding companies under complementary authority granted 
pursuant to section 4(k) of the Bank Holding Company Act and clarify 
certain existing limitations on those activities; amend the Board's 
risk-based capital requirements to better reflect the risks associated 
with a financial holding company's physical commodity activities; 
rescind the findings underlying the Board orders authorizing certain 
financial holding companies to engage in energy management services and 
energy tolling; remove copper from the list of metals that bank holding 
companies are permitted to own and store as an activity closely related 
to banking; and increase transparency regarding physical commodity 
activities of financial holding companies through more comprehensive 
regulatory reporting.

DATES: Comments must be received on or before December 22, 2016.

ADDRESSES: You may submit comments, identified by Docket No. R-1547 and 
RIN 7100 AE-58 by any of the following methods:
     Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.aspx.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Email: [email protected]. Include the 
docket number and RIN number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Robert deV. Frierson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and

[[Page 67221]]

Constitution Avenue NW., Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.aspx as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room 3515, 1801 K Street NW. (between 18th and 19th 
Streets NW.), Washington, DC 20006 between 9:00 a.m. and 5:00 p.m. on 
weekdays. For security reasons, the Board requires that visitors make 
an appointment to inspect comments. You may do so by calling (202) 452-
3684. Upon arrival, visitors will be required to present valid 
government-issued photo identification and to submit to security 
screening in order to inspect and photocopy comments.

FOR FURTHER INFORMATION CONTACT: Board: Constance M. Horsley, Assistant 
Director, (202) 452-5239, Elizabeth MacDonald, Manager, (202) 475-6316, 
Kevin Tran, Supervisory Financial Analyst, (202) 452-2309, or Vanessa 
Davis, Supervisory Financial Analyst, (202) 475-6674, Division of 
Banking Supervision and Regulation; or Laurie Schaffer, Associate 
General Counsel, (202) 452-2277, Michael Waldron, Special Counsel, 
(202) 452-2798, Will Giles, Counsel, (202) 452-3351, or Mary Watkins, 
Attorney, (202) 452-3722, Legal Division, Board of Governors of the 
Federal Reserve System, 20th and C Streets NW., Washington, DC 20551. 
For the hearing impaired only, Telecommunication Device for the Deaf 
(TDD), (202) 263-4869.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Background
    B. Risks Associated With Physical Commodity Activities
    C. Limitations on Physical Commodity Activities
    D. Summary of the Advance Notice of Proposed Rulemaking (ANPR) 
and Comments on the ANPR
II. Description of Proposed Rule
    A. Scope of Permissible Physical Commodity Activities
    1. Level of Complementary Commodity Activities Permitted
    2. Clarification of Prohibitions on Certain Operations
    B. Risk-Based Capital Requirements for Covered Physical 
Commodities
    1. Overview
    2. Calculation of Exposure Amount for Covered Physical 
Commodities
    3. Impact Analysis of Proposed Capital Requirements
    C. The Scope of Permitted Complementary Commodity Activities
    1. Background
    a. Physical Commodity Trading
    b. Energy Management Services and Energy Tolling
    2. Reconsideration of the Approval of Energy Management and 
Tolling as Complementary Activities
    3. Conformance Period
    E. Reclassification of Copper as an Industrial Metal
    F. New Financial Reporting Data on Physical Commodity Activities
    1. General
    2. Schedule HC-W
    3. Schedule HC-R Modifications
    4. Public Disclosure
III. Regulatory Analysis
    A. Regulatory Flexibility Act Analysis
    B. Paperwork Reduction Act
    C. Solicitation of Comments on Use of Plain Language

I. Introduction

A. Background

    Bank holding companies (BHCs) and their subsidiaries engage in 
certain types of physical commodity activities under a variety of 
authorities. Pursuant to the Bank Holding Company Act (BHC Act), BHCs 
may engage in activities that are ``so closely related to banking as to 
be a proper incident thereto.'' \1\ This authority allows BHCs to buy, 
sell, or hold precious metals, such as gold, silver, platinum, and 
palladium; participate as a principal in cash-settled derivative 
contracts based on commodities; and trade in commodity derivatives that 
allow for physical settlement under certain circumstances.
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    \1\ See 12 U.S.C. 1843(c)(8). In addition, national banks owned 
by BHCs may engage in certain limited types of physical commodity 
activities pursuant to authority granted under the National Bank 
Act. State-chartered banks also may be authorized to engage in the 
same activities under state statutes.
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    In the Gramm-Leach-Bliley Act (GLB Act) enacted in 1999, Congress 
expanded the activities in which a BHC may engage.\2\ The GLB Act 
permits BHCs that are well capitalized and well managed to elect to 
become financial holding companies (FHCs) and engage in a broader range 
of activities than permitted for BHCs that are not FHCs. Three 
provisions of the GLB Act permit FHCs to conduct a broader range of 
physical commodity activities and investments than are otherwise 
permitted for BHCs. First, the GLB Act permits FHCs to engage in any 
activity that the Board (in its sole discretion) determines is 
complementary to a financial activity and does not pose a substantial 
risk to the safety and soundness of depository institutions or the 
financial system generally.\3\ Pursuant to this authority, the Board 
has authorized certain FHCs to engage in physical commodity trading as 
well as energy management services and energy tolling. The GLB Act also 
added a grandfather provision that permits certain FHCs to continue to 
engage in a broad range of physical commodity activities.\4\ Finally, 
the GLB Act authorizes FHCs to make merchant banking investments in any 
type of nonfinancial company, including a company engaged in activities 
involving physical commodities.\5\
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    \2\ Public Law 106-102, 113 Stat. 1338 (1999).
    \3\ See Gramm-Leach-Bliley Act Sec.  103, 12 U.S.C. 
1843(k)(1)(B).
    \4\ 12 U.S.C. 1843(o).
    \5\ 12 U.S.C. 1843(k)(4)(H).
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B. Risks Associated With Physical Commodity Activities

    There are a number of potential legal, reputational and financial 
risks associated with the conduct of physical commodity trading 
activities. Over the past decade, monetary damages associated with an 
environmental catastrophe involving physical commodities have ranged 
from hundreds of millions to tens of billions of dollars. These damages 
can exceed the market value of the physical commodity involved in the 
catastrophic event, and can exceed the committed capital and insurance 
policies of the organization. Certain federal environmental laws, 
including the Oil Pollution Act of 1990 (OPA),\6\ the Comprehensive 
Environmental Response, Compensation, and Liability Act of 1980 
(CERCLA),\7\ and the Clean Water Act (CWA),\8\ generally impose 
liability on owners and operators of facilities and vessels for the 
release of physical commodities, such as oil, distillate fuel oil, jet 
fuel, liquefied petroleum gas, gasoline, fertilizer, natural gas, and 
propylene.\9\ Consequently, a company that directly owns an oil tanker 
or petroleum refinery that releases crude oil in a navigable waterway 
or adjoining shoreline in the United States may be liable for removal 
costs and damages for that release under the OPA.\10\
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    \6\ See 33 U.S.C. 2701-02.
    \7\ See 42 U.S.C. 9607.
    \8\ See 33 U.S.C. 1321. In general, liability under the OPA, 
CWA, and CERCLA is subject to limited defenses, including releases 
caused by an act of God. See, e.g., 33 U.S.C. 2703; 42 U.S.C. 9607.
    \9\ See 33 U.S.C. 1321, 2701 (defining ``oil''), 42 U.S.C. 7412, 
9601 (defining ``hazardous air pollutant'' and ``hazardous 
substance,'' respectively).
    \10\ See 33 U.S.C. 2702. The OPA generally limits liability for 
spills from facilities to $350,000,000 and liability from spills 
from vessels to the greater of $1,900 per gross ton or $22,000,000. 
Id. at 2704. However, the OPA liability cap will not apply if the 
party engaged in certain types of misconduct (e.g., willful 
misconduct, gross negligence, violation of Federal safety 
regulation, failure to report incident). Id.

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[[Page 67222]]

    In addition to Federal environmental law, state environmental laws 
separately impose liability for the harmful or unauthorized release of 
an environmentally sensitive commodity.\11\ Like Federal environmental 
law, many states impose strict liability for damages from the 
unauthorized release of specified harmful substances on the owners and 
operators of the facility or vessel from which the discharge occurred. 
Many states also impose liability based on the causal connection 
between a party's actions and the prohibited release.\12\ Some state 
statutes also impose strict liability directly on owners of the covered 
substance for damages caused by, and/or cleanup and removal costs 
incurred as a result of, the release of the substance.\13\ State common 
law tort doctrines may also provide additional bases for liability for 
environmental harm, such as negligence, trespass, and nuisance.\14\
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    \11\ The OPA, CERCLA, and CWA explicitly state that the statutes 
do not preempt state laws imposing additional liability or 
requirements with respect to the discharge of hazardous substances. 
33 U.S.C. 1312(o), 2718(a); 42 U.S.C. 9614(a).
    \12\ N.J. Admin. Code tit. 7, section 1E:1.6; State v. Montayne, 
604 N.Y.S.2d 978 (N.Y. App. Div. 1993) (finding an oil broker liable 
under New York Navigation Law section 181 because the broker was 
contractually obligated to provide the oil and specify the means of 
its delivery even though the broker did not own the oil and had used 
third parties to move and store the oil). See also N.J. Dep't of 
Envtl. Prot. v. Dimant, 212 N.J. 153, 177, 51 A.3d 816 (2012) 
(summarizing prior state cases to require some connection between 
the discharge complained of and the alleged discharger); Authority 
of New Brunswick v. Suydam Investors, 826 A.2d 673, 683 (N.J. 2003) 
(suggesting that such causal liability under New Jersey law should 
be read to impose liability on persons responsible for the discharge 
of the substance).
    \13\ See, e.g., Alaska Stat. section 46.03.822; Cal. Gov't Code 
Sec. Sec.  8670.3, 8670.56.5; Fla. Stat. section 376.12 (imposing 
liability for cleanup costs on the owner of the covered substance 
but only if the owner and operator of the facility or vessel do not 
pay such costs and such parties were not in compliance with the 
financial security requirements of the statute at the time of the 
release); Md. Envir. Code Ann. Sec.  4-401; Or. Rev. Stat. Sec.  
468B.310; Wash. Rev. Code Ann. section 90.56.370.
    \14\ Restatement (Second) of Torts sections 158, 165, 390, 822, 
825, 826.
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    State laws also allow for the assignment of the liability of one 
company to its parent and/or another affiliated company even if the 
affiliated company did not directly participate in the wrongdoing. This 
concept of ``piercing the corporate veil'' is an exception to the 
general rule in corporate law that a parent company is not liable for 
the acts of its subsidiaries, and may be applied when the affiliated 
entity exercises a high degree of control over the liable company.\15\ 
Courts typically require multiple indicia of control before assigning 
liability to the parent or affiliated company.\16\ Common indicia 
include managing day-to-day operations, undercapitalizing subsidiaries, 
and commingling of assets, employees, legal advice, accounting, or 
office space.\17\ Courts have also used the concept of veil piercing to 
assign liability under Federal environmental law.\18\
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    \15\ See, e.g., See William Passalacqua Builders, Inc., v. 
Resnick Developers South, Inc., 933 F.2d 131, 137-141 (2d Cir. 
1991); Berkey v. Third Avenue Ry. Co., 244 N.Y. 84, 155 NE. 58 
(1926), (holding that ``domination must be so complete, interference 
so obtrusive, that by the general rules of agency the parent will be 
a principal and the subsidiary an agent . . .''); Fletcher 
Cyclopedia of the Law of Corporations 41.30-.60 (rev. ed. 2006). See 
also Letter from the Securities Industry and Financial Markets 
Association et al., dated April 16, 2014, Appendix B, pg. 41 (SIFMA 
Comment Letter). Other courts have articulated the first prong of 
this inquiry--whether there was domination--as an inquiry into 
whether the two companies operated as a single economic unit or 
alter ego. See Fletcher v. Atex, Inc., 68 F.3d 1451, 1457 (1995); 
NetJets Aviation, Inc. v. LHC Communications, LLC, 537 F.3d 168, 176 
(2d Cir. 2008).
    \16\ See William Passalacqua Builders, Inc., v. Resnick 
Developers South, Inc., 933 F.2d 131, 137-141 (2d Cir. 1991); United 
States v. Golden Acres, Inc., 702 F. Supp. 1097, 1104 (D. Del. 1988) 
aff'd 879 F.2d 860, 1104 (3d Cir. 1989). See also Harco Nat. Ins. 
Co. v. Green Farms, Inc., 15 Del. J. Corp. L. 1030, 1038-1040 (Del. 
Ch. 1989).
    \17\ See, e.g., United States v. Golden Acres, Inc., 702 F. 
Supp. at 1104; New York State Elec. and Gas Corp. v. First Energy 
Corp., 766 F.3d 212, 224-227 (2nd Cir. 2014); William Passalacqua 
Builders, Inc., v. Resnick Developers South, Inc., 933 F.2d 131, 
137-141 (2d Cir. 1991).
    \18\ See, e.g., United States v. Bestfoods, 524 U.S.C. 51, 63-64 
(1998); AT&T Global Info. Solutions Co. v. Union Tank Car Co., 29 
F.Supp.2d 857, 869 (S.D. Oh. 1998).
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    Further, even if a parent company is not assigned liability through 
a veil piercing action, the parent company may provide support to 
affiliated entities involved in an environmental catastrophe to limit 
reputational damage or as a condition to a settlement agreement. For 
example, BP p.l.c., the ultimate parent company of BP Exploration & 
Production, Inc. and BP Corporation North America, Inc., guaranteed the 
payment of more than $20 billion as part of a consent decree resolving 
claims against its subsidiaries resulting from the Deepwater Horizon 
oil spill.\19\
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    \19\ U.S. v. BP Exploration & Production Inc., et al., No. 10-
4536 in MDL 2179 (E.D. La.) Consent Decree among defendant BP 
Exploration & Production Inc., The United States of America, and the 
States of Alabama, Florida, Louisiana, Mississippi, and Texas, 
Document 16093, Appendix 9, available at http://www.laed.uscourts.gov/sites/default/files/OilSpill/4042016ConsentDecree_0.pdf. See also https://www.justice.gov/enrd/deepwater-horizon.
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C. Limitations on Physical Commodity Activities

    To help address these risks, the Board placed a number of 
limitations, discussed below, on the physical commodity activities it 
has authorized under the GLB Act.
    Section 4(k)(1)(B) Complementary Authority. The GLB Act added 
section 4(k)(1)(B) to the BHC Act to permit an FHC to engage in 
activities that the Board determines to be complementary to a financial 
activity (complementary authority). The provision's purpose was to 
allow the Board to permit FHCs to engage in an activity that appears to 
be commercial rather than financial in nature, but that is meaningfully 
connected to a financial activity such that it complements the 
financial activity.\20\ When determining that an activity is 
complementary to a financial activity for an FHC, the Board must find 
that the activity does not pose a substantial risk to the safety and 
soundness of depository institution subsidiaries of the FHC or the 
financial system generally.\21\ In addition, the Board is required to 
consider whether performance of the activity can reasonably be expected 
to produce benefits to the public--such as greater convenience, 
increased competition, or gains in efficiency--that outweigh possible 
adverse effects, such as undue concentration of resources, decreased or 
unfair competition, conflicts of interest, or unsound banking 
practices.\22\
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    \20\ Citigroup Inc., 89 Fed. Res. Bull. 508 (2003), note 8 and 
related text (``2003 Citi Order'').
    \21\ 12 U.S.C. 1843(k)(1)(B).
    \22\ 12 U.S.C. 1843(j)(2).
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    Under this authority, the Board has approved the requests of a 
limited number of FHCs to engage in three complementary activities 
related to physical commodities: (1) Physical commodity trading 
involving the purchase and sale of commodities in the spot market, and 
taking and making delivery of physical commodities to settle commodity 
derivatives (physical commodity trading); \23\ (2) providing 
transactions and advisory services to power plant owners (energy

[[Page 67223]]

management services); \24\ and (3) paying a power plant owner fixed 
periodic payments that compensate the owner for its fixed costs in 
exchange for the right to all or part of the plant's power output 
(energy tolling).\25\ Together, these three activities are referred to 
as complementary commodity activities.
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    \23\ See Board orders regarding Citigroup Inc., 89 Fed. Res. 
Bull. 508 (2003); Fortis S.A./N.V., 94 Fed. Res. Bull. C20 (2008); 
Soci[eacute]t[eacute] G[eacute]n[eacute]rale, 92 Fed. Res. Bull. 
C113 (2006); Deutsche Bank AG, 91 Fed. Res. Bull. C54 (2005); 
JPMorgan Chase & Co., 91 Fed. Res. Bull. C57 (2005); Barclays Bank 
PLC, 90 Fed. Res. Bull. 511 (2004); UBS AG, 90 Fed. Res. Bull. 215 
(2004); and The Royal Bank of Scotland Group plc, 94 Fed. Res. Bull. 
C60 (2008). See also Board letters regarding Bank of America 
Corporation (April 24, 2007), BNP Paribas (August 31, 2007), Credit 
Suisse Group (March 27, 2007), Fortis S.A./N.V. (September 29, 
2006), Wachovia Corporation (April 13, 2006), Bank of Nova Scotia 
(February 17, 2011).
    \24\ See, e.g., The Royal Bank of Scotland Group plc, 94 Fed. 
Res. Bull. C60 (2008) (2008 RBS Order), and Fortis S.A./N.V., 94 
Fed. Res. Bull. C20 (2008) (2007 Fortis Order).
    \25\ Under energy tolling, the toller provides (or pays for) the 
fuel needed to produce the power that it directs the owner to 
produce. See, e.g., 2008 RBS Order. The agreements also generally 
provide that the owner will receive a marginal payment for each 
megawatt hour produced by the plant to cover the owner's variable 
costs plus a profit margin. Id. The plant owner, however, retains 
control over the day-to-day operations of the plant and physical 
plant assets at all times. Id.
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    The Board placed certain restrictions on each complementary 
commodity activity to protect against the risks the activity could pose 
to the safety and soundness of the FHC, any of its insured depository 
institution (IDI) subsidiaries, and the U.S. financial system. For 
example, the Board limited the size of these activities by imposing 
limits on the amount of assets or revenue that an FHC could have 
committed to complementary commodity activities. Specifically, the 
aggregate market value of commodities held under physical commodity 
trading and energy tolling may represent no more than 5 percent of the 
tier 1 capital of the FHC. The Board also imposed a cap on energy 
management services of no more than 5 percent of an FHC's consolidated 
operating revenues. To help protect against dealing in illiquid 
commodities, the Board also limited the physical commodity trading 
authority to only physical commodities approved by the Commodity 
Futures Trading Commission (CFTC) for trading on a U.S. futures 
exchange (unless specifically excluded by the Board) or commodities the 
Board otherwise approves.\26\
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    \26\ See 2003 Citi Order. In limited cases, the Board has 
permitted FHCs to take and make physical delivery of a non-CFTC-
approved commodity if the FHC demonstrated that there is a market in 
financially-settled contracts on that commodity, the commodity is 
fungible, the commodity is liquid, and the FHC has in place trading 
limits that address concentration risk and overall exposure. See, 
e.g., 2008 RBS Order.
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    The Board also prohibited FHCs from owning, operating, or investing 
in facilities that extract, transport, store, or alter commodities 
under complementary authority. FHCs also are required to ensure that 
the third-party contractors hired to store, transport, and otherwise 
handle the physical commodities of the FHC are reputable.
    Section 4(o) Grandfather Authority. In the GLB Act, Congress 
amended the BHC Act to allow certain companies to continue to engage in 
a broad range of activities involving physical commodities if these 
companies subsequently became FHCs.\27\ Under section 4(o) of the BHC 
Act, a company that was not a BHC prior to and becomes an FHC after 
November 12, 1999, may continue to engage in activities related to the 
trading, sale, or investment in commodities that were not permissible 
for BHCs as of September 30, 1997, if the company was engaged in the 
United States in any of such activities as of September 30, 1997 
(section 4(o) grandfather authority).\28\
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    \27\ See 12 U.S.C. 1843(o).
    \28\ 12 U.S.C. 1843(o). Two firms are authorized to engage in 
these activities: The Goldman Sachs Group, Inc. and Morgan Stanley, 
both of which became bank holding companies in 2008 and made 
successful elections to become financial holding companies at that 
time.
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    Section 4(o) grandfathered firms are permitted by statute to engage 
in a broader range of activities than firms that are limited to 
conducting physical commodity activities under complementary authority. 
This broader range of activities includes storing, transporting, 
extracting, and altering commodities. Section 4(o) imposes only two 
conditions on the conduct of activities: (i) The activities are limited 
to no more than 5 percent of the total consolidated assets of the FHC, 
and (ii) the FHC is prohibited from cross-marketing the services of its 
subsidiary depository institution(s) and subsidiary(ies) engaged in 
activities under the section 4(o) grandfather authority. The 5 percent 
of assets limit permits section 4(o) grandfathered FHCs to hold 
significantly larger amounts of a wider range of commodity-related 
assets than those FHCs that conduct commodities activities under 
complementary authority, which does not permit storage, transport, 
extraction or similar activities and imposes a stricter limit of 5 
percent of tier 1 capital on the more limited class of commodity 
holdings that are permitted under complementary authority.
    Merchant Banking Authority. The GLB Act also amended the BHC Act to 
allow FHCs to engage in merchant banking activities. Under section 
4(k)(4)(H) of the BHC Act, FHCs may invest in nonfinancial companies as 
part of a bona fide securities underwriting or merchant or investment 
banking activity (merchant banking authority).\29\ These investments 
may be made in any type of ownership interest and in any type of 
nonfinancial company (portfolio company). The GLB Act imposes 
conditions on the merchant banking investment activities of FHCs. 
First, the investment must be part of ``a bona fide underwriting or 
merchant or investment banking activity'' and may not be held by an IDI 
or subsidiary of an IDI.\30\ Second, an FHC making merchant banking 
investments must own or control a securities affiliate or a registered 
investment adviser that advises an affiliated insurance company.\31\ 
Third, merchant banking investments must be held only ``for a period of 
time to enable the sale or disposition thereof on a reasonable basis 
consistent with the financial viability of the activities.'' \32\ 
Finally, an FHC may not routinely manage or operate the portfolio 
company ``except as may be necessary or required to obtain a reasonable 
return on investment upon resale or disposition.'' \33\
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    \29\ Id. The statute grants similar authority to insurance 
companies that are FHCs or subsidiaries of FHCs. Id. at 
1843(k)(4)(I).
    \30\ 12 U.S.C. 1843(k)(4)(H)(i), (ii).
    \31\ Id. at 1843(k)(4)(H)(ii).
    \32\ Id. at 1843(k)(4)(H)(iii).
    \33\ 12 U.S.C. 1843(k)(4)(H)(iv).
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    The Board's rules contain limitations that implement these 
statutory requirements. For example, Regulation Y prohibits FHCs in 
most cases from holding merchant banking investments for more than 10 
years (or for more than 15 years for investments held in a qualifying 
private equity fund).\34\ Further, Regulation Y limits the duration of 
routine management to the period necessary to address the cause of the 
FHC's involvement, to obtain suitable alternative management 
arrangements, to dispose of the investment, or to otherwise obtain a 
reasonable return upon the resale or disposition of the investment.\35\ 
Additionally, an FHC must establish risk-management policies and 
procedures for its merchant banking activities, and policies and 
procedures that maintain corporate separateness between the FHC and its 
portfolio companies. Maintaining corporate separateness protects the 
FHC and its subsidiary IDIs from potential legal liability associated 
with the operations and financial obligations of the FHC's portfolio 
companies and private equity funds.\36\ The Board's regulatory capital 
rule (Regulation Q) addresses merchant banking investments through 
risk-weighting in the equity framework.\37\
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    \34\ See 12 CFR 225.172-.173.
    \35\ 12 CFR 225.171(e). Regulation Y also imposes documentation 
requirements on these extraordinary management activities. Id.
    \36\ See also id. at 225.175(b).
    \37\ 12 CFR 217.52-.53 and 217.153-.154.

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[[Page 67224]]

D. Summary of the Advance Notice of Proposed Rulemaking (ANPR) and 
Comments on the ANPR

    Over the last 15 years, a number of FHCs have engaged in physical 
commodity activities pursuant to these authorities and the Federal 
Reserve has gained supervisory experience with the implementation of 
these restrictions. In addition, the Federal Reserve has monitored the 
connection between authorized physical commodity activities and 
financial activities, including derivative trading and hedging 
activities. The Board notes that after an initial growth of physical 
commodity activities of FHCs, the level of physical commodity 
activities at FHCs has generally declined.
    In January 2014, as part of an ongoing review of the commodities 
activities of FHCs, the Board sought public comment on a variety of 
issues related to the unique and significant risks of physical 
commodity activities through an ANPR.\38\ In the ANPR, the Board 
invited comment on whether additional prudential restrictions or 
limitations on commodities-related activities were appropriate to 
further mitigate the risks of those activities.
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    \38\ See 79 FR 3329 (Jan. 21, 2014).
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    In light of the potential risks associated with physical commodity 
activities, the ANPR queried whether the current capital and insurance 
requirements adequately account for the degree and types of liabilities 
that would result from physical commodities in the event of an 
environmental catastrophe. The ANPR also sought comment on whether 
FHCs' vendor-approval processes and current industry safety policies 
and procedures are adequate in light of recent environmental 
disasters.\39\
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    \39\ See 79 FR 3329, 3332 (Jan. 21, 2014).
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    Apart from direct and indirect financial liability, the ANPR 
observed that the public confidence in a holding company that was 
engaged in a physical commodity activity could suddenly and severely be 
undermined by an environmental disaster, as could the confidence in the 
company's subsidiary IDI or their access to funding markets. Financial 
companies, and in particular holding companies of IDIs, are 
particularly vulnerable to reputational damage in their banking 
operations. As a result, a catastrophic event involving an FHC could 
undermine confidence in the FHC's subsidiary bank or may limit its 
access to funding markets until the extent of the FHC's liability is 
assessed.
    The Board received more than 180 unique comments and more than 
16,900 form letters in response to the ANPR from end users of 
commodities (e.g., non-financial entities that use commodities in their 
operations or businesses), trade associations, public interest groups, 
academics, members of Congress, and other individuals. In general, 
comments from individuals, members of Congress and public interest 
groups opposed FHC involvement in physical commodity activities or 
supported additional restrictions on FHC involvement in physical 
commodities. In contrast, comments from end users, FHCs, and banking 
trade organizations were generally supportive of FHC involvement in 
physical commodity activities or opposed additional restrictions on 
these activities. Comments from insurance companies urged the Board to 
consider the differences between insurance companies and FHCs in terms 
of their business models, risks, and regulations.
    Risks of FHC participation in physical commodity activities. 
Commenters that opposed FHC participation in physical commodity markets 
or that favored additional limitations on these activities argued that 
these activities pose risks to FHCs individually and to the financial 
system generally. These commenters generally described risks associated 
with physical commodity activities, including environmental risks, 
catastrophic risks, geopolitical risks (e.g., commodities activities 
conducted in regions experiencing political turmoil), compliance risks 
(e.g., bribery, environmental risks), and supply chain issues. Some of 
these commenters recommended that the Board prohibit trading in or 
ownership of commodities associated with catastrophic risk, strengthen 
prudential safeguards, or require additional capital in connection with 
such activities.
    Many of these commenters expressed concern regarding the ability of 
FHCs to monitor these risks and questioned the ability of FHCs to 
insure or hedge against these risks. Some commenters argued that FHCs 
face a challenge in monitoring commodities risks because of the diverse 
nature of commodities activities and the number of federal agencies 
involved in commodities regulation. Some commenters contended that 
regulators face these same challenges in monitoring commodities risks. 
Those opposed to FHC participation in physical commodity markets 
expressed concern that excessive speculation in commodities markets, 
which they attributed in part to FHC involvement in these markets, 
causes market distortions.
    Commenters that opposed FHCs engaging in physical commodity 
activities or that favored additional limitations on such activities 
expressed concern that FHCs have conflicts of interest in dealing with 
customers and enjoy an unfair competitive advantage. These commenters 
cited news articles alleging market manipulation by certain FHCs in the 
aluminum and copper markets. Some commenters also argued that the 
ability of FHCs to make proprietary trades and purchases of physical 
commodities may conflict with the interests of their customers. These 
commenters argued that FHCs may provide less favorable terms on 
products and services to customers when those customers compete with 
FHCs in the physical commodity markets. Finally, some commenters stated 
that the ability of FHCs to trade in physical commodity markets and own 
physical commodities provides an opportunity for FHCs to use 
information gleaned from their trading activities to manipulate 
financial markets.
    Commenters in favor of FHC participation in the physical commodity 
markets or opposed to additional restrictions on these activities 
argued that FHC participation in these markets provides valuable and 
hard-to-replace services to end users of commodities. Some commented 
that FHCs were desirable counterparties in these markets because FHCs 
are well capitalized, well regulated, and familiar with their 
customers' businesses. Commenters commonly argued that the ability of 
FHCs to offer bespoke hedging arrangements to customers would not be 
possible without their participation in physical commodity activities. 
Commenters also cautioned that costs for end users would increase if 
FHCs exited physical commodity markets, including costs to 
municipalities and retail purchasers of commodities.
    Some commenters contended that FHC involvement in physical 
commodity activities enhances liquidity and efficiency in physical 
commodity markets. Multiple commenters cited a correlation between 
recent reductions in wholesale power sales in California with the exit 
of certain FHCs from those markets. Commenters supportive of FHC 
participation in physical commodity activities stated that there was 
not sufficient evidence to substantiate the risks described in the 
ANPR. They responded by distinguishing events cited in the ANPR, like 
the Deepwater Horizon oil spill, from the exposures commonly faced by 
commodity traders both in terms of the extent of potential damages from 
an incident and the potential to be held financially

[[Page 67225]]

responsible for such incidents. More specifically, these commenters 
expressed confidence that adequate insurance generally was available or 
that the FHC corporate structure offered adequate protection against 
legal liability. Many FHCs and banking trade organizations argued that 
FHCs could manage risks arising from physical commodity activities 
through a robust risk-management framework that is tailored to specific 
categories of risk. Finally, commenters in favor of FHC participation 
in these activities regarded the reputational risks associated with 
physical commodities as being either not substantial or not unique to 
commodities.
    Complementarity of Complementary Commodity Activities. Multiple 
commenters argued that physical commodity activities conducted in 
connection with derivatives activities are complementary to financial 
activities for the reasons cited in the Board's orders. For example, 
commenters argued that physical commodity activities conducted pursuant 
to the complementary authority better enable FHCs to fulfill their 
obligations under commodity derivatives contracts and to net physical 
and financial contracts by allowing physical settlement.\40\
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    \40\ SIFMA Comment Letter at 28-30.
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    Other commenters believed that physical commodity activities are 
not complementary to financial activities. These commenters argued that 
the scope of complementary commodity activities exceeds Congress's 
intent for complementary authority, which they assert envisioned low-
risk activities such as publishing travel magazines. Some commenters 
argued that FHCs should only be permitted to engage in banking 
activities.
    Merchant Banking Authority. Some commenters supported imposing 
additional restrictions on merchant banking activities, including 
expanding the range of actions that would constitute routine management 
and shortening investment holding periods. Commenters supportive of 
additional restrictions on merchant banking activities argued that 
these activities pose many of the same risks to safety and soundness 
and financial stability that are posed by complementary commodity 
activities and section 4(o) grandfather authority, such as 
environmental risks, reputational risks, geopolitical risks, compliance 
risks, and supply chain issues.
    In contrast, other commenters urged the Board not to place 
additional restrictions on merchant banking investments for several 
reasons. First, they argued that merchant banking authority reflects a 
considered Congressional determination that accounted for both the 
benefits and the risks of these activities and determined the 
appropriate balance of restrictions on merchant banking activities. 
Commenters contended that additional restrictions on merchant banking 
investments would undermine the benefits of merchant banking activities 
and hamper economic growth by, for example, reducing access to seed 
capital for some small-to-medium-sized businesses. Some commenters 
maintained that current regulatory and risk-management safeguards are 
adequate to prevent or limit risks of merchant banking activities to 
financial institutions. In support of this position, some pointed to 
the lack of significant liability resulting from past merchant banking 
activities. Some commenters argued that imposing further restrictions 
on merchant banking could increase risks to FHCs by preventing FHCs 
from taking over routine management functions when necessary to avoid 
significant loss, and by preventing FHCs from diversifying their 
investment portfolios through merchant banking investments. Other 
commenters argued that if FHCs are given an insufficient investment 
horizon there is a greater likelihood that they will be forced to exit 
their investments at a loss in order to comply with holding period 
requirements.

II. Description of Proposed Rule

    Based on its review of comments and additional analysis, the Board 
invites public comment on a proposal to (i) adopt additional 
limitations on physical commodity activities conducted pursuant to the 
complementary activity authority in section 4(k)(1)(B) and clarify 
certain existing limitations on those activities to reduce potential 
risks these activities may pose to the safety and soundness of FHCs and 
their depository institutions; (ii) amend the Board's risk-based 
capital requirements to increase the requirements associated with 
physical commodity activities and merchant banking investments in 
companies engaged in physical commodity activities to better reflect 
the potential risks of legal liability associated with a catastrophic 
event involving these physical commodity activities; (iii) rescind the 
findings underlying the Board orders authorizing certain FHCs to engage 
in energy management services and energy tolling under complementary 
authority and provide firms currently authorized to conduct these 
activities a transition period to unwind or divest these activities; 
(iv) remove copper from the list of metals that BHCs are permitted to 
own and store as an activity closely related to banking under section 
4(c)(8) of the BHC Act and Regulation Y; and (v) increase transparency 
regarding the physical commodity activities of FHCs through more 
comprehensive regulatory reporting. The Board invites public comment on 
all aspects of this proposal, including in particular the issues 
identified below.

A. Scope of Permissible Physical Commodity Activities

1. Level of Complementary Commodity Activities Permitted
    As a condition of approving notices filed by FHCs to engage in 
physical commodity trading, the Board limited the market value of the 
commodities an FHC could hold under complementary authority to an 
aggregate of 5 percent of the FHC's consolidated tier 1 capital. The 
Board imposed this limit to reduce the safety and soundness risks of 
holding physical commodities, which include unique risks such as legal 
and environmental risks described above as well as operational risks 
associated with the storage and transportation of physical products 
(e.g., delay of delivery, loss of product).
    In addition to complementary authority, FHCs and their subsidiaries 
may hold physical commodities under other authorities. For example, the 
Office of the Comptroller of the Currency (OCC) has permitted certain 
national banks to hold physical commodities to hedge customer driven, 
bank-permissible derivative transactions \41\ and BHCs may take 
possession of physical commodities provided as collateral in 
satisfaction of debts previously contracted in good faith.\42\ As some 
commenters argued, holding physical commodities presents unique safety 
and soundness risks to a banking organization regardless of the 
authority under which the commodity is held or the entity within the 
organization that holds the commodities.\43\
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    \41\ See 12 U.S.C. 24(7); see, e.g., OCC Interpretive Letter No. 
935 (May 14, 2002).
    \42\ 12 U.S.C. 1843(c)(2); 12 CFR 225.22(d)(1).
    \43\ Letter from Senator Carl Levin dated April 16, 2014; Senate 
Permanent Subcommittee on Investigations, Wall Street Bank 
Involvement with Physical Commodities, 10, 390-396 (Nov. 20, 2014) 
(PSI Report); see also OCC Banking Circular 277 at 24 (noting the 
potential additional risks associated with physical hedging 
activities). In a comment letter on the ANPR dated December 17, 
2014, Senator Carl Levin, then-Chairman of the Subcommittee, 
requested that the PSI Report be added to the administrative record 
for the ANPR.

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[[Page 67226]]

    To address the potential that the Board's 5 percent limit may be of 
limited value in addressing the level and risks of physical commodity 
activities of FHCs because FHCs also rely on other authorities to 
conduct these activities, the Board is proposing to account for 
physical commodities held by the consolidated banking organization 
under a broader range of authorities within the 5 percent limit on 
physical commodity trading that an FHC may conduct under complementary 
authority. The proposed tighter limit would better account for the 
risks that activities involving physical commodities pose to the 
consolidated organization.\44\
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    \44\ An increase in the commodity derivatives business of a 
national bank that is a subsidiary of an FHC may increase the amount 
of physical commodities the national bank is able to hold as part of 
its commodity hedging activities as well as the capital requirements 
of the bank and FHC. See OCC Bulletin 2015-35 (Aug. 4, 2015) 
(limiting physical hedging activities to 5 percent of the notional 
value of the bank's derivatives that are in that same particular 
commodity and allow for physical settlement within 30 days). By 
including the amount of physical commodities held at the national 
bank within the proposed 5 percent limit, the proposed limit also 
would ensure that the amount of physical commodities the FHC is able 
to hold under complementary authority does not increase along with 
any increase in the amount of physical commodities held at the 
national bank.
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    Specifically, the proposal would prohibit an FHC from purchasing, 
selling, or delivering physical commodities pursuant to its authority 
to engage in physical commodity trading under section 4(c)(8) or 
4(k)(1)(B) if the market value of physical commodities owned by the FHC 
and its subsidiaries under any authority, other than authority to 
engage in merchant banking activities, similar investment authority for 
insurance companies, or authority to acquire assets or voting 
securities held in satisfaction of debts previously contracted, exceeds 
5 percent of the consolidated tier 1 capital of the FHC.\45\ The 
proposal would provide FHCs with two years from the effective date of 
this rule to conform to the revised 5 percent cap.
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    \45\ Consistent with the existing notice requirements of FHCs 
engaging in physical commodity trading, the proposal also would 
require an FHC to notify the Board if, on a consolidated basis, the 
market value of physical commodities owned by the FHC exceeds 4 
percent of the consolidated tier 1 capital of the FHC. See, e.g., 
2003 Citi Order.
---------------------------------------------------------------------------

    Under the proposal, the cap on an FHC's physical commodity trading 
activities would be calculated based on physical commodities the FHC 
holds on a consolidated basis. While it would not restrict the ability 
of a subsidiary to engage in a physical commodity activity pursuant to 
any authority other than complementary authority, it would limit the 
authority of the FHC to expand its physical commodity trading 
activities based on complementary authority if the FHC already engages 
in a substantial amount of physical commodity activities under other 
authorities. The proposal would exclude from the calculation of the cap 
physical commodity activities of portfolio companies held under 
merchant banking authority or related to satisfaction of debts 
previously contracted because activities under these authorities are 
temporary and, because of other restrictions, may be difficult for an 
FHC to monitor and control. Finally, because insurance company 
investments are regulated under state insurance law, companies held 
under section 4(k)(4)(I) are not a part of the Board's current 
proposal.\46\
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    \46\ Accord Letter from Teachers Insurance and Annuity 
Association of America dated April 16, 2014; letter from the 
American Council of Life Insurers dated April 16, 2014.
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2. Clarification of Prohibitions on Certain Operations
    As explained above, owners and operators of facilities and vessels 
that extract, process, store or transport certain physical commodities 
may be liable for damages and cleanup costs associated with a release 
of the physical commodity. Because this liability can be substantial, 
the Board prohibited FHCs from owning, operating, or investing in 
facilities for the extraction, transportation, storage, or distribution 
of commodities as part of complementary authority.\47\
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    \54\ For example, an FHC may face liability under certain 
states' environmental laws based on its ownership of the hazardous 
substance or on hiring third parties to deliver the substance. See 
supra notes 12-17 and corresponding text.
    \47\ See, e.g., 2003 Citi Order. The Board's orders also 
prohibit the FHC from processing, refining, or otherwise altering 
commodities, and clarify that in conducting its physical commodity 
trading, the FHC will be expected to use appropriate storage and 
transportation facilities owned and operated by third parties.
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    The proposal would codify in Regulation Y this limitation and 
strengthen restrictions designed to ensure that FHCs are not found to 
``operate'' an entity engaged in physical commodity activities for 
purposes of Federal and state environmental laws. These restrictions 
prohibit (1) participation in the day-to-day management or operations 
of the facility, (2) participation in management and operational 
decisions that occur in the ordinary course of the business of the 
facility, and (3) managing, directing, conducting or providing advice 
regarding operations having to do with the leakage or disposal of a 
physical commodity or hazardous waste or involvement in decisions 
related to the facility's compliance with environmental statutes or 
regulations, including any law or regulation referenced in the proposed 
definition of covered physical commodity (discussed below). The 
proposed list of actions is not meant to be exhaustive; an FHC is 
expected to take other steps as appropriate to limit the types of 
actions that potentially could impose environmental liability on the 
FHC or otherwise suggest that the FHC is unduly involved in the 
activities of third parties.
    Question 1. Does the scope of the proposed list of prohibited 
actions appropriately protect against an FHC being found to ``operate'' 
a facility or vessel under Federal and state environmental law? Please 
explain your answer. Would it be more or less appropriate for the 
regulation instead to prohibit any FHC involvement that could subject 
the FHC to any such liability as operator under environmental law 
without describing what types of actions could lead to the liability, 
and why?

B. Risk-Based Capital Requirements for Covered Physical Commodities

1. Overview
    The Board is proposing to amend its risk-based capital rule to 
better reflect the risk of legal liability that an FHC may incur as a 
result of its physical commodity activities. The resulting increase in 
capital requirements would be reflected in both the standardized 
approach and the advanced approaches risk-based capital ratios, and 
would be in addition to any existing capital requirements relating to 
market risk or operational risk applicable to the assets associated 
with physical commodity activities of an FHC or relating to existing 
counterparty credit risk applicable to financial transactions 
associated with such activities.
    As described in more detail below, covered physical commodities are 
those with the highest likelihood of exposing an FHC to legal liability 
under Federal or state environmental laws. The proposal would not 
change the risk-based capital treatment of other physical commodities. 
It would moderately increase the risk weight for covered physical 
commodities that are held as part of a commodity trading activity that 
would be permissible under section 4(k) of the BHC Act, and would 
significantly increase the risk weight for covered physical commodities 
that an FHC owns as part of an activity authorized solely under section 
4(o) of the BHC Act. The Board is proposing a higher risk weight

[[Page 67227]]

for activities permitted to be conducted solely under section 4(o) 
because these activities contain the highest legal liability and 
reputational risks (e.g., storing, refining, extracting, transporting 
or altering). The proposed risk weight for a merchant banking 
investment in a company engaged in covered physical commodity 
activities would depend on the nature of those activities.
    The proposed capital requirements would apply only to activities in 
physical commodities that are substances covered under Federal or 
relevant state environmental law (covered physical commodities). These 
physical commodities carry the greatest potential liability under 
relevant environmental laws. The proposed definition specifically 
identifies the Federal environmental laws--CERCLA, OPA, CAA, and CWA--
likely to impose such liability.\48\ However, the proposed definition 
does not name individual state environmental laws. Rather, an FHC would 
be required to identify on a state-by-state basis the physical 
commodities it owns that are not covered substances under the 
enumerated Federal laws. It would then be required to determine whether 
the physical commodities it owns in a particular state are subject to 
liability under that state's environmental laws. This approach is 
intended to limit an FHC's compliance burden to only those commodities 
and jurisdictions relevant to the activities actually conducted by the 
FHC, while helping to ensure the FHC understands the range of its 
riskiest physical commodity activities and the breadth of state 
environmental laws to which the FHC may be subject.
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    \48\ A physical commodity would be a covered physical commodity 
under the proposed definition if the commodity is a covered 
substance under the identified Federal environmental laws regardless 
of whether the commodity is held in the United States. Applying the 
Federal environmental law framework to all physical commodities held 
outside the United States acknowledges the risk that FHCs may be 
held liable under similar laws for damages or cleanup costs 
associated with an environmental catastrophe that occurs outside of 
the United States without requiring FHCs to identify the physical 
commodities and activities for which any foreign jurisdiction may 
impose liability.
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    FHCs may be subject to legal liability in an amount much greater 
than the value of the physical commodities they own. An environmental 
catastrophe linked to an FHC's physical commodity activities could 
suddenly and severely undermine public confidence in the FHC and any of 
its subsidiary IDIs, limiting its access to funding markets until the 
market assesses the extent of the FHC's liability. Both environmental 
risks and reputational risks are higher for activities permissible only 
under section 4(o) grandfather authority than for activities 
permissible as part of physical commodity trading under complementary 
authority.\49\ As noted above, section 4(o) grandfather authority 
permits direct ownership or operation of facilities that manage, 
refine, store, extract, transport, or alter covered physical 
commodities. These activities increase the potential that an FHC will 
be held liable for damages from an environmental catastrophe involving 
covered physical commodities. To help address these risks, as well as 
the inherent uncertainty in valuing the potential damages associated 
with a catastrophe, the proposal assigns a 1,250 percent risk weight--
the highest risk weight currently specified by the Board under the 
standardized approach \50\--to the market value of all covered physical 
commodities permitted to be owned only under section 4(o) grandfather 
authority.\51\ The proposal also assigns a 1,250 percent risk weight to 
the original cost basis (i.e., cost basis gross of accumulated 
depreciation and asset impairment) of section 4(o) infrastructure 
assets, which are any non-commodity on-balance-sheet assets owned 
pursuant to section 4(o) grandfather authority (e.g., pipelines, 
refineries). The proposal bases the capital requirement on the original 
cost basis of a 4(o) infrastructure asset rather than its carrying 
value because the risk of legal liability does not decline over the 
life of the infrastructure asset. The proposed capital requirement for 
4(o) infrastructure assets is intended to address the risk of legal 
liability resulting from the unauthorized discharge of a covered 
substance in connection with the infrastructure asset. The proposed 
1,250 percent risk weight is not intended to require capital against 
the full amount of legal liability and reputational harm that might 
result from a catastrophic event, which can vary significantly 
depending on the nature and extent of the environmental disaster and 
could be extremely large. Rather, the risk weight is intended to 
reflect the higher risks of physical commodity activities permissible 
only under section 4(o) grandfather authority without also making the 
activities prohibitively costly by attempting to capture the risks of 
the largest environmental catastrophes.
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    \49\ The proposal references activities engaged in by the FHC 
under section 4(o) grandfather authority, including activities of 
the FHC's subsidiaries. An FHC owning a covered physical commodity 
under section 4(o) grandfather authority may treat the commodity as 
a section 4(k) permissible commodity and apply a 300 percent risk 
weight if it meets certain requirements described below.
    \50\ See, e.g., 12 CFR 217.38, .41(c)(1), and .42(a)(1).
    \51\ The Board's regulatory capital rule applies a 1,250 percent 
risk weight to certain exposures that pose a high degree of risk to 
the banking organization and regarding which the banking 
organization may have difficulty determining the extent of the 
losses. For example, it applies a 1,250 percent risk weight to 
securitization exposures that raise supervisory concerns with the 
subjectivity involved in valuation of the exposure and in instances 
where the institution is not able to demonstrate a comprehensive 
understanding of the potential losses that could result from a 
default or partial default of the exposure. Similarly, the proposed 
1,250 percent risk weight for section 4(o) permissible commodities 
and section 4(o) infrastructure assets is intended to address both 
the risk of those activities and the difficulties in determining the 
legal liability exposure to an FHC from its section 4(o) permissible 
commodities. See 12 CFR 217.41(c)(1) and .42(a)(1); see also 78 FR 
62018, 62113 and 62117 (Oct. 11, 2013).
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    The proposal would assign a risk weight of 300 percent to covered 
commodities held pursuant to section 4(k) permissible physical 
commodity trading.\52\ The proposed 300 percent risk weight is designed 
to help ensure that FHCs engaged in commodity trading have a level of 
capitalization for such activities that is roughly comparable to that 
of nonbank commodities trading firms. Because the risks of an activity 
generally are independent of the authority under which an FHC conducts 
the activity, the proposal would also assign a 300 percent risk weight 
to physical commodity activities conducted under section 4(o) 
grandfather authority that would be permissible physical commodity 
trading under complementary authority.
---------------------------------------------------------------------------

    \52\ Cf. 12 CFR 217.52(b)(5).
---------------------------------------------------------------------------

    As part of the conditions for an amount of a covered physical 
commodity owned by an FHC engaged in physical commodity activities 
under section 4(o) grandfather authority to be assigned a 300 percent 
risk weight, the market value of the amount, when aggregated with the 
market value of almost all of the physical commodities owned by the FHC 
that the proposal would not already subject to a 1,250 percent risk 
weight, must not exceed 5 percent of the consolidated tier 1 capital of 
the FHC. The proposal refers to this aggregate amount as the ``section 
4(k) cap parity amount'' and, like the proposal's modifications to the 
5 percent cap on physical commodity trading, the section 4(k) cap 
parity amount would exclude amounts of physical commodities owned 
pursuant to merchant banking authority, similar insurance company 
investment authority, and authority to acquire assets and voting 
securities in satisfaction of debts previously contracted. The proposal 
would assign a 1,250 percent risk weight to this excess amount of 
section 4(k) permissible

[[Page 67228]]

commodities for the reasons the Board is proposing to tighten the 5 
percent of tier 1 capital limit on physical commodity trading conducted 
under complementary authority. Physical commodities that are not 
covered physical commodities or that are held under authorities other 
than section 4(o) grandfather authority would not receive additional 
capital requirements.\53\
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    \53\ In addition, in order for an amount of a covered physical 
commodity owned under section 4(o) grandfather authority to be 
considered an amount of section 4(k) permissible commodities, the 
commodity must be one for which a derivative contract has been 
authorized for trading on a U.S. futures exchange by the CFTC 
(unless specifically excluded by the Board) or another commodity 
that has been specifically authorized by the Board under 
complementary authority (approved physical commodity). The FHC also 
must have purchased the amount of the commodity in the spot market 
or own the amount for the purpose of taking or making physical 
delivery of the commodity to settle a forward, option, swap, or 
similar contract. Finally, the FHC must have not stored, extracted, 
produced, transported, or altered that amount while the FHC owned 
the commodity but instead must have hired reputable third parties to 
do so.
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    Question 2. To the extent the Board's proposed approach to the 
section 4(k) cap parity amount creates incentives for an FHC to conduct 
physical commodity activities under authorities that would result in 
lower capital requirements, should the Board require that an FHC 
include physical commodity activities conducted under authorities that 
receive less than a 300 percent risk weight first for purposes of 
determining the excess amount over the 4(k) cap parity amount?
    FHCs may also own companies under merchant banking authority that 
are engaged in physical commodity activities, including activities that 
involve physical commodity trading, storage, transportation, and 
refining. The proposal refers to investments in portfolio companies 
engaged in activities involving covered physical commodities as covered 
commodity merchant banking investments. Because these companies may be 
subject to similar types and amounts of liability as FHCs engaging in 
these activities directly, the proposal generally would apply the same 
risk weights to covered commodity merchant banking investments as the 
proposal would apply to covered physical commodities used in physical 
commodity activities under complementary authority and section 4(o) 
grandfather authority, respectively. Moreover, the proposal would not 
permit covered commodity merchant banking investments to receive the 
100 percent risk weight assigned to non-significant equity 
exposures.\54\
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    \54\ Under the Board's current standardized approach, merchant 
banking investments and certain other types of equity exposures must 
be assigned a 100 percent risk weight to the extent that the 
aggregate carrying value of the equity exposures does not exceed 10 
percent of the Board-regulated institution's total capital. 12 CFR 
217.52(b)(3).
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    Accordingly, the proposal would apply a 1,250 percent risk weight 
to an FHC's covered commodity merchant banking investment unless all of 
the physical commodity activities of the portfolio company are physical 
commodity trading activities permissible under complementary authority 
(commodity trading portfolio company).\55\ If all of the physical 
commodity activities of the portfolio company are permissible under 
complementary authority and the securities of the portfolio company are 
publicly traded, a 300 percent risk weight would be applied to the 
FHC's covered commodity merchant banking investment in the commodity 
trading portfolio company. Consistent with the standardized approach to 
equity investments not subject to a 100 percent risk weight, the 
proposal would assign a 400 percent risk weight to equity investments 
in commodity trading portfolio companies that are not publicly traded. 
If an FHC engages in any other physical commodity activity, including 
those that would be permissible only under the authority provided in 
section 4(o), the FHC must apply the 1,250 percent risk weight to that 
merchant banking investment.
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    \55\ Similar to the proposed restrictions on the 300 percent 
risk weight for covered physical commodities held under section 4(o) 
authority, a company would be considered a physical commodity 
trading company if its activities involving covered physical 
commodities consisted only of purchasing covered physical 
commodities (that are approved physical commodities) in the spot 
market and/or taking or making physical delivery of such commodities 
to settle forwards, options, swaps, or similar contracts. However, a 
portfolio company would be considered a commodity trading portfolio 
company regardless of the amount of covered physical commodities it 
held; as discussed above, obtaining daily information on the amounts 
of a portfolio company's commodities holdings or placing limits on 
the commodities activities of the company may be inconsistent with 
the more limited, generally-permissible involvement of an FHC in its 
portfolio companies.
---------------------------------------------------------------------------

    These risk weights are designed to address the risks associated 
with merchant banking investments generally, the potential reputational 
risks associated with the investment, and the possibility that the 
corporate veil may be pierced and the FHC held liable for environmental 
damage caused by the portfolio company. (A somewhat higher risk weight 
would be assigned to privately traded portfolio companies in 
recognition of the risk that an FHC may not be able to gain access to 
markets for a privately held portfolio company after an environmental 
catastrophe involving the portfolio company).
    However, nonfinancial companies use covered physical commodities to 
operate businesses otherwise unrelated to physical commodities. For 
example, grocery stores purchase gasoline to transport produce and a 
business or a warehouse may purchase oil for heating. To ensure the 
proposal would not apply to all merchant banking investments that own 
physical commodities but that are not engaged in a physical commodities 
business, the proposal would attempt to define and exempt activities of 
commodity end users from physical commodity activities. Under the 
proposal, a portfolio company would not be subject to these additional 
capital requirements as a covered commodity merchant banking investment 
solely because the portfolio company owns or operates a facility or 
vessel that purchases, stores, or transports a covered physical 
commodity only as necessary to power or support the facility or vessel. 
For example, an investment in a company that engages only in one 
physical commodity activity--oil storage--and does so solely for the 
purpose of heating its facility and operating machines within the 
facility would not be a covered commodity merchant banking investment. 
The Board is seeking comment on whether the proposed exclusion and its 
scope are appropriate and, if so, whether the proposed definition of 
the exclusion is workable.
    Question 3. Should investments in certain portfolio companies, such 
as end users of covered physical commodities, be exempted from 
additional capital requirements as a covered commodity merchant banking 
investment? If an exemption is appropriate, what should be the scope of 
the exemption?
    The Board is also considering the appropriate risk-based capital 
treatment for all merchant banking investments. For example, the Board 
is considering whether to continue to include merchant banking 
investments as ``non-significant equity exposures'' under the Board's 
standardized approach to risk-based capital rules.
    Question 4. How are the risks associated with merchant banking 
investments in companies involved in physical commodity activities 
different from or similar to other merchant banking investments? Do the 
Board's current capital requirements adequately capture the risks of 
merchant banking investments not covered under the proposal? If not, 
what additional capital requirements should be applied to merchant 
banking investments

[[Page 67229]]

generally? For example, is it appropriate to continue to include 
merchant banking investments as ``non-significant equity exposures'' 
under the Board's risk-based capital rules?
2. Calculation of Exposure Amount for Covered Physical Commodities
    Under the proposal, the proposed risk weights would be multiplied 
by (1) the market value of all section 4(o) permissible commodities; 
(2) the original cost basis of section 4(o) infrastructure assets; (3) 
the market value of section 4(k) permissible commodities; and (4) the 
carrying value of an FHC's equity investment in companies that engage 
in covered physical commodity activities to determine an FHC's risk-
based capital requirements for covered physical commodity activities.
    An FHC would be required to calculate the market value of its 
covered physical commodities based on the quantity of each covered 
physical commodity multiplied by the market price of the covered 
physical commodity.\56\ The proposed measure of exposure is designed to 
reflect an FHC's ongoing level of involvement in covered physical 
commodity activities, and to be relatively stable in the face of market 
price movements and individual holding amounts, as explained below. The 
quantity of a covered physical commodity would be measured as a daily 
average of the amount of each covered physical commodity held by an FHC 
over the previous calendar quarter.\57\ A measurement based on an 
average should reduce the potential for variations in capital 
requirements that could result from using a point-in-time measurement. 
Furthermore, use of a daily, as opposed to a weekly or monthly, average 
should mitigate fluctuations in the quantities of covered physical 
commodities held by an FHC that could misrepresent the FHC's holdings 
over a longer period.
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    \56\ An FHC that owns section 4(k) permissible commodities 
pursuant to section 4(o) grandfather authority would also be 
required to calculate the market value of other physical commodities 
as part of the proposed section 4(k) cap parity amount.
    \57\ To calculate the quantity of a covered physical commodity, 
an FHC would be required to apply the appropriate unit of 
measurement customarily used for each covered physical commodity. 
Customary units of measurement generally are reflected through 
industry convention and the actions of market participants. For 
example, physical commodity activities involving oil and oil 
products typically use barrels as the unit of measurement; 
transactions involving liquid natural gas would measure quantity in 
metric tons or gallons.
---------------------------------------------------------------------------

    The calculation of the market price of a covered physical commodity 
would be determined as a rolling average of the month-end, end-of-day 
spot prices for the covered physical commodity over the previous 60-
month period. If the market price of a covered physical commodity 
(e.g., oil) varies based on type, grade, and/or classification, the FHC 
would calculate the average market price for each classification as a 
distinct covered physical commodity. The Board notes that FHCs should 
have mechanisms in place to monitor the prices of the commodities held 
under complementary authority and grandfather authority.\58\
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    \58\ FHCs engaging in physical commodity trading currently must 
ensure the market value of commodities held under complementary 
authority does not exceed 5 percent of the FHC's consolidated tier 1 
capital. FHCs engaging in activities under section 4(o) grandfather 
authority must ensure that attributed aggregate consolidated assets 
of the companies held by the FHC pursuant to section 4(o) 
grandfather authority are not more than 5 percent of the total 
consolidated assets of the FHC. 12 U.S.C. 1843(o)(2).
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3. Impact Analysis of Proposed Capital Requirements
    The proposal would not amend the scope of application of the 
Board's capital rules. Therefore, only FHCs conducting complementary, 
section 4(o) grandfather, or merchant banking activities would be 
subject to the proposal. Foreign banking organizations conducting such 
activities in the United States would be subject to the proposal only 
to the extent the Board's capital rules apply to the organizations.
    The Board conducted an analysis of the impact of the proposed 
capital requirements on FHCs and physical commodities markets. In doing 
so, the Board considered the extent of FHC activity in the physical 
commodity markets, the share of exposure and revenue that physical 
commodity activities represent at FHCs, and the impact of the proposed 
capital requirements on an FHC's physical commodity activities relative 
to the existing risk-based capital requirements applicable to FHCs.
    The Board estimates that, across all FHCs that engage in physical 
commodity activities, the proposed capital requirements could increase 
risk-weighted assets as much as $34.0 billion. Assuming an average 
risk-based capital ratio of 12 percent, the proposal could increase the 
amount of capital required to be held to meet regulatory requirements 
by FHCs that engage in physical commodity activities under any 
authority by approximately $4.1 billion in the aggregate. These figures 
are based on (i) FHC-provided categorizations of their physical 
commodity holdings; (ii) FHC-provided estimates of their physical 
commodity holdings that are related to activities permitted solely 
under section 4(o) grandfather authority; and (iii) Board estimates of 
the amount of physical commodity holdings of an FHC that would be 
considered a covered physical commodity under this proposal. This 
estimate assumes that all physical commodities of FHCs would be covered 
physical commodities and therefore subject to the proposed additional 
risk weights.\59\
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    \59\ The impact on capital would be less to the extent that 
physical commodities of FHCs would not be covered physical 
commodities under the proposal.
---------------------------------------------------------------------------

    The estimated increase in risk-weighted assets resulting from the 
proposal would be insignificant (0.7 percent) relative to the total 
risk-weighted assets among FHCs that engage in physical commodity 
activities. The estimated increase relative to market-risk-weighted 
assets of these FHCs (that is, risk-weighted assets attributed to 
trading business) is 7.1 percent. This increase in risk weighting would 
not cause any FHC to breach the minimum capital requirements, and FHCs 
could likely absorb the increase in required capital at the firm level 
if they determine that physical commodity activities are important to 
the firm's overall strategy. However, if FHCs consider their physical 
commodity trading on a standalone basis, the proposed increases in 
capital requirements could make this activity significantly less 
attractive based on its return on capital, and could result in 
decreased activity. Such a reduction in activity is not expected to 
have a material impact on the broader physical commodity markets.
    Information on physical commodity markets, in particular those 
covered by this proposal, is relatively scarce. Nonetheless, it appears 
that the bulk of activity and inventory is conducted and held by non-
Board-regulated entities (such as energy firms and end users of 
physical commodities) rather than FHCs. Information available to the 
Board supports this view, with market participants asserting that, in 
general, FHCs' market shares in physical commodity markets are quite 
low and typically represent less than 1 percent of the market.
    FHCs play a larger, but still limited, role in commodity 
derivatives trading, and a significant portion of FHCs' physical 
commodity activity is related to their commodity derivative trading 
activity. Based on the CFTC Bank Participation Report, the market share 
of U.S. banks in derivative contracts involving physical commodities 
typically ranges from 2 percent to 15

[[Page 67230]]

percent.\60\ Derivatives activity related to non-bank subsidiaries of 
FHCs is estimated to be similar or slightly larger.\61\ Thus, any 
reduction in activity related to financial contracts that may arise 
from the proposal should not materially impact the overall market for 
financial commodity contracts.
---------------------------------------------------------------------------

    \60\ See Bank Participation Reports, available at www.cftc.gov/MarketReports/BankParticipationReports.
    \61\ See CFTC Commitments of Traders Report, available at 
www.cftc.gov/Marketreports/CommitmentsofTraders/index.htm.
---------------------------------------------------------------------------

    With respect to FHCs' merchant banking investment activities, the 
estimated impact of the proposed increased capital requirements appears 
insignificant. The aggregate value of merchant banking investments 
among FHCs is approximately $29 billion.\62\ More granular information 
regarding the proportion of merchant banking investment activity 
attributable to portfolio companies that engage in physical commodity 
activities is not available. Nevertheless, given the small market share 
of FHCs in the physical commodity markets, the Board expects that the 
value of FHC equity investments in portfolio companies that engage in 
physical commodity activities would be significantly less than the 
estimated $29 billion. Accordingly, the proposed increase in capital 
requirements for an FHC's merchant banking investment activity would 
not be expected to have a material impact.
---------------------------------------------------------------------------

    \62\ Data obtained from top-tier domestic holding companies that 
file the FR Y-12 reporting form.
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    Question 5. Does the proposed definition of ``covered physical 
commodity'' sufficiently cover the commodities that pose the greatest 
legal, reputational, and financial risks to an FHC? If not, please 
describe those high-risk commodities that would fall outside the scope 
of the definition.
    Question 6. What, if any, other criteria should the Board consider 
when determining whether a physical commodity poses a risk that the FHC 
would be liable for a catastrophe involving its physical commodity 
activities?
    Question 7. How appropriate are the proposed risk weights for 
covered physical commodities owned as part of an FHC's physical 
commodity trading activities or held by FHCs conducting activities 
solely permitted by section 4(o) grandfather authority and for merchant 
banking portfolio companies engaged in such activities? If not 
appropriately calibrated, what are the shortcomings of the capital 
requirement in capturing catastrophic risk and what other factors 
should the Board consider to calibrate the capital requirements?
    Question 8. What are the operational or practical challenges that 
implementing the proposed formulations for calculating the capital 
requirement would impose?
    Question 9. What, if any, alternative methodologies for calculating 
the quantity of the covered physical commodity should the Board 
consider?
    Question 10. Would the proposed capital requirements provide 
foreign banking organizations engaging in physical commodity 
activities, to the extend these organizations are not already subject 
to the Board's capital rules, with a competitive advantage over FHCs 
organized in the United States that engage in physical commodity 
activities? If so, what are the nature and amount of the competitive 
advantages?
    Question 11. What additional considerations or data should the 
Board consider to calculate the estimated impact of the proposal?

D. The Scope of Permitted Complementary Commodity Activities

1. Background
    In addition to considering whether conduct of the activities by an 
FHC poses a substantial risk to the safety and soundness of depository 
institution subsidiaries of the FHC or the financial system generally, 
in approving each complementary commodity activity, the Board 
considered whether each activity is ``meaningfully connected'' to a 
financial activity such that it complements the financial activity.\63\ 
Currently, twelve FHCs possess authority to engage in physical 
commodity trading, and five of those FHCs also have authority to engage 
in energy management services and energy tolling. For the reasons 
described below, the Board is proposing to rescind the authorization 
for FHCs to engage in energy tolling and energy management services.
---------------------------------------------------------------------------

    \63\ See, e.g., 2003 Citi Order.
---------------------------------------------------------------------------

a. Physical Commodity Trading
    In 2003, the Board determined that physical commodity trading--the 
purchasing and selling of physical commodities in the spot market and 
the taking and making delivery of physical commodities to settle 
derivatives that BHCs were authorized to trade (commodity 
derivatives)--was so meaningfully connected to a financial activity 
that it complemented the financial activity. The Board cited a number 
of reasons for its determination. The Board observed that physical 
commodity trading activities ``flow from the existing financial 
activities of FHCs''--specifically, commodity derivatives activities, 
which are permissible financial activities. Permissible financial 
commodity derivatives trading activities involved derivatives that the 
FHC could terminate, assign, or cash-settle without taking delivery of 
the underlying physical commodity.\64\ Complementary physical commodity 
trading allows an FHC to physically settle the derivatives contract.
---------------------------------------------------------------------------

    \64\ See 12 CFR 225.28(b)(8)(ii)(B)(3)-(4); 2003 Citi Order.
---------------------------------------------------------------------------

    The Board found physical commodity trading to be a complementary 
activity to financial commodities derivatives trading for a number of 
reasons. Physical commodity trading activities would flow from existing 
commodity derivatives activities. Physical commodity trading would 
enhance the ability of FHCs to efficiently provide a full range of 
commodity-related services to their customers; enable FHCs to transact 
more efficiently with customers in a wider variety of commodity markets 
and transaction formats; and enable FHCs to acquire more experience in 
the physical commodity markets and, in turn, improve their 
understanding of, and profitability in, the commodity derivatives 
markets. The Board also noted that diversified financial companies that 
were not at that time BHCs conducted physical commodity trading in 
connection with their commodity derivatives business. For these 
reasons, the Board believed that physical commodity trading was 
complementary to commodity derivatives activities.\65\
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    \65\ See 2003 Citi Order. Commenters to the ANPR also provided 
an additional example of the complementarity of physical commodity 
trading--the ability to net physical and financial contracts under 
the same master agreement and the ability to take physical delivery 
of futures to match financial options. SIFMA Comment Letter at 29-
30.
---------------------------------------------------------------------------

    The Board has not changed its view on the complementarity of these 
trading activities. However, as discussed above, the Board believes 
added limits are appropriate to reduce potential risks to depository 
institution subsidiaries of FHCs or the financial system generally.
b. Energy Management Services and Energy Tolling
    Following a number of changes to the energy industry, the Board 
determined that certain activities involving power plants--energy 
management services and energy tolling--were complementary to a 
financial

[[Page 67231]]

activity.\66\ The Board permitted six FHCs to engage in one or both of 
these activities between December 2007 and June 2010.\67\
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    \66\ The approvals to engage in these activities occurred after 
Federal and state deregulation of the energy industry, the energy 
crisis in the western United States, the growth of independent power 
producers, and the enactment of the Energy Policy Act of 2005, which 
encouraged investment in electricity energy infrastructure. See 
Public Law 109-58 (Aug. 8, 2005); Timothy P. Duane, Regulation's 
Rationale: Learning from the California Energy Crisis, 19 Yale J. on 
Reg. 471 (2002).
    \67\ Only five FHCs are currently permitted to engage in energy 
management services or energy tolling in the United States. One of 
the FHCs approved to engage in energy management services and energy 
tolling--Fortis--was acquired by another FHC after the Board's 
approvals. See Board letter to Robert L. Tortoriello (Dec. 5, 2008).
---------------------------------------------------------------------------

    In January 2014, the ANPR noted that three FHCs that engage in 
physical commodity activities had announced plans to decrease or 
discontinue their involvement in the activities.\68\ These 
developments, although potentially caused by a variety of factors,\69\ 
led the Board to reconsider whether complementary commodity activities 
continued to be so meaningfully connected to a financial activity so as 
to complement the financial activity. Subsequent to the ANPR, many of 
these plans were realized and discontinuance of physical commodity 
activities became more pronounced for FHCs engaging in energy tolling 
and energy management activities.\70\ Of the five FHCs that currently 
have the authority to engage in either energy management services or 
energy tolling, at least four have discontinued these activities in the 
U.S.\71\
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    \68\ 79 FR 3329, 3334 (Jan. 21, 2014).
    \69\ See id.; SIFMA Comment Letter at 29.
    \70\ See, e.g., Mercuria Closes Acquisition of J.P. Morgan Chase 
Physical Commodities Business, Mercuria (March 10, 2014), available 
at http://www.mercuria.com/media-room/business-news/mercuria-closes-acquisition-jp-morgan-chase-physical-commodities-business; Morgan 
Stanley Completes Sale of Global Oil Merchanting Business to 
Castleton Commodities International LLC, Morgan Stanley (November 2, 
2015), available at https://www.morganstanley.com/press-releases/21e458d2-0231-493b-a95a-5084c3b4c701.
    \71\ See, e.g., Ron Bousson, Timeline: Deutsche Bank's 
Commodities Operations, Reuters (December 5, 2013), available at 
http://www.reuters.com/article/us-deutsche-commodities-timeline-idUSBRE9B40UZ20131205?mod=related&channelName=PersonalFinance; 
Sempra Energy, RBS Complete Sale of Commodities Joint Venture North 
American Assets to JP Morgan Unit, Sempra Energy (December 1, 2010), 
available at http://investor.shareholder.com/sre/releasedetail.cfm?ReleaseID=534828; Martin Arnold & Daniel Schafer, 
Barclays to Wind Down Commodities Trading, Financial Times (April 
20, 2014), available at http://www.ft.com/cms/s/0/5761ec06-c707-11e3-aa73-00144feabdc0.html; Mercuria Closes Acquisition of J.P. 
Morgan Chase Physical Commodities Business, Mercuria (March 10, 
2014), available at http://www.mercuria.com/media-room/business-news/mercuria-closes-acquisition-jp-morgan-chase-physical-commodities-business.''
---------------------------------------------------------------------------

    Energy management services. Under an energy management agreement, 
an FHC acts as an energy manager that provides transactional, advisory 
and administrative services to a power plant owner.\72\ An energy 
manager may also provide financial intermediation services. An energy 
manager performs administrative tasks related to the sale of power and 
the delivery of fuel to run the plant, and may enter into fuel and 
power contracts for the owner that satisfy the owner's criteria, 
including by purchasing fuel from a third party in order to resell it 
to the power plant owner and by purchasing the energy output of the 
power plant for release in the market. An FHC, as energy manager, also 
may enter into hedging transactions with the owner to manage fuel costs 
and energy prices. The energy manager generally is compensated based on 
a percentage of the difference between the delivered fuel prices and 
the realized power revenues (the ``spark spread'') with a guaranteed 
minimum compensation amount.
---------------------------------------------------------------------------

    \72\ These services are typically outlines in an energy 
management plan and risk-management policy that governs how the 
power plant should be operated. E.g., 2007 Fortis Order.
---------------------------------------------------------------------------

    In seeking approval to conduct energy management services, FHCs 
argued that these services may help a power plant owner develop and 
refine the power plant's risk-management policies and optimize the 
plant owner's decisions about when to operate, which are heavily 
influenced by fuel costs, power prices, and the financing available. 
FHCs also argued that these activities would improve the FHCs' 
understanding of energy markets and their ability to serve as an 
effective competitor in the derivatives markets.
    Energy Tolling. The FHCs that currently engage in energy management 
services also engage in energy tolling. A primary difference between 
energy tolling and energy management is that the former permits the 
``toller'' to act as principal for its own account rather than act as 
the agent, or otherwise for the benefit, of the power plant owner. 
Under both energy management and tolling, an FHC generally is 
responsible for monitoring day-to-day market conditions to determine 
when to operate the plant and when to provide the necessary fuel. 
Unlike the typical energy management agreements, pursuant to a tolling 
agreement, an FHC may direct--rather than advise--the owner to operate 
the plant so that the toller--rather than the owner--may capture the 
spark spread.\73\ The compensation structure of a tolling agreement 
reflects the FHC's role as principal: The toller pays the owner a fixed 
periodic payment in exchange for the right to all or part of the 
plant's power output and provides the owner with a marginal payment 
based on the amount of energy produced to compensate for the costs of 
running the plant.
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    \73\ The Board compared a tolling agreement to a call option 
with the strike price being the cost of producing that amount of 
power. See 2008 RBS Order. A tolling agreement also has been 
compared to an operating lease agreement because it allows the 
toller the exclusive right to use the plant during the term of the 
agreement and the benefits of ownership without the capital 
investment. See Further Definition of ``Swap,'' ``Security-Based 
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping, 77 FR 48207, 48242 
(Aug. 13, 2012) (citing the letter from Mary Anne Mason, 
HoganLovells LLP on behalf of Southern California Edison Company, 
Pacific Gas and Electric Company and San Diego Gas and Electric 
Company, dated July 22, 2011 (2011 CA Utilities Letter); Regulating 
Financial Holding Companies and Physical Commodities: Hearing Before 
the S. Subcomm. in Fin. Insts. and Consumer Prot. (Jan. 15, 2014) 
(testimony of Norman Bay, Director, Office of Enforcement, Federal 
Energy Regulatory Commission at 15), available at http://www.banking.senate.gov/public/index.cfm/2014/1/regulating-financial-holding-companies-and-physical-commodities.
---------------------------------------------------------------------------

2. Reconsideration of the Approval of Energy Management and Tolling as 
Complementary Activities
    The Board is reconsidering whether energy management services and 
energy tolling activities are complementary to a financial activity. 
Over time, these two activities have not appeared to be as directly or 
meaningfully connected to a financial activity as is physical commodity 
trading.
    Physical commodity trading provides FHCs with an alternative method 
of settling BHC-permissible commodity derivatives.\74\ Unlike physical 
commodity trading, energy management services and energy tolling do not 
directly support and are not directly related to engaging in otherwise 
BHC-permissible commodity derivatives activities or other financial 
activities.
---------------------------------------------------------------------------

    \74\ See 2003 Citi Order.
---------------------------------------------------------------------------

    Moreover, the expected benefits of permitting these activities do 
not appear to have been realized over time. For example, it was 
originally expected that allowing FHCs to conduct energy management 
services and energy tolling activities would allow FHCs to gain 
additional information to help manage commodity-related risks.\75\ It 
is not clear that energy management services or energy tolling 
significantly improve an FHC's understanding of commodity derivatives 
markets since--in order to engage in energy management services or 
energy tolling--an FHC must already have a thorough understanding of 
commodity derivatives markets. Moreover, FHCs that have divested their 
physical commodity business lines continue to engage in commodity

[[Page 67232]]

derivatives trading and termination of their energy management and 
energy tolling activities is not expected to negatively impact their 
ability to provide commodity derivative services.
---------------------------------------------------------------------------

    \75\ See 2007 Fortis Order.
---------------------------------------------------------------------------

    The authorizations for energy management services and energy 
tolling also noted that unregulated financial competitors of FHCs 
engaged in these activities. However, it is unclear over time what, if 
any, advantages those financial firms gain from conducting energy 
management or energy tolling activities over FHCs in the conduct of 
derivatives and other FHC-permissible physical commodity activities.
    Energy tolling was permitted in part to allow an FHC to hedge its 
own, or to assist its client to hedge, positions in energy.\76\ 
However, there are other effective ways for an FHC to hedge its 
positions, and an FHC may assist clients to hedge their positions 
without the FHC engaging in energy tolling.
---------------------------------------------------------------------------

    \76\ Physical commodity trading also may be used to hedge 
positions in energy of FHCs and their clients.
---------------------------------------------------------------------------

    The proposal would not appear to eliminate the benefits commenters, 
including energy companies, commonly noted in letters responding to the 
ANPR.\77\ The proposal would affect the actual activity of only one 
firm and the theoretical authority of five FHCs to engage in 
complementary commodity activities and would directly limit only 
certain types of agreements (i.e., energy tolling and energy management 
services agreements) between FHCs and power plant owners. In addition, 
the proposal would not affect the authority of FHCs to provide 
derivatives and related financial products and services to power plants 
or engage in physical commodities trading. Permissible activities may 
include providing inventory and project finance arrangements involving 
physical commodities,\78\ financially- and physically-settled 
derivatives to hedge fuel costs and energy prices,\79\ buying and 
selling certain physical commodities in the spot market,\80\ and 
derivatives advisory services.\81\
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    \77\ Commenters focused on the benefits of FHC involvement in 
physical commodity trading activities, rather than the benefits of 
energy management services or energy tolling. For example, NRG 
Energy, Inc., a leading competitive power company and major 
electricity provider, noted a number of activities that would not 
appear to be affected by the proposed elimination of energy 
management services or energy tolling, including providing first-
lien hedging arrangements, project financing, market making, 
``customized hedging and risk management solutions like working 
capital/inventory intermediation facilities and volumetric 
production payment structures,'' and long-term physical commodity 
transactions. Letter from NRG Energy, Inc. dated April 15, 2014. See 
also Letter from American Gas Association et al., dated March 31, 
2014 (discussing the importance of the ability of FHCs to 
physically-settle derivatives transactions); Letter from Electric 
Power Supply Association dated April 16, 2014 (discussing the 
importance of FHC's ability to hedge physical power producers' 
prices and revenues as well as engage in market making and credit 
intermediation activities); SIFMA Letter, Appendix G (discussing 
market making and the provision of market liquidity, efficient price 
formation, risk-management solutions, project finance, credit 
extension, and greater competition).
    \78\ See, e.g., 12 CFR 225.28(b)(1); Chemical New York Corp., 59 
Fed. Res. Bull. 698 (1973) (approving as a permissible lending 
activity for BHCs an arrangement under which a BHC would finance a 
utility's coal purchases by purchasing from a third party, and 
taking title to, a quantity of coal on a monthly basis at the 
direction of the utility customer); Letter to Mr. Lustgarten dated 
May 15, 2006 (finding certain commodity purchase and forward sale 
transactions entered to finance commodity inventories of an FHC's 
customers to be a permissible lending activity of the FHC); Letter 
to Ms. Davy dated May 15, 2006 (finding certain volumetric 
production payments to be a permissible lending activity).
    \79\ See 12 CFR 225.28(b)(8) and the Board's approvals to engage 
in physical commodity trading.
    \80\ See, e.g., 2003 Citi Order.
    \81\ 12 CFR 225.28(b)(6).
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3. Conformance Period
    The proposal would provide FHCs with a two-year transition period 
to conform their energy management services and energy tolling 
agreements following the effective date of the final rule if adopted. 
This conformance period is intended to reduce the burdens associated 
with applying the proposal to existing agreements. As noted, the Board 
invites comments on all aspects of the proposal, including specific 
questions regarding the appropriate conformance period.
    Question 12. Are there reasons that support determining energy 
management services or energy tolling are complementary to a financial 
activity that are not discussed above? If so, what are those reasons?
    Question 13. Are there any potential effects on the safety and 
soundness of FHCs engaged in energy management services and energy 
tolling of rescinding such authorities? How would the potential effects 
differ if only one or the other activity was rescinded?
    Question 14. What are the average lengths of an energy management 
services agreement and an energy tolling agreement? Under what 
circumstances may such agreements be terminated early and what are the 
contractual consequences of doing so? Are there challenges other than 
termination of such agreements associated with conformance to the 
proposed rescission of energy management services and energy tolling 
orders? To what extent may a conformance period alleviate those 
challenges? What is an appropriate conformance period for this aspect 
of the proposal and why?

E. Reclassification of Copper as an Industrial Metal

    In 1997, the Board amended Regulation Y to provide that BHCs could 
own and store copper, and engage in related incidental activities, as 
an activity so closely related to banking as to be proper incident 
thereto.\82\ The Board has previously permitted BHCs to buy, sell, and 
store gold, silver, platinum and palladium bullion, coins, bars and 
rounds for their own accounts and the accounts of others. The list of 
precious metals was expanded to include copper, a metal used in minting 
coins, after trading in copper became permissible for national 
banks.\83\
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    \82\ 62 FR 9290, 9336 (Feb. 28, 1997). The authorization also 
included ``any other metal approved by the Board.'' No other metals 
have been approved by the Board under this authority.
    \83\ Id. at 9311.
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    Over time, copper has become most commonly used as a base or 
industrial metal, and not as a store of value in the same way as gold, 
silver, platinum and palladium.\84\ While gold, silver, platinum and 
palladium have industrial uses as well, these precious metals have 
traditionally been traded internationally primarily for their exchange 
value rather than for industrial uses.\85\ Copper, while it has been 
used in coins, has never been traded as a precious metal and has always 
been classified and traded as a ``base'' or ``industrial'' metal.\86\ 
The

[[Page 67233]]

most significant uses of copper are for industrial purposes, rather 
than as a store of value.\87\ Further, the OCC has recently proposed a 
similar reclassification of copper under the National Bank Act.\88\
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    \84\ PSI Report.
    \85\ PSI Report at 353.
    \86\ Id. The most common benchmark price for copper is the 
copper futures price established on the London Metals Exchange 
(LME), the largest financial market for metals. PSI Report at 351. 
The LME identifies four categories of metals; copper is included in 
the ``non-ferrous'' or ``base'' metal category, which also includes 
aluminum, nickel, and zinc, rather than the ``precious metals'' 
category that includes gold, silver, platinum and palladium. Id. at 
352. Since the publication of the PSI Report, the LME has ceased 
certain activities with respect to gold and silver and has initiated 
activities with respect to platinum and palladium. See https://www.lme.com/metals/precious-metals/. COMEX, a division of the New 
York Mercantile Exchange, also classifies copper as a base metal and 
gold, silver, platinum and palladium as precious metals. See, e.g., 
http://www.cmegroup.com/trading/metals/base.html. Moreover, 
standardized copper futures contracts involve large amounts of 
copper, comparable to the amounts for futures contracts for base 
metals such as aluminum, lead and zinc. See https://www.lme.com/metals/non-ferrous/copper/contract-specifications/futures/ (LME 
copper futures contract specification 25 metric tons); https://www.lme.com/metals/non-ferrous/aluminium/contract-specifications/futures/ (LME aluminum futures contract specification 25 metric 
tons); https://www.lme.com/metals/non-ferrous/lead/contract-specifications/futures/ (LME lead futures contract specification 25 
metric tons); https://www.lme.com/metals/non-ferrous/lead/contract-specifications/futures/; https://www.lme.com/metals/non-ferrous/zinc/contract-specifications/futures/ (LME zinc futures contract 
specification 25 metric tons); http://www.cmegroup.com/trading/metals/base/copper_contractSpecs_futures.html (COMEX copper futures 
contract specification 25,000 pounds); http://www.cmegroup.com/trading/metals/base/aluminum-mw-us-transaction-premium-platts-swap-futures_contractSpecs_futures.html (COMEX aluminum MW US transaction 
premium plats futures contract specification 25 metric tons). 
Precious metals futures contracts, by contrast, involve much smaller 
amounts. See, e.g., http://www.cmegroup.com/trading/metals/precious/gold_contractSpecs_futures.html (COMEX gold futures contract 
specification 100 troy ounces); http://www.cmegroup.com/trading/metals/precious/silver_contractSpecs_futures.html (COMEX silver 
futures contract specification 5,000 troy ounces); http://www.cmegroup.com/trading/metals/precious/platinum_contractSpecs_futures.html (COMEX platinum futures contract 
specification 50 troy ounces); http://www.cmegroup.com/trading/metals/precious/palladium_contractSpecs_futures.html (COMEX 
palladium futures contract specification 100 troy ounces).
    \87\ See, e.g., http://minerals.usgs.gov/minerals/pubs/commodity/copper/, ``Copper Statistics and Information,'' (building 
construction is the single largest market for copper, followed by 
electronics and electronic products, transportation, industrial 
machinery, and consumer and general products), compare http://minerals.usgs.gov/minerals/pubs/commodity/gold/, ``Gold Statistics 
and Information,'' (``Although gold is important to industry and the 
arts, it also retains a unique status among all commodities as a 
long-term store of value''); http://minerals.usgs.gov/minerals/pubs/commodity/silver/, ``Silver Statistics and Information,'' (``Silver 
has been used for thousands of years as ornaments and utensils, for 
trade, and as the basis for many monetary systems'').
    \88\ Available at http://occ.gov/news-issuances/news-releases/2016/nr-occ-2016-108.html.
---------------------------------------------------------------------------

    For these reasons, the Board proposes to treat the purchase and 
sale of copper in the same manner as the purchase and sale of other 
non-precious metals; specifically, as an activity requiring FHC status 
and complementary authority and subject to the restrictions and 
limitations (including the 5 percent of tier 1 capital cap) imposed on 
FHCs engaged in complementary commodity activities. Under the proposal, 
copper would be removed from the list of metals BHCs are permitted to 
own and store without limit as an activity closely related to banking 
under section 4(c)(8) of the BHC Act and Regulation Y.
    The Board proposes not to authorize services such as arranging for 
storage, safe custody, assaying, and shipment of copper. The Board is 
also proposing to make a corresponding change in the language of 
section 225.28(b)(8)(ii)(B) of Regulation Y to remove copper from the 
list of metals on which a BHC may enter derivatives contracts that 
require taking delivery of the underlying metal as principal. Removing 
copper from this list will ensure that the metals specifically listed 
as financial assets for purposes of derivatives trading activities 
remain consistent with the metals permitted to be bought, sold and 
stored by BHCs.\89\
---------------------------------------------------------------------------

    \89\ Copper would be treated as a non-financial asset for 
purposes of 12 CFR 225.28(b)(8)(ii)(B).
---------------------------------------------------------------------------

    The proposal would take effect one year after the rule is finalized 
to provide BHCs time to conform to this change.
    Question 15. What is the cumulative impact on BHCs of the proposed 
limitation on physical copper trading authority combined with the 
proposed additional restrictions on complementary physical commodities 
trading? What is the cumulative impact of these proposals on copper 
markets?
    Question 16. Is a one-year transition period during which BHCs 
currently engaged in buying, selling, and storing copper would be 
permitted to wind down their activities with respect to copper under 
this authority sufficient or appropriate? If not, what is the 
appropriate transition period and why? What is the appropriate scope of 
BHCs that should benefit from such a transition period? Should the 
scope, for example, be limited to BHCs that own copper as of the date 
of this proposal or BHCs that do not have separate complementary 
authority to hold copper?

F. New Financial Reporting Data on Physical Commodity Activities

1. General
    The Board is proposing to modify the Consolidated Financial 
Statements for Holding Companies (FR Y-9C) to (i) create a new Schedule 
HC-W, Physical Commodities and Related Activities, and (ii) add data 
items to Schedule HC-R, Part II, Risk-Weighted Assets. Schedule HC-W 
would collect more specific information on the covered physical 
commodities holdings and activities of FHCs, and the modifications to 
HC-R, Part II would report the risk-weighted asset amounts associated 
with an FHC's engagement in activities that involve (1) covered 
physical commodities, (2) section 4(o) infrastructure assets, or (3) 
investments in covered commodity merchant banking investments. The 
proposed reporting requirements would become effective on the same date 
as the proposed risk-weighted asset requirements.
2. Schedule HC-W
    Part A. Currently, BHCs report the gross (total) fair value of all 
physical commodities on Schedule HC-D to the FR Y-9C. On Part A of the 
proposed new Schedule HC-W, FHCs would be required to report the total 
fair value of categories of physical commodities held in inventory as 
follows:
    (1) Petroleum and petroleum products;
    (2) Natural gas;
    (3) Natural gas liquids;
    (4) Fertilizer;
    (5) Propylene;
    (6) Coal and coal products;
    (7) Uranium; uranium products;
    (8) Other covered physical commodities; and
    (9) All other physical commodities.
    The sum of the total fair values of commodities reported on Part A 
as proposed would continue to be reported as the gross fair value of 
physical commodities held in inventory in item 9 of Schedule HC-D.
    The categories of physical commodities listed in items (1)-(8) 
above are proposed to be defined in a manner consistent with the 
proposed definition of ``covered physical commodities.'' Categories 
(1)-(7) generally include those covered substances under Federal 
environmental law. The item ``other covered physical commodities'' 
would include all other covered physical commodities held in inventory 
that would not be included in items (1)-(7) described above and 
therefore would reflect those covered substances under relevant state 
environmental law.
    Part B. On Part B of the proposed new Schedule HC-W, FHCs would be 
required to indicate affirmatively or negatively whether they are 
engaged in particular aspects of physical commodity-related activities. 
Specifically, FHCs would indicate whether they own any covered physical 
commodities, any section 4(o) infrastructure assets, or investments in 
covered commodity merchant banking investments. FHCs also would 
indicate whether they are engaged in the exploration, extraction, 
production, or refining of physical commodities. FHCs also would 
indicate whether they own facilities, vessels or conveyances for the 
storage or transportation of covered physical commodities. Further, 
FHCs would be required to report (i) the total fair value of section 
4(k) permissible commodities and section 4(o) permissible commodities 
owned; (ii) the original cost basis of any section 4(o) infrastructure 
assets owned; and (iii) the carrying value of their investments in 
covered commodity merchant banking investments.
3. Schedule HC-R Modifications
    The Board is also proposing to modify Schedule HC-R, Part II to 
include new

[[Page 67234]]

items related to the proposed capital requirement described in this 
proposal for a firm's physical commodity activities conducted under any 
of the commodity authorities and that involve covered physical 
commodities. New line items would be added to Column A of Schedule HC-
R, Part II to report (1) the market value of an FHC's covered physical 
commodity activities involving covered physical commodities (calculated 
as described in this proposal) conducted under section 4(k)(1)(B) of 
the Bank Holding Company Act or section 4(o) of the Bank Holding 
Company Act (as applicable); (2) the original cost basis of section 
4(o) infrastructure assets owned pursuant to section 4(o) of the Bank 
Holding Company Act; and (3) the carrying value of an FHC's investments 
in covered commodity merchant banking investments made under section 
4(k)(4)(H) of the BHC Act. Specifically, the following modifications 
are being proposed:
     New line items would be added to Column L to allocate a 
300 percent risk weight to (A) the market value of an FHC's physical 
commodity activities involving section 4(k) permissible commodities and 
(B) the carrying value of investments in covered commodity merchant 
banking investments that are publicly traded commodity trading 
portfolio companies to the 300 percent risk weight category;
     New line items would be added to Column M to allocate a 
400 percent risk weight to the carrying value of investments in covered 
commodity merchant banking investments that are commodity trading 
portfolio companies and are not publicly traded to the 400 percent risk 
weight category; and
     New line items would be added to Column Q to allocate a 
1,250 percent risk weight to the (A) the market value of physical 
commodity activities involving section 4(o) permissible commodities 
(including section 4(k) permissible commodities in excess of the 
section 4(k) cap parity amount); (B) the original cost basis of section 
4(o) infrastructure assets owned pursuant to section 4(o) of the BHC 
Act; and (C) the carrying value of investments in covered commodity 
merchant banking investments that are not commodity trading portfolio 
companies.
4. Public Disclosure
    The Board proposes to make the information reported as described 
above available to the public. The Board has long supported meaningful 
public disclosure by banking organizations with the objective of 
improving market discipline and encouraging sound risk-management 
practices. The Board believes that the information that would be 
collected in Part A of proposed Schedule HR-W would provide the public 
with important information on the degree to which FHCs are involved in 
trading covered physical commodities, improving market discipline, and 
enhancing understanding of the role FHCs play in these markets through 
their nonfinancial activities. Public disclosure of the new reporting 
items would also facilitate supervisory monitoring of commodity 
activities that present particular risks to safety and soundness, as 
discussed in this proposal. The Board proposes to make the disclosures 
in Part B of the new proposed Schedule HC-W public for similar reasons. 
Additionally, the Board believes that public disclosure of the 
information in Part B will provide market participants, end users, and 
supervisors with important information that is not captured in 
inventory reporting about the nature and extent of FHC presence in the 
physical commodities markets over time. This information would provide 
additional insight into the potential risks FHCs may bear as part of 
their commodities activities as well as a more complete picture of 
their role in the commodity markets.
    The proposed reporting requirements in Schedule HC-W, Part B and 
proposed modifications to Schedule HC-R, Part II are consistent with 
other public capital reporting requirements. The Board notes that 
public disclosure of these proposed items would also be consistent with 
the international standards regarding public disclosure of regulatory 
capital under Pillar 3 of the Basel Accord. Such disclosure is designed 
to complement the minimum capital requirements and the supervisory 
review process by encouraging market discipline through enhanced and 
meaningful public disclosure.
    For the reasons discussed above, the Board is proposing that the 
proposed new reporting requirements be released to the public. However, 
a reporting FHC may request confidential treatment for the proposed 
reporting items if the company believes that, based on its particular 
individual circumstances, disclosure of specific commercial or 
financial information in the report would likely result in substantial 
harm to its competitive position or that disclosure of the submitted 
information would result in unwarranted invasion of personal privacy.
    Question 17. To what extent do the proposed regulatory reporting 
requirements improve transparency of physical commodity activities of 
FHCs and provide supporting data for assessing the capital requirement?
    Question 18. How well do the proposed reporting requirements 
physical commodity activities (both Part A and Part B) capture FHCs' 
physical commodity activities? What other categorizations should the 
Board consider for these proposed reporting requirements?
    Question 19. What other information, if any, should the Board 
consider collecting from FHCs for public reporting purposes in order to 
enhance market discipline and public understanding of FHCs' physical 
commodities or merchant banking activities?

III. Regulatory Analysis

A. Regulatory Flexibility Act Analysis

    The Board is providing an initial regulatory flexibility analysis 
with respect to this proposed rule. The Regulatory Flexibility Act, 5 
U.S.C. 601 et seq. (RFA), generally requires an agency to assess the 
impact a rule is expected to have on small entities. The RFA requires 
an agency either to provide an initial regulatory flexibility analysis 
with a proposed rule for which a general notice of proposed rulemaking 
is required or to certify that the proposed rule will not have a 
significant impact on a substantial number of small entities. Based on 
its analysis and for the reasons stated below, the Board believes that 
this proposed rule will not have a significant economic impact on a 
substantial number of small entities. A final regulatory flexibility 
analysis will be conducted after comments received during the public 
comment period have been considered.
    Under regulations issued by the Small Business Administration, a 
small entity includes a depository institution, bank holding company, 
or savings and loan holding company with total assets of $550 million 
or less. As of June 30, 2016, there were approximately 3,203 small bank 
holding companies and approximately 162 small savings and loan holding 
companies. As described above, the Board is proposing to apply risk-
based capital and other regulatory requirements for certain physical 
commodities and merchant banking investment activities conducted by 
banking organizations. This proposed rule is expected only to apply to 
banking organizations that (i) conduct physical commodity activities 
under complementary authority with the Board's approval; (ii) conduct 
physical commodity activities under section 4(o) grandfather authority; 
or (iii) engage in

[[Page 67235]]

merchant banking investment activities related to physical commodities. 
Small entities generally will not fall into any of these categories. To 
date, the Board has granted approvals to 12 FHCs to conduct physical 
commodity activities under complementary authority, meanwhile, there 
are two banking organizations that are presently conducting physical 
commodity activities under section 4(o) grandfather authority. In both 
cases, the banking organizations all hold total consolidated assets 
greater than $50 billion. Further, of the approximately $29 billion in 
total merchant banking investment activity engaged in by banking 
organizations, approximately 99 percent of this activity is conducted 
by banking organizations with total consolidated assets greater than 
$50 billion.
    The Board is aware of no other Federal rules that duplicate, 
overlap, or conflict with this proposal. The Board believes that this 
proposal will not have a significant economic impact on small banking 
organizations supervised by the Board and therefore believes that there 
are no significant alternatives to this proposal that would reduce the 
economic impact on small banking organizations supervised by the Board.

B. Paperwork Reduction Act

Request for Comment on Proposed Information Collection
    In accordance with section 3512 of the Paperwork Reduction Act of 
1995 (44 U.S.C. 3501-3521) (PRA), the Board may not conduct or sponsor, 
and a respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number. The Board reviewed the proposed rule 
under the authority delegated to the Board by OMB.
    The proposed rule contains requirements subject to the PRA. The 
reporting requirements are found in section II.F. To implement the 
reporting requirement set forth in F, the Board proposes to revise the 
Consolidated Financial Statements for Holding Companies (FR Y-9C; OMB 
No. 7100-0128) to create a new Schedule HC-W, Physical Commodities and 
Related Activities and to add data items to Schedule HC-R, Part II, 
Risk-Weighted Assets.
    Comments are invited on:
    (a) Whether the proposed collections of information are necessary 
for the proper performance of the Board's functions, including whether 
the information has practical utility;
    (b) The accuracy of the estimates of the burden of the proposed 
information collections, including the validity of the methodology and 
assumptions used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or startup costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments on 
aspects of this proposed rule that may affect reporting, recordkeeping, 
or disclosure requirements and burden estimates should be sent to 
Robert deV. Frierson, Secretary, Board of Governors of the Federal 
Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 
20551. A copy of the comments may also be submitted to the OMB desk 
officer by mail to the Office of Information and Regulatory Affairs, 
U.S. Office of Management and Budget, New Executive Office Building, 
Room 10235, 725 17th Street NW., Washington, DC 20503 or by facsimile 
to 202-395-6974.
Proposed Revision, Without Extension, of the Following Information 
Collection
    Title of Information Collection: Consolidated Financial Statements 
for Holding Companies, Parent Company Only Financial Statements for 
Large Holding Companies, Parent Company Only Financial Statements for 
Small Holding Companies, Financial Statement for Employee Stock 
Ownership Plan Holding Companies, and the Supplemental to the 
Consolidated Financial Statements for Holding Companies.
    OMB Control Number: 7100-0128.
    Agency Form Number: FR Y-9C, FR Y-9LP, FR Y-9SP, FR Y-9ES, and FR 
Y-9CS.
    Frequency of Response: Quarterly, semiannually, and annually.
    Affected Public: Businesses or other for-profit.
    Respondents: Bank holding companies (BHCs), savings and loan 
holding companies (SLHCs), securities holding companies (SHCs), and 
U.S. Intermediate Holding Companies (IHCs) (collectively, holding 
companies (HCs)).
    Abstract: The FR Y-9 family of reporting forms continues to be the 
primary source of financial data on holding companies that examiners 
rely on in the intervals between on-site inspections. Financial data 
from these reporting forms are used to detect emerging financial 
problems, to review performance and conduct preinspection analysis, to 
monitor and evaluate capital adequacy, to evaluate holding company 
mergers and acquisitions, and to analyze a holding company's overall 
financial condition to ensure the safety and soundness of its 
operations. The FR Y-9C serves as standardized financial statements for 
the consolidated holding company. The FR Y-9LP, and FR Y 9SP serve as 
standardized financial statements for parent holding companies; the FR 
Y-9ES is a financial statement for holding companies that are Employee 
Stock Ownership Plans (ESOPs). The Federal Reserve also has the 
authority to use the FR Y-9CS (a free-form supplement) to collect 
additional information deemed to be (1) critical and (2) needed in an 
expedited manner.
    Current Actions: To implement the reporting requirement set forth 
in section F, the Board proposes to revise the FR Y-9C to (1) create a 
new Schedule HC-W, Physical Commodities and Related Activities, which 
would collect more specific information on the covered physical 
commodities holdings and activities of FHCs and (2) add data items to 
Schedule HC-R, Part II, Risk-Weighted Assets, which would report the 
risk-weighted asset amounts associated with an FHC's engagement in 
covered physical commodity activities. It is expected that 14 out of 
the 667 current FR Y-9C respondents would file the new reporting 
requirements set forth in section F. The Board estimates that proposed 
revisions to the FR Y-9C would not materially increase the estimated 
average hours per response or total estimated annual burden. The Board 
is not proposing to revise the FR Y-9LP, FR Y9-SP, FR Y-9ES, and FR Y-
9CS. The draft reporting forms and instructions are available on the 
Board's public Web site at http://www.federalreserve.gov/apps/reportforms/review.aspx.
    Estimated Burden per Response: FR Y-9C (non advanced approaches 
holding companies): 50.17 hours; FR Y-9C (advanced approached holding 
companies HCs): 51.42 hours; FR Y-9LP: 5.25 hours; FR Y-9SP: 5.40 
hours; FR Y-9ES: 0.50 hours; FR Y-9CS: 0.50 hours.
    Number of Respondents: FR Y-9C (non advanced approaches holding 
companies): 654; FR Y-9C (advanced approached holding companies): 13; 
FR Y-9LP: 792; FR Y-9SP: 4,122; FR Y-9ES: 88; FR Y-9CS: 236.
    Total Estimated Annual Burden: FR Y-9C (non advanced approaches 
holding companies): 131,245 hours; FR Y-9C (advanced approached holding 
companies): 2,674 hours; FR Y-9LP:

[[Page 67236]]

16,632 hours; FR Y-9SP: 44,518 hours; FR Y-9ES: 44 hours; FR Y-9CS: 472 
hours.

C. Solicitation of Comments on Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires the agencies to 
use plain language in all proposed and final rules published after 
January 1, 2000. The agencies invite comment on how to make this 
interim final rule easier to understand. For example:
     Have the agencies organized the material to suit your 
needs? If not, how could the rule be more clearly stated?
     Are the requirements in the rule clearly stated? If not, 
how could the rule be more clearly stated?
     Does the rule contain technical language or jargon that is 
not clear? If so, what language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the rule easier to understand? If 
so, what changes would make the rule easier to understand?
     Would more, but shorter, sections be better? If so, which 
sections should be changed?
     What else could the agencies do to make the rule easier to 
understand?

List of Subjects

12 CFR Part 217

    Administrative practice and procedure; Banks, banking; Capital; 
Federal Reserve System; Holding companies; Reporting and recordkeeping 
requirements; Securities.

12 CFR Part 225

    Administrative practice and procedure, Banks, Banking, Federal 
Reserve System, Holding companies, Reporting and recordkeeping 
requirements, Securities.

Authority and Issuance

    For the reasons set forth in the preamble, the Board proposes to 
amend 12 CFR parts 217 and 225 to as follows:

PART 217--CAPITAL ADEQUACY OF BANK HOLDING COMPANIES, SAVINGS AND 
LOAN HOLDING COMPANIES, AND STATE MEMBER BANKS (REGULATION Q)

0
 1. The authority citation for part 217 continues to read as follows:

    Authority: 12 U.S.C. 248(a), 321-338a, 481-486, 1462a, 1467a, 
1818, 1828, 1831n, 1831o, 1831p-l, 1831w, 1835, 1844(b), 1851, 3904, 
3906-3909, 4808, 5365, 5368, 5371.

0
2. Section 217.2 is amended by:
0
 (a) Revising the definition of ``Advanced approaches total risk-
weighted assets''.
0
 (b) Adding the definition of ``Approved physical commodity'' and 
``Covered physical commodity''.
0
 (c) Revising the definition of ``Standardized total risk-weighted 
assets''.
    The revisions and additions are set forth below:


Sec.  217.2  Definitions

* * * * *
    Advanced approaches total risk-weighted assets means
    (1) The sum of:
    (i) Credit-risk weighted assets;
    (ii) Credit valuation adjustment (CVA) risk-weighted assets;
    (iii) Risk-weighted assets for operational risk;
    (iv) For a market risk Board-regulated institution only, advanced 
market risk-weighted assets; and
    (v) Risk-weighted assets for covered physical commodity activities 
as calculated under Sec. Sec.  217.39 through 217.40; minus
    (2) Excess eligible credit reserves not included in the Board-
regulated institution's tier 2 capital.
* * * * *
    Approved physical commodity means a physical commodity for which a 
derivative contract has been authorized for trading on a U.S. futures 
exchange by the Commodity Futures Trading Commission (unless 
specifically excluded by the Board) or other commodities that have been 
specifically authorized by the Board under section 4(k)(1)(B) of the 
Bank Holding Company Act 12 (12 U.S.C. 1843(k)(1)(B)).
* * * * *
    Covered physical commodity means any physical commodity that is, or 
a component of which is, specifically named:
    (1) As a ``hazardous substance'' under section 104 of the 
Comprehensive Environmental Response, Compensation, and Liability Act 
(42 U.S.C. 9601);
    (2) As ``oil'' under section 1001 of the Oil Pollution Act of 1990 
(33 U.S.C. 2701) or section 311 of the Clean Water Act (33 U.S.C. 
1321);
    (3) As a ``hazardous air pollutant'' under section 112 of the Clean 
Air Act (42 U.S.C. 7412);
    (4) In regulations interpreting the foregoing terms under the 
corresponding statute; or
    (5) In a state statute, or regulation promulgated thereunder, that 
makes a party other than a governmental entity or fund responsible for 
removal or remediation efforts related to the unauthorized release of 
the substance or for costs incurred as a result of the unauthorized 
release; provided that, with respect to paragraph (5) of this 
definition, the Board-regulated institution owned the commodity in the 
state that promulgated the law imposing such liability during the last 
reporting period.
* * * * *
    Standardized total risk-weighted assets means:
    (1) The sum of:
    (i) Total risk-weighted assets for general credit risk as 
calculated under Sec.  217.31;
    (ii) Total risk-weighted assets for cleared transactions and 
default fund contributions as calculated under Sec.  217.35;
    (iii) Total risk-weighted assets for unsettled transactions as 
calculated under Sec.  217.38;
    (iv) Total risk-weighted assets for covered physical commodity 
activities as calculated under Sec. Sec.  217.39 through 217.40;
    (v) Total risk-weighted assets for securitization exposures as 
calculated under Sec.  217.42;
    (vi) Total risk-weighted assets for equity exposures as calculated 
under Sec. Sec.  217.52 and 217.53; and
    (vii) For a market risk Board-regulated institution only, 
standardized market risk-weighted assets; minus
    (2) Any amount of the Board-regulated institution's allowance for 
loan and lease losses that is not included in tier 2 capital and any 
amount of allocated transfer risk reserves.
* * * * *
0
3. Section 217.30 is amended by revising paragraph (b) as follows:


Sec.  217.30   Applicability.

* * * * *
    (b) Notwithstanding paragraph (a) of this section, a market risk 
Board-regulated institution must exclude from its calculation of risk-
weighted assets under this subpart the risk-weighted asset amounts of 
all covered positions, as defined in subpart F of this part (except 
foreign exchange positions that are not trading positions, OTC 
derivative positions, cleared transactions, unsettled transactions, and 
covered physical commodities).
0
 4. Section 217.31 is revised to read as follows:


Sec.  217.31  Mechanics for calculating risk-weighted assets for 
general credit risk.

    (a) General risk-weighting requirements. A Board-regulated 
institution must apply risk weights to its exposures as follows:
    (1) A Board-regulated institution must determine the exposure 
amount of each

[[Page 67237]]

on-balance sheet exposure, each OTC derivative contract, and each off-
balance sheet commitment, trade and transaction-related contingency, 
guarantee, repo-style transaction, financial standby letter of credit, 
forward agreement, or other similar transaction that is not:
    (i) An unsettled transaction subject to Sec.  217.38;
    (ii) A cleared transaction subject to Sec.  217.35;
    (iii) A default fund contribution subject to Sec.  217.35;
    (iv) A covered physical commodity, a section 4(o) infrastructure 
asset, or a covered commodity merchant banking investment subject to 
Sec. Sec.  217.39 through 217.40;
    (v) A securitization exposure subject to Sec. Sec.  217.41 through 
217.45; or
    (vi) An equity exposure (other than an equity OTC derivative 
contract) subject to Sec. Sec.  217.51 through 217.53.
    (2) The Board-regulated institution must multiply each exposure 
amount by the risk weight appropriate to the exposure based on the 
exposure type or counterparty, eligible guarantor, or financial 
collateral to determine the risk-weighted asset amount for each 
exposure.
    (b) Total risk-weighted assets for general credit risk equals the 
sum of the risk-weighted asset amounts calculated under this section.
0
5. Section 217.39 is added to read as follows:


Sec.  217.39  Covered Physical Commodity Activities.

    (a) General. A Board-regulated institution's total risk-weighted 
assets for covered physical commodity activities equals the sum of the 
risk-weighted asset amounts for each of its covered physical 
commodities, each of its equity exposures to covered commodities 
merchant banking investments, and each of its 4(o) infrastructure 
assets, each as determined under this section and Sec.  217.40.
    (b) Risk-weighted asset amount for covered physical commodities. 
The risk-weighted asset amount for a covered physical commodity equals:
    (1) The exposure amount for a section 4(k) permissible commodity 
multiplied by 300 percent, subject to the limitation in paragraph 
(c)(3) of this section, plus
    (2) The exposure amount for a section 4(o) permissible commodity 
multiplied by 1,250 percent.
    (c) Exposure amounts for covered physical commodities.
    (1) The exposure amount for a section 4(k) permissible commodity 
equals the section 4(k) permissible commodity quantity, as determined 
under paragraph (d) of this section, multiplied by the simple average 
of the covered physical commodity's month-end, end-of-day spot prices 
over the previous 60 months.
    (2) The exposure amount for a section 4(o) permissible commodity 
equals the section 4(o) permissible commodity quantity, as determined 
under paragraph (d) of this section, multiplied by the simple average 
of the covered physical commodity's month-end, end-of-day spot prices 
over the previous 60 months.
    (3)(i) If the section 4(k) cap parity amount of the Board-regulated 
institution exceeds 5 percent of the tier 1 capital of the Board-
regulated institution, then such excess (up to the sum of the exposure 
amounts for each section 4(k) permissible commodity owned by the Board-
regulated institution pursuant to section 4(o) of the Bank Holding 
Company Act (12 U.S.C. 1843(o))) must be risk weighted at 1,250 
percent.
    (ii) For purposes of paragraph (c)(3) of this section, section 4(k) 
cap parity amount equals:
    (A) The sum of the exposure amounts for each section 4(k) 
permissible commodity that is owned by the Board-regulated institution 
pursuant to section 4(o) of the Bank Holding Company Act (12 U.S.C. 
1843(o)); plus
    (B) The sum of the market value of each physical commodity 
(calculated as the average of the amounts of the physical commodity 
owned by the Board-regulated institution recorded as of the close of 
business on each day of the previous calendar quarter multiplied by the 
simple average of the physical commodity's month-end, end-of-day spot 
prices over the previous 60 months) that is owned by the Board-
regulated institution pursuant to:
    (1) Any authority other than sections 4(c)(2), 4(k)(4)(H), 
4(k)(4)(I), and 4(o) of the Bank Holding Company Act (12 U.S.C. 
1843(c)(2), (k)(4)(H), (k)(4)(I), and (o)); or
    (2) Section 4(o) of the Bank Holding Company Act (12 U.S.C. 
1843(o)), but only with respect to a physical commodity that is not a 
covered physical commodity.
    (iii) A Board-regulated institution that owns one or more covered 
physical commodities pursuant to section 4(o) of the Bank Holding 
Company Act (12 U.S.C. 1843(o)) must determine the market value of each 
covered physical commodity described in paragraph (c)(ii)(B) of this 
section pursuant to the calculation method described therein.
    (d) Quantity of a covered physical commodity. (1) A Board-regulated 
institution must determine the section 4(k) permissible commodity 
quantity and the section 4(o) permissible commodity quantity of each 
covered physical commodity the Board-regulated institution owns 
pursuant to section 4(k)(1)(B) or section 4(o) of the Bank Holding 
Company Act (12 U.S.C. 1843(k)(1)(B) or (o)).
    (2) For a covered physical commodity that the Board-regulated 
institution owns pursuant to section 4(o) of the Bank Holding Company 
Act (12 U.S.C. 1843(o)):
    (i) The section 4(o) permissible commodity quantity of a covered 
physical commodity equals the average of the amounts of the covered 
physical commodity owned by the Board-regulated institution recorded as 
of the close of business on each day of the previous calendar quarter 
minus any section 4(k) permissible commodity quantity;
    (ii) If the covered physical commodity is an approved physical 
commodity, the section 4(k) permissible commodity quantity of the 
covered physical commodity equals the average of the amounts of the 
covered physical commodity owned by the Board-regulated institution as 
of the close of business on each day of the previous calendar quarter, 
if the daily quantity of the covered physical commodity:
    (A) Was purchased by the Board-regulated institution in the spot 
market or is owned for the purpose of the Board-regulated institution 
taking or making physical delivery of the commodity to settle a forward 
contract, option, future, option on future, swap, or a similar contract 
in which a Board-regulated institution is authorized to engage under 
section 225.28(b)(8)(ii) of the Board's Regulation Y (12 CFR 
225.28(b)(8)(ii)); and
    (B) Was stored, extracted, produced, transported, or altered 
(including by processing or refining) only by reputable, third-party 
facilities during that day; and
    (iii) If the covered physical commodity is not an approved physical 
commodity, the section 4(k) permissible commodity quantity of the 
covered physical commodity equals zero.
    (3) For a covered physical commodity that the Board-regulated 
institution owns pursuant to section 4(k)(1)(B) of the Bank Holding 
Company Act (12 U.S.C. 1843(k)(1)(B)):
    (i) The section 4(o) permissible commodity quantity equals zero; 
and
    (ii) The section 4(k) permissible commodity quantity equals the 
average of the amounts of the covered physical commodity owned by the 
Board-regulated institution recorded as of the

[[Page 67238]]

close of business on each day of the previous calendar quarter.
    (e) Covered commodity merchant banking investments risk weights. 
(1) The risk-weighted asset amount for a covered commodity merchant 
banking investment, as the term is defined in Sec.  217.40, is the 
exposure amount for the investment multiplied by the appropriate risk 
weight, each as calculated according to this section.
    (2) A Board-regulated institution must assign a 1,250 percent risk 
weight to an exposure amount for a covered commodity merchant banking 
investment except as provided in paragraphs (e)(3) and (e)(4) of this 
section.
    (3) A Board-regulated institution must assign a 300 percent risk 
weight to an exposure amount for a covered commodity merchant banking 
investment that is a publicly traded commodity trading portfolio 
company, as the term is defined in Sec.  217.40.
    (4) A Board-regulated institution must assign a 400 percent risk 
weight to an exposure amount for a covered commodity merchant 
investment that is a commodity trading portfolio company, as the term 
is defined in Sec.  217.40, that is not publicly traded.
    (f) 4(o) infrastructure assets risk weights. (1) The risk-weighted 
asset amount for a 4(o) infrastructure asset equals the original cost 
basis (cost basis gross of accumulated depreciation and asset 
impairment) of the 4(o) infrastructure asset multiplied by 1,250 
percent.
    (2) For purposes of this section, a 4(o) infrastructure asset is an 
on-balance sheet exposure owned pursuant to section 4(o) of the Bank 
Holding Company Act that is not a physical commodity.
0
 6. Section 217.40 is added to read as follows:


Sec.  217.40  Covered Commodity Merchant Banking Investments.

    (a) Definition of covered commodity merchant banking investment and 
commodity trading portfolio company. For purposes of this part,
    (1) A covered commodity merchant banking investment is a company
    (i) The shares, assets, or ownership interests of which are owned 
or controlled by the Board-regulated institution pursuant to section 
4(k)(4)(H) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)); 
and
    (ii) Is engaged in covered physical commodity activities.
    (2) A commodity trading portfolio company is a covered commodity 
merchant banking investment that engages in covered physical commodity 
activities that are only the purchasing and selling of one or more 
covered physical commodities (each of which is an approved physical 
commodity) in the spot market and the taking and making physical 
delivery of one or more covered physical commodities (each of which is 
an approved physical commodity) to settle forward contracts, options, 
futures, options on futures, swaps, or similar contracts.
    (b) Covered physical commodity activities. For purposes of this 
section, covered physical commodity activities include, but are not 
limited to,
    (1) Storing, producing, transporting, or altering (including by 
processing or refining) a covered physical commodity;
    (2) Buying or selling a covered physical commodity in the spot 
market;
    (3) Taking or making physical delivery of a covered physical 
commodity to settle a contract; and
    (4) Owning or operating a facility or vessel that holds or uses a 
covered physical commodity.
    (c) End-user exception. Notwithstanding paragraph (b) of this 
section, covered physical commodity activities do not include
    (1) Owning or operating an end-user facility or vessel; or
    (2) Buying, owning or storing a covered physical commodity solely 
for purposes of powering or supporting an end-user facility or vessel 
that is owned or operated by the portfolio company.
    (d) Definition of end-user facility or vessel. For purposes of 
paragraph (c)(2) of this section, end-user facility or vessel means a 
facility or vessel that does not store, produce, transport, or alter a 
covered physical commodity except as necessary to power or support the 
facility or vessel. An end-user facility or vessel does not include a 
power plant.


217.51  [Amended]

0
 7. Section 217.51(a)(1) is revised to read as follows:
    (a) General. (1) To calculate its risk-weighted asset amounts for 
equity exposures that are not equity exposures to an investment fund, a 
covered commodity merchant banking investment, as defined in Sec.  
217.40, a Board-regulated institution must use the Simple Risk-Weight 
Approach (SRWA) provided in Sec.  217.52. A Board-regulated institution 
must use the look-through approaches provided in Sec.  217.53 to 
calculate its risk-weighted asset amounts for equity exposures to 
investment funds and use the approach provided in Sec. Sec.  217.39 and 
217.40 for equity exposures to covered commodity merchant banking 
investments.
* * * * *


217.100  [Amended]

0
8. Section 217.100(b)(3) is revised to read as follows:
* * * * *
    (b) * * *
    (3) A market risk Board-regulated institution must exclude from its 
calculation of risk-weighted assets under this subpart the risk-
weighted asset amounts of all covered positions, as defined in subpart 
F of this part (except foreign exchange positions that are not trading 
positions, over-the-counter derivative positions, cleared transactions, 
unsettled transactions, and covered physical commodities).
* * * * *
0
 9. Section 217.131 is amended by revising the section heading and 
revising paragraph (e)(3)(vii) to read as follows:


Sec.  217.131  Introduction and exposure measurement.

* * * * *
    (e) * * *
    (3) * * *
    (vii). The risk-weighted asset amount for any other on-balance-
sheet asset that does not meet the definition of a wholesale, retail, 
securitization, IMM, equity exposure, covered commodity merchant 
banking investment, cleared transaction, or default fund contribution 
and is not subject to deduction under Sec.  217.22(a), (c), or (d) 
equals the carrying value of the asset.
* * * * *
0
10. Section 217.151(a)(1) is revised to read as follows:


Sec.  217.151  Introduction and exposure measurement.

    (a) General. (1) To calculate its risk-weighted asset amounts for 
equity exposures that are not equity exposures to an investment fund or 
a covered commodity merchant banking investment, as defined in Sec.  
217.40, a Board-regulated institution may apply either the Simple Risk-
Weight Approach (SRWA) provided in Sec.  217.152 or, if it qualifies to 
do so, the Internal Models Approach (IMA) in Sec.  217.153. A Board-
regulated institution must use the look-through approaches provided in 
Sec.  217.154 to calculate its risk-weighted asset amounts for equity 
funds and use the approach provided in Sec. Sec.  217.39 through 217.40 
for equity exposures to covered commodity merchant banking investments.
* * * * *

[[Page 67239]]

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

0
11. The authority citation to part 225 continues to read as follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906, 
3907, and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.


Sec.  225.28  [Amended]

0
12. Sec.  225.28 is amended by removing the term ``copper'' from 
paragraphs (b)(8)(ii)(B) and (b)(8)(iii).
0
13. Section 225.95 is added to read as follows:


Sec.  225.95  What are some of the requirements to engage in 
complementary activities?

    (a) Paragraphs (b)-(e) of this section apply to financial holding 
companies that the Board has approved to purchase and sell physical 
commodities in the spot market and to take and make delivery of 
physical commodities to settle contracts identified in section 
225.28(b)(8)(B) of this part (12 CFR 225.28(b)(8)(B)) as an activity 
that is complementary to a financial activity under section 4(k)(1)(B) 
of the BHC Act (12 U.S.C. 1843(k)(1)(B)).
    (b) A financial holding company may not purchase or sell physical 
commodities in the spot market or take or make delivery of physical 
commodities pursuant to sections 4(c)(8) or 4(k)(1)(B) of the Bank 
Holding Company Act (12 U.S.C. 1843(c)(8), (k)(1)(B)) if the market 
value of physical commodities owned by the financial holding company 
and its subsidiaries (other than through ownership or control of assets 
or subsidiaries pursuant to sections 4(c)(2), 4(k)(4)(H), or 4(k)(4)(I) 
of the Bank Holding Company Act (12 U.S.C. 1843(c)(2), (k)(4)(H), 
(k)(4)(I))) exceeds 5 percent of the consolidated tier 1 capital of the 
financial holding company, as determined under the Board's Regulation Q 
(12 CFR part 217).
    (c) A financial holding company must notify the Board if the 
aggregate market value of physical commodities owned by the financial 
holding company and its subsidiaries (other than through ownership or 
control of assets or subsidiaries pursuant to sections 4(c)(2), 
4(k)(4)(H) or 4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. 
1843(c)(2), (k)(4)(H), (k)(4)(I))) exceeds 4 percent of the 
consolidated tier 1 capital of the financial holding company, as 
determined under the Board's Regulation Q (12 CFR part 217).
    (d) A financial holding company may not own operate, or invest in 
facilities or vessels for the extraction, transportation, storage, or 
distribution of physical commodities pursuant to section 4(k)(1)(B) of 
the Bank Holding Company Act (12 U.S.C. 1843(k)(1)(B)).
    (e) For purposes of paragraph (d) of this section, the term operate 
includes
    (1) Participation in the day-to-day management or operations of the 
facility;
    (2) Participation in management and operational decisions that 
occur in the ordinary course of the business of the facility; and
    (3) Managing, directing, conducting, or providing advice regarding 
operations having to do with the leakage or disposal of a physical 
commodity or hazardous waste or decisions about the facility's 
compliance with environmental statutes or regulations, including any 
law or regulation referenced in the definition of covered physical 
commodity in section 217.2 of the Board's Regulation Q (12 CFR 217.2).

    By order of the Board of Governors of the Federal Reserve 
System, September 23, 2016.
Robert deV. Frierson,
Secretary of the Board.
[FR Doc. 2016-23349 Filed 9-29-16; 8:45 am]
BILLING CODE P



                                                      67220                 Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules

                                                      standards for cooking products, and                     needed if these products cannot meet                  FEDERAL RESERVE SYSTEM
                                                      submit comments to DOE.                                 the proposed standard levels. DOE is
                                                         In view of the request for a comment                 also seeking test data showing how the                12 CFR Parts 217 and 225
                                                      period extension for the September 2016                 design differences for commercial-style
                                                      SNOPR, DOE has determined that a 30-                                                                          [Docket No. R–1547]
                                                                                                              cooking tops impact cooking
                                                      day extension of the public comment                     performance relative to residential-style             RIN 7100 AE–58
                                                      period for the September 2016 SNOPR                     products.
                                                      is appropriate. The comment period is                                                                         Regulations Q and Y; Risk-Based
                                                      extended until November 2, 2016. DOE                      AHAM and GE Appliances, a Haier
                                                                                                                                                                    Capital and Other Regulatory
                                                      further notes that any submissions of                   Company (GE) also objected to the
                                                                                                                                                                    Requirements for Activities of
                                                      comments or other information                           proposed test method for determining                  Financial Holding Companies Related
                                                      submitted between the original                          the standby power consumption of                      to Physical Commodities and Risk-
                                                      comment end date and the extension of                   combined cooking products (i.e.,                      Based Capital Requirements for
                                                      the comment period will be deemed                       household cooking appliances that                     Merchant Banking Investments
                                                      timely filed.                                           combines a conventional cooking top
                                                         DOE also notes that, in response to                  and/or conventional oven with other                   AGENCY: Board of Governors of the
                                                      the August 2016 TP SNOPR, it received                   appliance functionality, which may or                 Federal Reserve System (Board).
                                                      a number of comments pertaining to the                  may not include another cooking                       ACTION: Notice of proposed rulemaking.
                                                      test procedure that impact the proposed                 product). GE urged DOE to consider
                                                      standard levels from the September                      adopting for conventional cooking tops                SUMMARY:    The Board is seeking
                                                      2016 SNOPR.1 Based on these                             the same prescriptive design                          comment on a proposal to adopt
                                                      comments and the extension of the                                                                             additional limitations on physical
                                                                                                              requirement for the power supply that
                                                      comment period, DOE has identified                                                                            commodity trading activities conducted
                                                                                                              was proposed for conventional ovens.
                                                      additional information and data it is                                                                         by financial holding companies under
                                                                                                              DOE welcomes comments on the merits                   complementary authority granted
                                                      seeking that would be beneficial for the                of the approach of adopting a
                                                      analysis in support of the standards                                                                          pursuant to section 4(k) of the Bank
                                                                                                              prescriptive standard for the power                   Holding Company Act and clarify
                                                      rulemaking.                                             supply for conventional cooking tops,
                                                         Sub-Zero Group, Inc. commented that                                                                        certain existing limitations on those
                                                                                                              including data on combined cooking                    activities; amend the Board’s risk-based
                                                      the proposed test procedure and                         products.
                                                      standards do not take into account                                                                            capital requirements to better reflect the
                                                      design features associated with                           AHAM and GE also expressed                          risks associated with a financial holding
                                                      commercial-style gas cooking tops that                  concern regarding the proposed                        company’s physical commodity
                                                      impact efficiency, including:                           requirement to test each unique size                  activities; rescind the findings
                                                         • High input rate burners with large                 setting of multi-ring surface units.                  underlying the Board orders authorizing
                                                      diameters and high controllability of the               AHAM and GE stated that multi-ring                    certain financial holding companies to
                                                      flame, for quicker heat-up times as well                elements provide consumers the ability                engage in energy management services
                                                      as the ability to simmer foods such as                  to adjust the element size to the size of             and energy tolling; remove copper from
                                                      chocolates and sauces;                                  the cookware, which in turn saves                     the list of metals that bank holding
                                                         • Heavy cast iron grates for better                  energy. AHAM and GE noted that                        companies are permitted to own and
                                                      heat distribution and strength to support               because the inner elements of multi-ring              store as an activity closely related to
                                                      large loads;                                                                                                  banking; and increase transparency
                                                                                                              surface units operate at lower efficiency,
                                                         • Greater distance from the burner to                                                                      regarding physical commodity activities
                                                                                                              the proposed test procedure could result
                                                      the grate for heat distribution and                                                                           of financial holding companies through
                                                                                                              in the elimination of multi-ring                      more comprehensive regulatory
                                                      reduction of carbon monoxide; and                       elements. DOE welcomes data
                                                         • Larger open area for primary and                                                                         reporting.
                                                                                                              comparing available surface element
                                                      secondary air for combustion and                        diameters and cooking top energy use                  DATES:  Comments must be received on
                                                      exhaust of combustion byproducts.                                                                             or before December 22, 2016.
                                                                                                              for cooking tops with multi-ring surface
                                                         DOE welcomes data showing how                                                                              ADDRESSES: You may submit comments,
                                                                                                              units and those that do not have this
                                                      these design factors affect the measured                                                                      identified by Docket No. R–1547 and
                                                      annual energy consumption relative to                   feature.
                                                                                                                                                                    RIN 7100 AE–58 by any of the following
                                                      the proposed standard levels. As noted                    Issued in Washington, DC, on September
                                                                                                                                                                    methods:
                                                      in the September 2016 SNOPR, DOE                        23, 2016.
                                                                                                                                                                       • Agency Web site: http://
                                                      selected the proposed standard level for                Kathleen B. Hogan,                                    www.federalreserve.gov. Follow the
                                                      gas cooking tops to maintain the full                   Deputy Assistant Secretary for Energy                 instructions for submitting comments at
                                                      functionality of cooking tops marketed                  Efficiency, Energy Efficiency and Renewable           http://www.federalreserve.gov/
                                                      as commercial-style and noted that                      Energy.                                               generalinfo/foia/ProposedRegs.aspx.
                                                      commercial-style gas cooking tops are                   [FR Doc. 2016–23660 Filed 9–29–16; 8:45 am]              • Federal eRulemaking Portal: http://
                                                      available on the market that meet the                   BILLING CODE 6450–01–P                                www.regulations.gov. Follow the
                                                      proposed efficiency level. 81 FR 60784,                                                                       instructions for submitting comments.
asabaliauskas on DSK3SPTVN1PROD with PROPOSALS




                                                      60817, 60865. As a result, DOE is also                                                                           • Email: regs.comments@
                                                      seeking data specifically on the                                                                              federalreserve.gov. Include the docket
                                                      efficiency of commercial-style products                                                                       number and RIN number in the subject
                                                      relative to the proposed standard level                                                                       line of the message.
                                                      and the design changes that would be                                                                             • Fax: (202) 452–3819 or (202) 452–
                                                        1 These comments are available in the
                                                                                                                                                                    3102.
                                                      conventional cooking products test procedure
                                                                                                                                                                       • Mail: Robert deV. Frierson,
                                                      docket at https://www.regulations.gov/docket?D=                                                               Secretary, Board of Governors of the
                                                      EERE-2012-BT-TP-0013.                                                                                         Federal Reserve System, 20th Street and


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                                                                            Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules                                                    67221

                                                      Constitution Avenue NW., Washington,                       C. The Scope of Permitted Complementary            the financial system generally.3
                                                      DC 20551.                                                     Commodity Activities                            Pursuant to this authority, the Board has
                                                        All public comments will be made                         1. Background                                      authorized certain FHCs to engage in
                                                                                                                 a. Physical Commodity Trading                      physical commodity trading as well as
                                                      available on the Board’s Web site at
                                                                                                                 b. Energy Management Services and Energy
                                                      http://www.federalreserve.gov/                                Tolling
                                                                                                                                                                    energy management services and energy
                                                      generalinfo/foia/ProposedRegs.aspx as                      2. Reconsideration of the Approval of              tolling. The GLB Act also added a
                                                      submitted, unless modified for technical                      Energy Management and Tolling as                grandfather provision that permits
                                                      reasons. Accordingly, your comments                           Complementary Activities                        certain FHCs to continue to engage in a
                                                      will not be edited to remove any                           3. Conformance Period                              broad range of physical commodity
                                                      identifying or contact information.                        E. Reclassification of Copper as an                activities.4 Finally, the GLB Act
                                                      Public comments may also be viewed                            Industrial Metal                                authorizes FHCs to make merchant
                                                      electronically or in paper form in Room                    F. New Financial Reporting Data on                 banking investments in any type of
                                                                                                                    Physical Commodity Activities                   nonfinancial company, including a
                                                      3515, 1801 K Street NW. (between 18th
                                                                                                                 1. General                                         company engaged in activities involving
                                                      and 19th Streets NW.), Washington, DC                      2. Schedule HC–W
                                                      20006 between 9:00 a.m. and 5:00 p.m.                      3. Schedule HC–R Modifications
                                                                                                                                                                    physical commodities.5
                                                      on weekdays. For security reasons, the                     4. Public Disclosure                               B. Risks Associated With Physical
                                                      Board requires that visitors make an                    III. Regulatory Analysis                              Commodity Activities
                                                      appointment to inspect comments. You                       A. Regulatory Flexibility Act Analysis
                                                      may do so by calling (202) 452–3684.                       B. Paperwork Reduction Act                            There are a number of potential legal,
                                                      Upon arrival, visitors will be required to                 C. Solicitation of Comments on Use of              reputational and financial risks
                                                      present valid government-issued photo                         Plain Language                                  associated with the conduct of physical
                                                      identification and to submit to security                                                                      commodity trading activities. Over the
                                                                                                              I. Introduction                                       past decade, monetary damages
                                                      screening in order to inspect and
                                                      photocopy comments.                                     A. Background                                         associated with an environmental
                                                                                                                                                                    catastrophe involving physical
                                                      FOR FURTHER INFORMATION CONTACT:                           Bank holding companies (BHCs) and                  commodities have ranged from
                                                      Board: Constance M. Horsley, Assistant                  their subsidiaries engage in certain                  hundreds of millions to tens of billions
                                                      Director, (202) 452–5239, Elizabeth                     types of physical commodity activities                of dollars. These damages can exceed
                                                      MacDonald, Manager, (202) 475–6316,                     under a variety of authorities. Pursuant              the market value of the physical
                                                      Kevin Tran, Supervisory Financial                       to the Bank Holding Company Act (BHC                  commodity involved in the catastrophic
                                                      Analyst, (202) 452–2309, or Vanessa                     Act), BHCs may engage in activities that              event, and can exceed the committed
                                                      Davis, Supervisory Financial Analyst,                   are ‘‘so closely related to banking as to             capital and insurance policies of the
                                                      (202) 475–6674, Division of Banking                     be a proper incident thereto.’’ 1 This                organization. Certain federal
                                                      Supervision and Regulation; or Laurie                   authority allows BHCs to buy, sell, or                environmental laws, including the Oil
                                                      Schaffer, Associate General Counsel,                    hold precious metals, such as gold,                   Pollution Act of 1990 (OPA),6 the
                                                      (202) 452–2277, Michael Waldron,                        silver, platinum, and palladium;                      Comprehensive Environmental
                                                      Special Counsel, (202) 452–2798, Will                   participate as a principal in cash-settled            Response, Compensation, and Liability
                                                      Giles, Counsel, (202) 452–3351, or Mary                 derivative contracts based on                         Act of 1980 (CERCLA),7 and the Clean
                                                      Watkins, Attorney, (202) 452–3722,                      commodities; and trade in commodity                   Water Act (CWA),8 generally impose
                                                      Legal Division, Board of Governors of                   derivatives that allow for physical                   liability on owners and operators of
                                                      the Federal Reserve System, 20th and C                  settlement under certain circumstances.               facilities and vessels for the release of
                                                      Streets NW., Washington, DC 20551. For                     In the Gramm-Leach-Bliley Act (GLB                 physical commodities, such as oil,
                                                      the hearing impaired only,                              Act) enacted in 1999, Congress                        distillate fuel oil, jet fuel, liquefied
                                                      Telecommunication Device for the Deaf                   expanded the activities in which a BHC                petroleum gas, gasoline, fertilizer,
                                                      (TDD), (202) 263–4869.                                  may engage.2 The GLB Act permits                      natural gas, and propylene.9
                                                      SUPPLEMENTARY INFORMATION:                              BHCs that are well capitalized and well               Consequently, a company that directly
                                                                                                              managed to elect to become financial                  owns an oil tanker or petroleum refinery
                                                      Table of Contents                                       holding companies (FHCs) and engage                   that releases crude oil in a navigable
                                                      I. Introduction                                         in a broader range of activities than                 waterway or adjoining shoreline in the
                                                         A. Background                                        permitted for BHCs that are not FHCs.                 United States may be liable for removal
                                                         B. Risks Associated With Physical                    Three provisions of the GLB Act permit                costs and damages for that release under
                                                            Commodity Activities                              FHCs to conduct a broader range of                    the OPA.10
                                                         C. Limitations on Physical Commodity                 physical commodity activities and
                                                            Activities
                                                         D. Summary of the Advance Notice of
                                                                                                              investments than are otherwise                           3 See Gramm-Leach-Bliley Act § 103, 12 U.S.C.

                                                                                                              permitted for BHCs. First, the GLB Act                1843(k)(1)(B).
                                                            Proposed Rulemaking (ANPR) and                                                                             4 12 U.S.C. 1843(o).
                                                            Comments on the ANPR                              permits FHCs to engage in any activity                   5 12 U.S.C. 1843(k)(4)(H).
                                                      II. Description of Proposed Rule                        that the Board (in its sole discretion)                  6 See 33 U.S.C. 2701–02.
                                                         A. Scope of Permissible Physical                     determines is complementary to a                         7 See 42 U.S.C. 9607.
                                                            Commodity Activities                              financial activity and does not pose a                   8 See 33 U.S.C. 1321. In general, liability under
                                                         1. Level of Complementary Commodity                  substantial risk to the safety and
asabaliauskas on DSK3SPTVN1PROD with PROPOSALS




                                                                                                                                                                    the OPA, CWA, and CERCLA is subject to limited
                                                            Activities Permitted                              soundness of depository institutions or               defenses, including releases caused by an act of
                                                         2. Clarification of Prohibitions on Certain                                                                God. See, e.g., 33 U.S.C. 2703; 42 U.S.C. 9607.
                                                                                                                                                                       9 See 33 U.S.C. 1321, 2701 (defining ‘‘oil’’), 42
                                                            Operations
                                                                                                                1 See 12 U.S.C. 1843(c)(8). In addition, national
                                                         B. Risk-Based Capital Requirements for                                                                     U.S.C. 7412, 9601 (defining ‘‘hazardous air
                                                                                                              banks owned by BHCs may engage in certain             pollutant’’ and ‘‘hazardous substance,’’
                                                            Covered Physical Commodities                      limited types of physical commodity activities        respectively).
                                                         1. Overview                                          pursuant to authority granted under the National         10 See 33 U.S.C. 2702. The OPA generally limits
                                                         2. Calculation of Exposure Amount for                Bank Act. State-chartered banks also may be           liability for spills from facilities to $350,000,000
                                                            Covered Physical Commodities                      authorized to engage in the same activities under     and liability from spills from vessels to the greater
                                                         3. Impact Analysis of Proposed Capital               state statutes.                                       of $1,900 per gross ton or $22,000,000. Id. at 2704.
                                                            Requirements                                        2 Public Law 106–102, 113 Stat. 1338 (1999).                                                     Continued




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                                                      67222                  Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules

                                                         In addition to Federal environmental                   entity exercises a high degree of control                 C. Limitations on Physical Commodity
                                                      law, state environmental laws separately                  over the liable company.15 Courts                         Activities
                                                      impose liability for the harmful or                       typically require multiple indicia of                        To help address these risks, the Board
                                                      unauthorized release of an                                control before assigning liability to the                 placed a number of limitations,
                                                      environmentally sensitive commodity.11                    parent or affiliated company.16 Common                    discussed below, on the physical
                                                      Like Federal environmental law, many                      indicia include managing day-to-day                       commodity activities it has authorized
                                                      states impose strict liability for damages                operations, undercapitalizing                             under the GLB Act.
                                                      from the unauthorized release of                          subsidiaries, and commingling of assets,                     Section 4(k)(1)(B) Complementary
                                                      specified harmful substances on the                       employees, legal advice, accounting, or                   Authority. The GLB Act added section
                                                      owners and operators of the facility or
                                                                                                                office space.17 Courts have also used the                 4(k)(1)(B) to the BHC Act to permit an
                                                      vessel from which the discharge
                                                                                                                concept of veil piercing to assign                        FHC to engage in activities that the
                                                      occurred. Many states also impose
                                                                                                                liability under Federal environmental                     Board determines to be complementary
                                                      liability based on the causal connection
                                                                                                                law.18                                                    to a financial activity (complementary
                                                      between a party’s actions and the
                                                                                                                   Further, even if a parent company is                   authority). The provision’s purpose was
                                                      prohibited release.12 Some state statutes
                                                                                                                not assigned liability through a veil                     to allow the Board to permit FHCs to
                                                      also impose strict liability directly on
                                                      owners of the covered substance for                                                                                 engage in an activity that appears to be
                                                                                                                piercing action, the parent company
                                                      damages caused by, and/or cleanup and                                                                               commercial rather than financial in
                                                                                                                may provide support to affiliated
                                                      removal costs incurred as a result of, the                                                                          nature, but that is meaningfully
                                                                                                                entities involved in an environmental                     connected to a financial activity such
                                                      release of the substance.13 State                         catastrophe to limit reputational damage
                                                      common law tort doctrines may also                                                                                  that it complements the financial
                                                                                                                or as a condition to a settlement                         activity.20 When determining that an
                                                      provide additional bases for liability for                agreement. For example, BP p.l.c., the
                                                      environmental harm, such as                                                                                         activity is complementary to a financial
                                                                                                                ultimate parent company of BP                             activity for an FHC, the Board must find
                                                      negligence, trespass, and nuisance.14                     Exploration & Production, Inc. and BP
                                                         State laws also allow for the                                                                                    that the activity does not pose a
                                                                                                                Corporation North America, Inc.,                          substantial risk to the safety and
                                                      assignment of the liability of one
                                                      company to its parent and/or another                      guaranteed the payment of more than                       soundness of depository institution
                                                      affiliated company even if the affiliated                 $20 billion as part of a consent decree                   subsidiaries of the FHC or the financial
                                                      company did not directly participate in                   resolving claims against its subsidiaries                 system generally.21 In addition, the
                                                      the wrongdoing. This concept of                           resulting from the Deepwater Horizon                      Board is required to consider whether
                                                      ‘‘piercing the corporate veil’’ is an                     oil spill.19                                              performance of the activity can
                                                      exception to the general rule in                                                                                    reasonably be expected to produce
                                                      corporate law that a parent company is                       15 See, e.g., See William Passalacqua Builders,        benefits to the public—such as greater
                                                      not liable for the acts of its subsidiaries,              Inc., v. Resnick Developers South, Inc., 933 F.2d         convenience, increased competition, or
                                                                                                                131, 137–141 (2d Cir. 1991); Berkey v. Third              gains in efficiency—that outweigh
                                                      and may be applied when the affiliated                    Avenue Ry. Co., 244 N.Y. 84, 155 NE. 58 (1926),
                                                                                                                (holding that ‘‘domination must be so complete,           possible adverse effects, such as undue
                                                      However, the OPA liability cap will not apply if the      interference so obtrusive, that by the general rules      concentration of resources, decreased or
                                                      party engaged in certain types of misconduct (e.g.,       of agency the parent will be a principal and the          unfair competition, conflicts of interest,
                                                      willful misconduct, gross negligence, violation of        subsidiary an agent . . .’’); Fletcher Cyclopedia of      or unsound banking practices.22
                                                      Federal safety regulation, failure to report incident).   the Law of Corporations 41.30–.60 (rev. ed. 2006).
                                                      Id.                                                       See also Letter from the Securities Industry and
                                                                                                                                                                             Under this authority, the Board has
                                                         11 The OPA, CERCLA, and CWA explicitly state           Financial Markets Association et al., dated April 16,     approved the requests of a limited
                                                      that the statutes do not preempt state laws imposing      2014, Appendix B, pg. 41 (SIFMA Comment Letter).          number of FHCs to engage in three
                                                      additional liability or requirements with respect to      Other courts have articulated the first prong of this     complementary activities related to
                                                      the discharge of hazardous substances. 33 U.S.C.          inquiry—whether there was domination—as an
                                                                                                                inquiry into whether the two companies operated
                                                                                                                                                                          physical commodities: (1) Physical
                                                      1312(o), 2718(a); 42 U.S.C. 9614(a).
                                                         12 N.J. Admin. Code tit. 7, section 1E:1.6; State v.   as a single economic unit or alter ego. See Fletcher      commodity trading involving the
                                                      Montayne, 604 N.Y.S.2d 978 (N.Y. App. Div. 1993)          v. Atex, Inc., 68 F.3d 1451, 1457 (1995); NetJets         purchase and sale of commodities in the
                                                      (finding an oil broker liable under New York              Aviation, Inc. v. LHC Communications, LLC, 537            spot market, and taking and making
                                                      Navigation Law section 181 because the broker was         F.3d 168, 176 (2d Cir. 2008).
                                                                                                                   16 See William Passalacqua Builders, Inc., v.
                                                                                                                                                                          delivery of physical commodities to
                                                      contractually obligated to provide the oil and
                                                      specify the means of its delivery even though the         Resnick Developers South, Inc., 933 F.2d 131, 137–        settle commodity derivatives (physical
                                                      broker did not own the oil and had used third             141 (2d Cir. 1991); United States v. Golden Acres,        commodity trading); 23 (2) providing
                                                      parties to move and store the oil). See also N.J.         Inc., 702 F. Supp. 1097, 1104 (D. Del. 1988) aff’d        transactions and advisory services to
                                                      Dep’t of Envtl. Prot. v. Dimant, 212 N.J. 153, 177,       879 F.2d 860, 1104 (3d Cir. 1989). See also Harco         power plant owners (energy
                                                      51 A.3d 816 (2012) (summarizing prior state cases         Nat. Ins. Co. v. Green Farms, Inc., 15 Del. J. Corp.
                                                      to require some connection between the discharge          L. 1030, 1038–1040 (Del. Ch. 1989).
                                                                                                                   17 See, e.g., United States v. Golden Acres, Inc.,        20 Citigroup Inc., 89 Fed. Res. Bull. 508 (2003),
                                                      complained of and the alleged discharger);
                                                      Authority of New Brunswick v. Suydam Investors,           702 F. Supp. at 1104; New York State Elec. and Gas        note 8 and related text (‘‘2003 Citi Order’’).
                                                      826 A.2d 673, 683 (N.J. 2003) (suggesting that such       Corp. v. First Energy Corp., 766 F.3d 212, 224–227           21 12 U.S.C. 1843(k)(1)(B).

                                                      causal liability under New Jersey law should be           (2nd Cir. 2014); William Passalacqua Builders, Inc.,         22 12 U.S.C. 1843(j)(2).
                                                      read to impose liability on persons responsible for       v. Resnick Developers South, Inc., 933 F.2d 131,             23 See Board orders regarding Citigroup Inc., 89
                                                      the discharge of the substance).                          137–141 (2d Cir. 1991).                                   Fed. Res. Bull. 508 (2003); Fortis S.A./N.V., 94 Fed.
                                                         13 See, e.g., Alaska Stat. section 46.03.822; Cal.        18 See, e.g., United States v. Bestfoods, 524 U.S.C.
                                                                                                                                                                          Res. Bull. C20 (2008); Société Générale, 92 Fed. Res.
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                                                      Gov’t Code §§ 8670.3, 8670.56.5; Fla. Stat. section       51, 63–64 (1998); AT&T Global Info. Solutions Co.         Bull. C113 (2006); Deutsche Bank AG, 91 Fed. Res.
                                                      376.12 (imposing liability for cleanup costs on the       v. Union Tank Car Co., 29 F.Supp.2d 857, 869 (S.D.        Bull. C54 (2005); JPMorgan Chase & Co., 91 Fed.
                                                      owner of the covered substance but only if the            Oh. 1998).                                                Res. Bull. C57 (2005); Barclays Bank PLC, 90 Fed.
                                                      owner and operator of the facility or vessel do not          19 U.S. v. BP Exploration & Production Inc., et al.,   Res. Bull. 511 (2004); UBS AG, 90 Fed. Res. Bull.
                                                      pay such costs and such parties were not in               No. 10–4536 in MDL 2179 (E.D. La.) Consent Decree         215 (2004); and The Royal Bank of Scotland Group
                                                      compliance with the financial security                    among defendant BP Exploration & Production Inc.,         plc, 94 Fed. Res. Bull. C60 (2008). See also Board
                                                      requirements of the statute at the time of the            The United States of America, and the States of           letters regarding Bank of America Corporation
                                                      release); Md. Envir. Code Ann. § 4–401; Or. Rev.          Alabama, Florida, Louisiana, Mississippi, and             (April 24, 2007), BNP Paribas (August 31, 2007),
                                                      Stat. § 468B.310; Wash. Rev. Code Ann. section            Texas, Document 16093, Appendix 9, available at           Credit Suisse Group (March 27, 2007), Fortis S.A./
                                                      90.56.370.                                                http://www.laed.uscourts.gov/sites/default/files/         N.V. (September 29, 2006), Wachovia Corporation
                                                         14 Restatement (Second) of Torts sections 158,         OilSpill/4042016ConsentDecree_0.pdf. See also             (April 13, 2006), Bank of Nova Scotia (February 17,
                                                      165, 390, 822, 825, 826.                                  https://www.justice.gov/enrd/deepwater-horizon.           2011).



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                                                                             Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules                                               67223

                                                      management services); 24 and (3) paying                     Section 4(o) Grandfather Authority. In             ownership interest and in any type of
                                                      a power plant owner fixed periodic                       the GLB Act, Congress amended the                     nonfinancial company (portfolio
                                                      payments that compensate the owner for                   BHC Act to allow certain companies to                 company). The GLB Act imposes
                                                      its fixed costs in exchange for the right                continue to engage in a broad range of                conditions on the merchant banking
                                                      to all or part of the plant’s power output               activities involving physical                         investment activities of FHCs. First, the
                                                      (energy tolling).25 Together, these three                commodities if these companies                        investment must be part of ‘‘a bona fide
                                                      activities are referred to as                            subsequently became FHCs.27 Under                     underwriting or merchant or investment
                                                      complementary commodity activities.                      section 4(o) of the BHC Act, a company                banking activity’’ and may not be held
                                                         The Board placed certain restrictions                 that was not a BHC prior to and                       by an IDI or subsidiary of an IDI.30
                                                      on each complementary commodity                          becomes an FHC after November 12,                     Second, an FHC making merchant
                                                      activity to protect against the risks the                1999, may continue to engage in                       banking investments must own or
                                                      activity could pose to the safety and                    activities related to the trading, sale, or           control a securities affiliate or a
                                                      soundness of the FHC, any of its insured                 investment in commodities that were                   registered investment adviser that
                                                      depository institution (IDI) subsidiaries,               not permissible for BHCs as of                        advises an affiliated insurance
                                                      and the U.S. financial system. For                       September 30, 1997, if the company was                company.31 Third, merchant banking
                                                      example, the Board limited the size of                   engaged in the United States in any of                investments must be held only ‘‘for a
                                                      these activities by imposing limits on                   such activities as of September 30, 1997              period of time to enable the sale or
                                                      the amount of assets or revenue that an                  (section 4(o) grandfather authority).28               disposition thereof on a reasonable basis
                                                      FHC could have committed to                                 Section 4(o) grandfathered firms are               consistent with the financial viability of
                                                      complementary commodity activities.                      permitted by statute to engage in a                   the activities.’’ 32 Finally, an FHC may
                                                      Specifically, the aggregate market value                 broader range of activities than firms                not routinely manage or operate the
                                                      of commodities held under physical                       that are limited to conducting physical               portfolio company ‘‘except as may be
                                                      commodity trading and energy tolling                     commodity activities under                            necessary or required to obtain a
                                                      may represent no more than 5 percent                     complementary authority. This broader                 reasonable return on investment upon
                                                      of the tier 1 capital of the FHC. The                    range of activities includes storing,                 resale or disposition.’’ 33
                                                      Board also imposed a cap on energy                       transporting, extracting, and altering                   The Board’s rules contain limitations
                                                      management services of no more than 5                    commodities. Section 4(o) imposes only                that implement these statutory
                                                      percent of an FHC’s consolidated                         two conditions on the conduct of                      requirements. For example, Regulation
                                                      operating revenues. To help protect                      activities: (i) The activities are limited to         Y prohibits FHCs in most cases from
                                                      against dealing in illiquid commodities,                 no more than 5 percent of the total                   holding merchant banking investments
                                                      the Board also limited the physical                      consolidated assets of the FHC, and (ii)              for more than 10 years (or for more than
                                                      commodity trading authority to only                      the FHC is prohibited from cross-                     15 years for investments held in a
                                                      physical commodities approved by the                     marketing the services of its subsidiary              qualifying private equity fund).34
                                                      Commodity Futures Trading                                depository institution(s) and                         Further, Regulation Y limits the
                                                      Commission (CFTC) for trading on a                       subsidiary(ies) engaged in activities                 duration of routine management to the
                                                      U.S. futures exchange (unless                            under the section 4(o) grandfather                    period necessary to address the cause of
                                                      specifically excluded by the Board) or                   authority. The 5 percent of assets limit              the FHC’s involvement, to obtain
                                                      commodities the Board otherwise                          permits section 4(o) grandfathered FHCs               suitable alternative management
                                                      approves.26                                              to hold significantly larger amounts of a             arrangements, to dispose of the
                                                         The Board also prohibited FHCs from                   wider range of commodity-related assets               investment, or to otherwise obtain a
                                                      owning, operating, or investing in                       than those FHCs that conduct                          reasonable return upon the resale or
                                                      facilities that extract, transport, store, or            commodities activities under                          disposition of the investment.35
                                                      alter commodities under                                  complementary authority, which does                   Additionally, an FHC must establish
                                                      complementary authority. FHCs also are                   not permit storage, transport, extraction             risk-management policies and
                                                      required to ensure that the third-party                  or similar activities and imposes a                   procedures for its merchant banking
                                                      contractors hired to store, transport, and               stricter limit of 5 percent of tier 1 capital         activities, and policies and procedures
                                                      otherwise handle the physical                            on the more limited class of commodity                that maintain corporate separateness
                                                      commodities of the FHC are reputable.                    holdings that are permitted under                     between the FHC and its portfolio
                                                                                                               complementary authority.                              companies. Maintaining corporate
                                                         24 See, e.g., The Royal Bank of Scotland Group
                                                                                                                  Merchant Banking Authority. The                    separateness protects the FHC and its
                                                      plc, 94 Fed. Res. Bull. C60 (2008) (2008 RBS Order),     GLB Act also amended the BHC Act to                   subsidiary IDIs from potential legal
                                                      and Fortis S.A./N.V., 94 Fed. Res. Bull. C20 (2008)      allow FHCs to engage in merchant                      liability associated with the operations
                                                      (2007 Fortis Order).                                     banking activities. Under section                     and financial obligations of the FHC’s
                                                         25 Under energy tolling, the toller provides (or
                                                                                                               4(k)(4)(H) of the BHC Act, FHCs may                   portfolio companies and private equity
                                                      pays for) the fuel needed to produce the power that
                                                      it directs the owner to produce. See, e.g., 2008 RBS
                                                                                                               invest in nonfinancial companies as part              funds.36 The Board’s regulatory capital
                                                      Order. The agreements also generally provide that        of a bona fide securities underwriting or             rule (Regulation Q) addresses merchant
                                                      the owner will receive a marginal payment for each       merchant or investment banking activity               banking investments through risk-
                                                      megawatt hour produced by the plant to cover the         (merchant banking authority).29 These
                                                      owner’s variable costs plus a profit margin. Id. The                                                           weighting in the equity framework.37
                                                                                                               investments may be made in any type of
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                                                      plant owner, however, retains control over the day-
                                                      to-day operations of the plant and physical plant                                                                30 12  U.S.C. 1843(k)(4)(H)(i), (ii).
                                                                                                                 27 See  12 U.S.C. 1843(o).
                                                      assets at all times. Id.                                                                                         31 Id. at 1843(k)(4)(H)(ii).
                                                         26 See 2003 Citi Order. In limited cases, the Board     28 12 U.S.C. 1843(o). Two firms are authorized to
                                                                                                                                                                       32 Id. at 1843(k)(4)(H)(iii).
                                                      has permitted FHCs to take and make physical             engage in these activities: The Goldman Sachs           33 12 U.S.C. 1843(k)(4)(H)(iv).
                                                      delivery of a non-CFTC-approved commodity if the         Group, Inc. and Morgan Stanley, both of which
                                                                                                                                                                       34 See 12 CFR 225.172-.173.
                                                      FHC demonstrated that there is a market in               became bank holding companies in 2008 and made
                                                                                                                                                                       35 12 CFR 225.171(e). Regulation Y also imposes
                                                      financially-settled contracts on that commodity, the     successful elections to become financial holding
                                                      commodity is fungible, the commodity is liquid,          companies at that time.                               documentation requirements on these extraordinary
                                                      and the FHC has in place trading limits that address       29 Id. The statute grants similar authority to      management activities. Id.
                                                                                                                                                                       36 See also id. at 225.175(b).
                                                      concentration risk and overall exposure. See, e.g.,      insurance companies that are FHCs or subsidiaries
                                                      2008 RBS Order.                                          of FHCs. Id. at 1843(k)(4)(I).                          37 12 CFR 217.52–.53 and 217.153–.154.




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                                                      67224                   Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules

                                                      D. Summary of the Advance Notice of                       form letters in response to the ANPR                     Commenters that opposed FHCs
                                                      Proposed Rulemaking (ANPR) and                            from end users of commodities (e.g.,                  engaging in physical commodity
                                                      Comments on the ANPR                                      non-financial entities that use                       activities or that favored additional
                                                         Over the last 15 years, a number of                    commodities in their operations or                    limitations on such activities expressed
                                                      FHCs have engaged in physical                             businesses), trade associations, public               concern that FHCs have conflicts of
                                                                                                                interest groups, academics, members of                interest in dealing with customers and
                                                      commodity activities pursuant to these
                                                                                                                Congress, and other individuals. In                   enjoy an unfair competitive advantage.
                                                      authorities and the Federal Reserve has
                                                                                                                general, comments from individuals,                   These commenters cited news articles
                                                      gained supervisory experience with the
                                                                                                                members of Congress and public interest               alleging market manipulation by certain
                                                      implementation of these restrictions. In
                                                                                                                groups opposed FHC involvement in                     FHCs in the aluminum and copper
                                                      addition, the Federal Reserve has
                                                                                                                physical commodity activities or                      markets. Some commenters also argued
                                                      monitored the connection between
                                                                                                                supported additional restrictions on                  that the ability of FHCs to make
                                                      authorized physical commodity
                                                                                                                FHC involvement in physical                           proprietary trades and purchases of
                                                      activities and financial activities,
                                                                                                                commodities. In contrast, comments                    physical commodities may conflict with
                                                      including derivative trading and
                                                                                                                from end users, FHCs, and banking                     the interests of their customers. These
                                                      hedging activities. The Board notes that                                                                        commenters argued that FHCs may
                                                      after an initial growth of physical                       trade organizations were generally
                                                                                                                supportive of FHC involvement in                      provide less favorable terms on products
                                                      commodity activities of FHCs, the level                                                                         and services to customers when those
                                                      of physical commodity activities at                       physical commodity activities or
                                                                                                                opposed additional restrictions on these              customers compete with FHCs in the
                                                      FHCs has generally declined.                                                                                    physical commodity markets. Finally,
                                                         In January 2014, as part of an ongoing                 activities. Comments from insurance
                                                                                                                companies urged the Board to consider                 some commenters stated that the ability
                                                      review of the commodities activities of                                                                         of FHCs to trade in physical commodity
                                                      FHCs, the Board sought public comment                     the differences between insurance
                                                                                                                companies and FHCs in terms of their                  markets and own physical commodities
                                                      on a variety of issues related to the                                                                           provides an opportunity for FHCs to use
                                                      unique and significant risks of physical                  business models, risks, and regulations.
                                                                                                                   Risks of FHC participation in physical             information gleaned from their trading
                                                      commodity activities through an                                                                                 activities to manipulate financial
                                                      ANPR.38 In the ANPR, the Board invited                    commodity activities. Commenters that
                                                                                                                opposed FHC participation in physical                 markets.
                                                      comment on whether additional                                                                                      Commenters in favor of FHC
                                                      prudential restrictions or limitations on                 commodity markets or that favored
                                                                                                                                                                      participation in the physical commodity
                                                      commodities-related activities were                       additional limitations on these activities
                                                                                                                                                                      markets or opposed to additional
                                                      appropriate to further mitigate the risks                 argued that these activities pose risks to
                                                                                                                                                                      restrictions on these activities argued
                                                      of those activities.                                      FHCs individually and to the financial
                                                                                                                                                                      that FHC participation in these markets
                                                         In light of the potential risks                        system generally. These commenters
                                                                                                                                                                      provides valuable and hard-to-replace
                                                      associated with physical commodity                        generally described risks associated
                                                                                                                                                                      services to end users of commodities.
                                                      activities, the ANPR queried whether                      with physical commodity activities,
                                                                                                                                                                      Some commented that FHCs were
                                                      the current capital and insurance                         including environmental risks,
                                                                                                                                                                      desirable counterparties in these
                                                      requirements adequately account for the                   catastrophic risks, geopolitical risks
                                                                                                                                                                      markets because FHCs are well
                                                      degree and types of liabilities that                      (e.g., commodities activities conducted
                                                                                                                                                                      capitalized, well regulated, and familiar
                                                      would result from physical commodities                    in regions experiencing political                     with their customers’ businesses.
                                                      in the event of an environmental                          turmoil), compliance risks (e.g., bribery,            Commenters commonly argued that the
                                                      catastrophe. The ANPR also sought                         environmental risks), and supply chain                ability of FHCs to offer bespoke hedging
                                                      comment on whether FHCs’ vendor-                          issues. Some of these commenters                      arrangements to customers would not be
                                                      approval processes and current industry                   recommended that the Board prohibit                   possible without their participation in
                                                      safety policies and procedures are                        trading in or ownership of commodities                physical commodity activities.
                                                      adequate in light of recent                               associated with catastrophic risk,                    Commenters also cautioned that costs
                                                      environmental disasters.39                                strengthen prudential safeguards, or                  for end users would increase if FHCs
                                                         Apart from direct and indirect                         require additional capital in connection              exited physical commodity markets,
                                                      financial liability, the ANPR observed                    with such activities.                                 including costs to municipalities and
                                                      that the public confidence in a holding                      Many of these commenters expressed                 retail purchasers of commodities.
                                                      company that was engaged in a physical                    concern regarding the ability of FHCs to                 Some commenters contended that
                                                      commodity activity could suddenly and                     monitor these risks and questioned the                FHC involvement in physical
                                                      severely be undermined by an                              ability of FHCs to insure or hedge                    commodity activities enhances liquidity
                                                      environmental disaster, as could the                      against these risks. Some commenters                  and efficiency in physical commodity
                                                      confidence in the company’s subsidiary                    argued that FHCs face a challenge in                  markets. Multiple commenters cited a
                                                      IDI or their access to funding markets.                   monitoring commodities risks because                  correlation between recent reductions in
                                                      Financial companies, and in particular                    of the diverse nature of commodities                  wholesale power sales in California
                                                      holding companies of IDIs, are                            activities and the number of federal                  with the exit of certain FHCs from those
                                                      particularly vulnerable to reputational                   agencies involved in commodities                      markets. Commenters supportive of FHC
                                                      damage in their banking operations. As                    regulation. Some commenters                           participation in physical commodity
                                                      a result, a catastrophic event involving                  contended that regulators face these                  activities stated that there was not
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                                                      an FHC could undermine confidence in                      same challenges in monitoring                         sufficient evidence to substantiate the
                                                      the FHC’s subsidiary bank or may limit                    commodities risks. Those opposed to                   risks described in the ANPR. They
                                                      its access to funding markets until the                   FHC participation in physical                         responded by distinguishing events
                                                      extent of the FHC’s liability is assessed.                commodity markets expressed concern                   cited in the ANPR, like the Deepwater
                                                         The Board received more than 180                       that excessive speculation in                         Horizon oil spill, from the exposures
                                                      unique comments and more than 16,900                      commodities markets, which they                       commonly faced by commodity traders
                                                                                                                attributed in part to FHC involvement in              both in terms of the extent of potential
                                                        38 See   79 FR 3329 (Jan. 21, 2014).                    these markets, causes market                          damages from an incident and the
                                                        39 See   79 FR 3329, 3332 (Jan. 21, 2014).              distortions.                                          potential to be held financially


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                                                                            Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules                                                   67225

                                                      responsible for such incidents. More                    investments for several reasons. First,               period to unwind or divest these
                                                      specifically, these commenters                          they argued that merchant banking                     activities; (iv) remove copper from the
                                                      expressed confidence that adequate                      authority reflects a considered                       list of metals that BHCs are permitted to
                                                      insurance generally was available or                    Congressional determination that                      own and store as an activity closely
                                                      that the FHC corporate structure offered                accounted for both the benefits and the               related to banking under section 4(c)(8)
                                                      adequate protection against legal                       risks of these activities and determined              of the BHC Act and Regulation Y; and
                                                      liability. Many FHCs and banking trade                  the appropriate balance of restrictions               (v) increase transparency regarding the
                                                      organizations argued that FHCs could                    on merchant banking activities.                       physical commodity activities of FHCs
                                                      manage risks arising from physical                      Commenters contended that additional                  through more comprehensive regulatory
                                                      commodity activities through a robust                   restrictions on merchant banking                      reporting. The Board invites public
                                                      risk-management framework that is                       investments would undermine the                       comment on all aspects of this proposal,
                                                      tailored to specific categories of risk.                benefits of merchant banking activities               including in particular the issues
                                                      Finally, commenters in favor of FHC                     and hamper economic growth by, for                    identified below.
                                                      participation in these activities regarded              example, reducing access to seed capital
                                                      the reputational risks associated with                  for some small-to-medium-sized                        A. Scope of Permissible Physical
                                                      physical commodities as being either                    businesses. Some commenters                           Commodity Activities
                                                      not substantial or not unique to                        maintained that current regulatory and                1. Level of Complementary Commodity
                                                      commodities.                                            risk-management safeguards are                        Activities Permitted
                                                         Complementarity of Complementary                     adequate to prevent or limit risks of
                                                      Commodity Activities. Multiple                          merchant banking activities to financial                 As a condition of approving notices
                                                      commenters argued that physical                         institutions. In support of this position,            filed by FHCs to engage in physical
                                                      commodity activities conducted in                       some pointed to the lack of significant               commodity trading, the Board limited
                                                      connection with derivatives activities                  liability resulting from past merchant                the market value of the commodities an
                                                      are complementary to financial                          banking activities. Some commenters                   FHC could hold under complementary
                                                      activities for the reasons cited in the                 argued that imposing further restrictions             authority to an aggregate of 5 percent of
                                                      Board’s orders. For example,                            on merchant banking could increase                    the FHC’s consolidated tier 1 capital.
                                                      commenters argued that physical                         risks to FHCs by preventing FHCs from                 The Board imposed this limit to reduce
                                                      commodity activities conducted                          taking over routine management                        the safety and soundness risks of
                                                      pursuant to the complementary                           functions when necessary to avoid                     holding physical commodities, which
                                                      authority better enable FHCs to fulfill                 significant loss, and by preventing FHCs              include unique risks such as legal and
                                                      their obligations under commodity                       from diversifying their investment                    environmental risks described above as
                                                      derivatives contracts and to net physical               portfolios through merchant banking                   well as operational risks associated with
                                                      and financial contracts by allowing                     investments. Other commenters argued                  the storage and transportation of
                                                      physical settlement.40                                  that if FHCs are given an insufficient                physical products (e.g., delay of
                                                         Other commenters believed that                       investment horizon there is a greater                 delivery, loss of product).
                                                      physical commodity activities are not                   likelihood that they will be forced to                   In addition to complementary
                                                      complementary to financial activities.                  exit their investments at a loss in order             authority, FHCs and their subsidiaries
                                                      These commenters argued that the scope                  to comply with holding period                         may hold physical commodities under
                                                      of complementary commodity activities                   requirements.                                         other authorities. For example, the
                                                      exceeds Congress’s intent for                                                                                 Office of the Comptroller of the
                                                      complementary authority, which they                     II. Description of Proposed Rule                      Currency (OCC) has permitted certain
                                                      assert envisioned low-risk activities                      Based on its review of comments and                national banks to hold physical
                                                      such as publishing travel magazines.                    additional analysis, the Board invites                commodities to hedge customer driven,
                                                      Some commenters argued that FHCs                        public comment on a proposal to (i)                   bank-permissible derivative
                                                      should only be permitted to engage in                   adopt additional limitations on physical              transactions 41 and BHCs may take
                                                      banking activities.                                     commodity activities conducted                        possession of physical commodities
                                                         Merchant Banking Authority. Some                     pursuant to the complementary activity                provided as collateral in satisfaction of
                                                      commenters supported imposing                           authority in section 4(k)(1)(B) and                   debts previously contracted in good
                                                      additional restrictions on merchant                     clarify certain existing limitations on               faith.42 As some commenters argued,
                                                      banking activities, including expanding                 those activities to reduce potential risks            holding physical commodities presents
                                                      the range of actions that would                         these activities may pose to the safety               unique safety and soundness risks to a
                                                      constitute routine management and                       and soundness of FHCs and their                       banking organization regardless of the
                                                      shortening investment holding periods.                  depository institutions; (ii) amend the               authority under which the commodity is
                                                      Commenters supportive of additional                     Board’s risk-based capital requirements               held or the entity within the
                                                      restrictions on merchant banking                        to increase the requirements associated               organization that holds the
                                                      activities argued that these activities                 with physical commodity activities and                commodities.43
                                                      pose many of the same risks to safety                   merchant banking investments in
                                                      and soundness and financial stability                   companies engaged in physical                            41 See 12 U.S.C. 24(7); see, e.g., OCC Interpretive

                                                      that are posed by complementary                         commodity activities to better reflect the            Letter No. 935 (May 14, 2002).
                                                      commodity activities and section 4(o)                   potential risks of legal liability
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                                                                                                                                                                       42 12 U.S.C. 1843(c)(2); 12 CFR 225.22(d)(1).

                                                      grandfather authority, such as                          associated with a catastrophic event                     43 Letter from Senator Carl Levin dated April 16,

                                                      environmental risks, reputational risks,                involving these physical commodity                    2014; Senate Permanent Subcommittee on
                                                                                                                                                                    Investigations, Wall Street Bank Involvement with
                                                      geopolitical risks, compliance risks, and               activities; (iii) rescind the findings                Physical Commodities, 10, 390–396 (Nov. 20, 2014)
                                                      supply chain issues.                                    underlying the Board orders authorizing               (PSI Report); see also OCC Banking Circular 277 at
                                                         In contrast, other commenters urged                  certain FHCs to engage in energy                      24 (noting the potential additional risks associated
                                                      the Board not to place additional                       management services and energy tolling                with physical hedging activities). In a comment
                                                                                                                                                                    letter on the ANPR dated December 17, 2014,
                                                      restrictions on merchant banking                        under complementary authority and                     Senator Carl Levin, then-Chairman of the
                                                                                                              provide firms currently authorized to                 Subcommittee, requested that the PSI Report be
                                                        40 SIFMA   Comment Letter at 28–30.                   conduct these activities a transition                 added to the administrative record for the ANPR.



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                                                      67226                 Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules

                                                         To address the potential that the                    the authority of the FHC to expand its                 involvement in decisions related to the
                                                      Board’s 5 percent limit may be of                       physical commodity trading activities                  facility’s compliance with
                                                      limited value in addressing the level                   based on complementary authority if the                environmental statutes or regulations,
                                                      and risks of physical commodity                         FHC already engages in a substantial                   including any law or regulation
                                                      activities of FHCs because FHCs also                    amount of physical commodity                           referenced in the proposed definition of
                                                      rely on other authorities to conduct                    activities under other authorities. The                covered physical commodity (discussed
                                                      these activities, the Board is proposing                proposal would exclude from the                        below). The proposed list of actions is
                                                      to account for physical commodities                     calculation of the cap physical                        not meant to be exhaustive; an FHC is
                                                      held by the consolidated banking                        commodity activities of portfolio                      expected to take other steps as
                                                      organization under a broader range of                   companies held under merchant                          appropriate to limit the types of actions
                                                      authorities within the 5 percent limit on               banking authority or related to                        that potentially could impose
                                                      physical commodity trading that an                      satisfaction of debts previously                       environmental liability on the FHC or
                                                      FHC may conduct under                                   contracted because activities under                    otherwise suggest that the FHC is
                                                      complementary authority. The proposed                   these authorities are temporary and,                   unduly involved in the activities of
                                                      tighter limit would better account for                  because of other restrictions, may be                  third parties.
                                                      the risks that activities involving                     difficult for an FHC to monitor and                       Question 1. Does the scope of the
                                                      physical commodities pose to the                        control. Finally, because insurance                    proposed list of prohibited actions
                                                      consolidated organization.44                            company investments are regulated                      appropriately protect against an FHC
                                                         Specifically, the proposal would                     under state insurance law, companies                   being found to ‘‘operate’’ a facility or
                                                      prohibit an FHC from purchasing,                        held under section 4(k)(4)(I) are not a                vessel under Federal and state
                                                      selling, or delivering physical                         part of the Board’s current proposal.46                environmental law? Please explain your
                                                      commodities pursuant to its authority to                                                                       answer. Would it be more or less
                                                      engage in physical commodity trading                    2. Clarification of Prohibitions on
                                                                                                              Certain Operations                                     appropriate for the regulation instead to
                                                      under section 4(c)(8) or 4(k)(1)(B) if the                                                                     prohibit any FHC involvement that
                                                      market value of physical commodities                       As explainedabove, owners and                       could subject the FHC to any such
                                                      owned by the FHC and its subsidiaries                   operators of facilities and vessels that               liability as operator under
                                                      under any authority, other than                         extract, process, store or transport                   environmental law without describing
                                                      authority to engage in merchant banking                 certain physical commodities may be                    what types of actions could lead to the
                                                      activities, similar investment authority                liable for damages and cleanup costs                   liability, and why?
                                                      for insurance companies, or authority to                associated with a release of the physical
                                                      acquire assets or voting securities held                commodity. Because this liability can be               B. Risk-Based Capital Requirements for
                                                      in satisfaction of debts previously                     substantial, the Board prohibited FHCs                 Covered Physical Commodities
                                                      contracted, exceeds 5 percent of the                    from owning, operating, or investing in                1. Overview
                                                      consolidated tier 1 capital of the FHC.45               facilities for the extraction,
                                                      The proposal would provide FHCs with                    transportation, storage, or distribution of               The Board is proposing to amend its
                                                      two years from the effective date of this               commodities as part of complementary                   risk-based capital rule to better reflect
                                                      rule to conform to the revised 5 percent                authority.47                                           the risk of legal liability that an FHC
                                                      cap.                                                       The proposal would codify in                        may incur as a result of its physical
                                                         Under the proposal, the cap on an                    Regulation Y this limitation and                       commodity activities. The resulting
                                                      FHC’s physical commodity trading                        strengthen restrictions designed to                    increase in capital requirements would
                                                      activities would be calculated based on                 ensure that FHCs are not found to                      be reflected in both the standardized
                                                      physical commodities the FHC holds on                   ‘‘operate’’ an entity engaged in physical              approach and the advanced approaches
                                                      a consolidated basis. While it would not                commodity activities for purposes of                   risk-based capital ratios, and would be
                                                      restrict the ability of a subsidiary to                 Federal and state environmental laws.                  in addition to any existing capital
                                                      engage in a physical commodity activity                 These restrictions prohibit (1)                        requirements relating to market risk or
                                                      pursuant to any authority other than                    participation in the day-to-day                        operational risk applicable to the assets
                                                      complementary authority, it would limit                 management or operations of the                        associated with physical commodity
                                                                                                              facility, (2) participation in management              activities of an FHC or relating to
                                                        44 An increase in the commodity derivatives           and operational decisions that occur in                existing counterparty credit risk
                                                      business of a national bank that is a subsidiary of     the ordinary course of the business of                 applicable to financial transactions
                                                      an FHC may increase the amount of physical              the facility, and (3) managing, directing,             associated with such activities.
                                                      commodities the national bank is able to hold as
                                                      part of its commodity hedging activities as well as     conducting or providing advice                            As described in more detail below,
                                                      the capital requirements of the bank and FHC. See       regarding operations having to do with                 covered physical commodities are those
                                                      OCC Bulletin 2015–35 (Aug. 4, 2015) (limiting           the leakage or disposal of a physical                  with the highest likelihood of exposing
                                                      physical hedging activities to 5 percent of the         commodity or hazardous waste or                        an FHC to legal liability under Federal
                                                      notional value of the bank’s derivatives that are in
                                                      that same particular commodity and allow for                                                                   or state environmental laws. The
                                                      physical settlement within 30 days). By including          46 Accord Letter from Teachers Insurance and        proposal would not change the risk-
                                                      the amount of physical commodities held at the          Annuity Association of America dated April 16,         based capital treatment of other physical
                                                      national bank within the proposed 5 percent limit,      2014; letter from the American Council of Life
                                                      the proposed limit also would ensure that the           Insurers dated April 16, 2014.                         commodities. It would moderately
                                                                                                                                                                     increase the risk weight for covered
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                                                      amount of physical commodities the FHC is able to          54 For example, an FHC may face liability under

                                                      hold under complementary authority does not             certain states’ environmental laws based on its        physical commodities that are held as
                                                      increase along with any increase in the amount of       ownership of the hazardous substance or on hiring      part of a commodity trading activity that
                                                      physical commodities held at the national bank.         third parties to deliver the substance. See supra
                                                        45 Consistent with the existing notice                notes 12–17 and corresponding text.
                                                                                                                                                                     would be permissible under section 4(k)
                                                      requirements of FHCs engaging in physical                  47 See, e.g., 2003 Citi Order. The Board’s orders   of the BHC Act, and would significantly
                                                      commodity trading, the proposal also would require      also prohibit the FHC from processing, refining, or    increase the risk weight for covered
                                                      an FHC to notify the Board if, on a consolidated        otherwise altering commodities, and clarify that in    physical commodities that an FHC owns
                                                      basis, the market value of physical commodities         conducting its physical commodity trading, the
                                                      owned by the FHC exceeds 4 percent of the               FHC will be expected to use appropriate storage and
                                                                                                                                                                     as part of an activity authorized solely
                                                      consolidated tier 1 capital of the FHC. See, e.g.,      transportation facilities owned and operated by        under section 4(o) of the BHC Act. The
                                                      2003 Citi Order.                                        third parties.                                         Board is proposing a higher risk weight


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                                                                            Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules                                               67227

                                                      for activities permitted to be conducted                section 4(o) grandfather authority than                     connection with the infrastructure asset.
                                                      solely under section 4(o) because these                 for activities permissible as part of                       The proposed 1,250 percent risk weight
                                                      activities contain the highest legal                    physical commodity trading under                            is not intended to require capital against
                                                      liability and reputational risks (e.g.,                 complementary authority.49 As noted                         the full amount of legal liability and
                                                      storing, refining, extracting, transporting             above, section 4(o) grandfather authority                   reputational harm that might result from
                                                      or altering). The proposed risk weight                  permits direct ownership or operation of                    a catastrophic event, which can vary
                                                      for a merchant banking investment in a                  facilities that manage, refine, store,                      significantly depending on the nature
                                                      company engaged in covered physical                     extract, transport, or alter covered                        and extent of the environmental disaster
                                                      commodity activities would depend on                    physical commodities. These activities                      and could be extremely large. Rather,
                                                      the nature of those activities.                         increase the potential that an FHC will                     the risk weight is intended to reflect the
                                                         The proposed capital requirements                    be held liable for damages from an                          higher risks of physical commodity
                                                      would apply only to activities in                       environmental catastrophe involving                         activities permissible only under section
                                                      physical commodities that are                           covered physical commodities. To help                       4(o) grandfather authority without also
                                                      substances covered under Federal or                     address these risks, as well as the                         making the activities prohibitively
                                                      relevant state environmental law                        inherent uncertainty in valuing the                         costly by attempting to capture the risks
                                                      (covered physical commodities). These                   potential damages associated with a                         of the largest environmental
                                                      physical commodities carry the greatest                 catastrophe, the proposal assigns a 1,250                   catastrophes.
                                                      potential liability under relevant                      percent risk weight—the highest risk                           The proposal would assign a risk
                                                      environmental laws. The proposed                        weight currently specified by the Board                     weight of 300 percent to covered
                                                      definition specifically identifies the                  under the standardized approach 50—to                       commodities held pursuant to section
                                                      Federal environmental laws—CERCLA,                      the market value of all covered physical                    4(k) permissible physical commodity
                                                      OPA, CAA, and CWA—likely to impose                      commodities permitted to be owned                           trading.52 The proposed 300 percent
                                                      such liability.48 However, the proposed                 only under section 4(o) grandfather                         risk weight is designed to help ensure
                                                      definition does not name individual                     authority.51 The proposal also assigns a                    that FHCs engaged in commodity
                                                      state environmental laws. Rather, an                    1,250 percent risk weight to the original                   trading have a level of capitalization for
                                                      FHC would be required to identify on a                  cost basis (i.e., cost basis gross of                       such activities that is roughly
                                                      state-by-state basis the physical                       accumulated depreciation and asset                          comparable to that of nonbank
                                                      commodities it owns that are not                        impairment) of section 4(o)                                 commodities trading firms. Because the
                                                      covered substances under the                            infrastructure assets, which are any non-                   risks of an activity generally are
                                                      enumerated Federal laws. It would then                  commodity on-balance-sheet assets                           independent of the authority under
                                                      be required to determine whether the                    owned pursuant to section 4(o)                              which an FHC conducts the activity, the
                                                      physical commodities it owns in a                       grandfather authority (e.g., pipelines,                     proposal would also assign a 300
                                                      particular state are subject to liability               refineries). The proposal bases the                         percent risk weight to physical
                                                      under that state’s environmental laws.                  capital requirement on the original cost                    commodity activities conducted under
                                                      This approach is intended to limit an                   basis of a 4(o) infrastructure asset rather                 section 4(o) grandfather authority that
                                                      FHC’s compliance burden to only those                   than its carrying value because the risk                    would be permissible physical
                                                      commodities and jurisdictions relevant                  of legal liability does not decline over                    commodity trading under
                                                      to the activities actually conducted by                 the life of the infrastructure asset. The                   complementary authority.
                                                      the FHC, while helping to ensure the                    proposed capital requirement for 4(o)                          As part of the conditions for an
                                                      FHC understands the range of its riskiest               infrastructure assets is intended to                        amount of a covered physical
                                                                                                              address the risk of legal liability                         commodity owned by an FHC engaged
                                                      physical commodity activities and the
                                                                                                              resulting from the unauthorized                             in physical commodity activities under
                                                      breadth of state environmental laws to
                                                                                                              discharge of a covered substance in                         section 4(o) grandfather authority to be
                                                      which the FHC may be subject.
                                                         FHCs may be subject to legal liability                                                                           assigned a 300 percent risk weight, the
                                                      in an amount much greater than the
                                                                                                                 49 The proposal references activities engaged in         market value of the amount, when
                                                      value of the physical commodities they
                                                                                                              by the FHC under section 4(o) grandfather                   aggregated with the market value of
                                                                                                              authority, including activities of the FHC’s                almost all of the physical commodities
                                                      own. An environmental catastrophe                       subsidiaries. An FHC owning a covered physical
                                                                                                              commodity under section 4(o) grandfather authority          owned by the FHC that the proposal
                                                      linked to an FHC’s physical commodity
                                                                                                              may treat the commodity as a section 4(k)                   would not already subject to a 1,250
                                                      activities could suddenly and severely                  permissible commodity and apply a 300 percent               percent risk weight, must not exceed 5
                                                      undermine public confidence in the                      risk weight if it meets certain requirements
                                                                                                                                                                          percent of the consolidated tier 1 capital
                                                      FHC and any of its subsidiary IDIs,                     described below.
                                                                                                                 50 See, e.g., 12 CFR 217.38, .41(c)(1), and .42(a)(1).   of the FHC. The proposal refers to this
                                                      limiting its access to funding markets
                                                                                                                 51 The Board’s regulatory capital rule applies a         aggregate amount as the ‘‘section 4(k)
                                                      until the market assesses the extent of
                                                                                                              1,250 percent risk weight to certain exposures that         cap parity amount’’ and, like the
                                                      the FHC’s liability. Both environmental                 pose a high degree of risk to the banking                   proposal’s modifications to the 5
                                                      risks and reputational risks are higher                 organization and regarding which the banking
                                                                                                              organization may have difficulty determining the            percent cap on physical commodity
                                                      for activities permissible only under
                                                                                                              extent of the losses. For example, it applies a 1,250       trading, the section 4(k) cap parity
                                                         48 A physical commodity would be a covered
                                                                                                              percent risk weight to securitization exposures that        amount would exclude amounts of
                                                                                                              raise supervisory concerns with the subjectivity            physical commodities owned pursuant
                                                      physical commodity under the proposed definition        involved in valuation of the exposure and in
                                                                                                                                                                          to merchant banking authority, similar
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                                                      if the commodity is a covered substance under the       instances where the institution is not able to
                                                      identified Federal environmental laws regardless of     demonstrate a comprehensive understanding of the            insurance company investment
                                                      whether the commodity is held in the United             potential losses that could result from a default or        authority, and authority to acquire
                                                      States. Applying the Federal environmental law          partial default of the exposure. Similarly, the
                                                      framework to all physical commodities held outside      proposed 1,250 percent risk weight for section 4(o)
                                                                                                                                                                          assets and voting securities in
                                                      the United States acknowledges the risk that FHCs       permissible commodities and section 4(o)                    satisfaction of debts previously
                                                      may be held liable under similar laws for damages       infrastructure assets is intended to address both the       contracted. The proposal would assign a
                                                      or cleanup costs associated with an environmental       risk of those activities and the difficulties in            1,250 percent risk weight to this excess
                                                      catastrophe that occurs outside of the United States    determining the legal liability exposure to an FHC
                                                      without requiring FHCs to identify the physical         from its section 4(o) permissible commodities. See
                                                                                                                                                                          amount of section 4(k) permissible
                                                      commodities and activities for which any foreign        12 CFR 217.41(c)(1) and .42(a)(1); see also 78 FR
                                                      jurisdiction may impose liability.                      62018, 62113 and 62117 (Oct. 11, 2013).                      52 Cf.   12 CFR 217.52(b)(5).



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                                                      67228                 Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules

                                                      commodities for the reasons the Board                       Accordingly, the proposal would                      an environmental catastrophe involving
                                                      is proposing to tighten the 5 percent of                 apply a 1,250 percent risk weight to an                 the portfolio company).
                                                      tier 1 capital limit on physical                         FHC’s covered commodity merchant                           However, nonfinancial companies use
                                                      commodity trading conducted under                        banking investment unless all of the                    covered physical commodities to
                                                      complementary authority. Physical                        physical commodity activities of the                    operate businesses otherwise unrelated
                                                      commodities that are not covered                         portfolio company are physical                          to physical commodities. For example,
                                                      physical commodities or that are held                    commodity trading activities                            grocery stores purchase gasoline to
                                                      under authorities other than section 4(o)                permissible under complementary                         transport produce and a business or a
                                                      grandfather authority would not receive                  authority (commodity trading portfolio                  warehouse may purchase oil for heating.
                                                      additional capital requirements.53                       company).55 If all of the physical                      To ensure the proposal would not apply
                                                         Question 2. To the extent the Board’s                 commodity activities of the portfolio                   to all merchant banking investments
                                                      proposed approach to the section 4(k)                    company are permissible under                           that own physical commodities but that
                                                      cap parity amount creates incentives for                 complementary authority and the                         are not engaged in a physical
                                                      an FHC to conduct physical commodity                     securities of the portfolio company are                 commodities business, the proposal
                                                      activities under authorities that would                  publicly traded, a 300 percent risk                     would attempt to define and exempt
                                                      result in lower capital requirements,                    weight would be applied to the FHC’s                    activities of commodity end users from
                                                      should the Board require that an FHC                     covered commodity merchant banking                      physical commodity activities. Under
                                                      include physical commodity activities                    investment in the commodity trading                     the proposal, a portfolio company
                                                      conducted under authorities that receive                 portfolio company. Consistent with the                  would not be subject to these additional
                                                      less than a 300 percent risk weight first                standardized approach to equity                         capital requirements as a covered
                                                      for purposes of determining the excess                   investments not subject to a 100 percent                commodity merchant banking
                                                      amount over the 4(k) cap parity                          risk weight, the proposal would assign                  investment solely because the portfolio
                                                      amount?                                                  a 400 percent risk weight to equity                     company owns or operates a facility or
                                                         FHCs may also own companies under                     investments in commodity trading                        vessel that purchases, stores, or
                                                      merchant banking authority that are                      portfolio companies that are not                        transports a covered physical
                                                      engaged in physical commodity                            publicly traded. If an FHC engages in                   commodity only as necessary to power
                                                      activities, including activities that                    any other physical commodity activity,                  or support the facility or vessel. For
                                                      involve physical commodity trading,                      including those that would be                           example, an investment in a company
                                                      storage, transportation, and refining.                   permissible only under the authority                    that engages only in one physical
                                                      The proposal refers to investments in                    provided in section 4(o), the FHC must                  commodity activity—oil storage—and
                                                      portfolio companies engaged in                           apply the 1,250 percent risk weight to                  does so solely for the purpose of heating
                                                      activities involving covered physical                    that merchant banking investment.                       its facility and operating machines
                                                      commodities as covered commodity                                                                                 within the facility would not be a
                                                                                                                  These risk weights are designed to
                                                      merchant banking investments. Because                                                                            covered commodity merchant banking
                                                                                                               address the risks associated with
                                                      these companies may be subject to                                                                                investment. The Board is seeking
                                                                                                               merchant banking investments
                                                      similar types and amounts of liability as                                                                        comment on whether the proposed
                                                                                                               generally, the potential reputational
                                                      FHCs engaging in these activities                                                                                exclusion and its scope are appropriate
                                                                                                               risks associated with the investment,
                                                      directly, the proposal generally would                                                                           and, if so, whether the proposed
                                                                                                               and the possibility that the corporate
                                                      apply the same risk weights to covered                                                                           definition of the exclusion is workable.
                                                                                                               veil may be pierced and the FHC held
                                                      commodity merchant banking                                                                                          Question 3. Should investments in
                                                                                                               liable for environmental damage caused
                                                      investments as the proposal would                                                                                certain portfolio companies, such as
                                                                                                               by the portfolio company. (A somewhat                   end users of covered physical
                                                      apply to covered physical commodities
                                                      used in physical commodity activities                    higher risk weight would be assigned to                 commodities, be exempted from
                                                      under complementary authority and                        privately traded portfolio companies in                 additional capital requirements as a
                                                      section 4(o) grandfather authority,                      recognition of the risk that an FHC may                 covered commodity merchant banking
                                                      respectively. Moreover, the proposal                     not be able to gain access to markets for               investment? If an exemption is
                                                      would not permit covered commodity                       a privately held portfolio company after                appropriate, what should be the scope
                                                      merchant banking investments to                                                                                  of the exemption?
                                                      receive the 100 percent risk weight                      certain other types of equity exposures must be            The Board is also considering the
                                                                                                               assigned a 100 percent risk weight to the extent that
                                                      assigned to non-significant equity                       the aggregate carrying value of the equity exposures
                                                                                                                                                                       appropriate risk-based capital treatment
                                                      exposures.54                                             does not exceed 10 percent of the Board-regulated       for all merchant banking investments.
                                                                                                               institution’s total capital. 12 CFR 217.52(b)(3).       For example, the Board is considering
                                                         53 In addition, in order for an amount of a covered      55 Similar to the proposed restrictions on the 300
                                                                                                                                                                       whether to continue to include
                                                      physical commodity owned under section 4(o)              percent risk weight for covered physical                merchant banking investments as ‘‘non-
                                                      grandfather authority to be considered an amount         commodities held under section 4(o) authority, a
                                                      of section 4(k) permissible commodities, the             company would be considered a physical                  significant equity exposures’’ under the
                                                      commodity must be one for which a derivative             commodity trading company if its activities             Board’s standardized approach to risk-
                                                      contract has been authorized for trading on a U.S.       involving covered physical commodities consisted        based capital rules.
                                                      futures exchange by the CFTC (unless specifically        only of purchasing covered physical commodities            Question 4. How are the risks
                                                      excluded by the Board) or another commodity that         (that are approved physical commodities) in the
                                                      has been specifically authorized by the Board under      spot market and/or taking or making physical
                                                                                                                                                                       associated with merchant banking
                                                                                                                                                                       investments in companies involved in
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                                                      complementary authority (approved physical               delivery of such commodities to settle forwards,
                                                      commodity). The FHC also must have purchased             options, swaps, or similar contracts. However, a        physical commodity activities different
                                                      the amount of the commodity in the spot market or        portfolio company would be considered a                 from or similar to other merchant
                                                      own the amount for the purpose of taking or making       commodity trading portfolio company regardless of
                                                      physical delivery of the commodity to settle a           the amount of covered physical commodities it
                                                                                                                                                                       banking investments? Do the Board’s
                                                      forward, option, swap, or similar contract. Finally,     held; as discussed above, obtaining daily               current capital requirements adequately
                                                      the FHC must have not stored, extracted, produced,       information on the amounts of a portfolio               capture the risks of merchant banking
                                                      transported, or altered that amount while the FHC        company’s commodities holdings or placing limits        investments not covered under the
                                                      owned the commodity but instead must have hired          on the commodities activities of the company may
                                                      reputable third parties to do so.                        be inconsistent with the more limited, generally-
                                                                                                                                                                       proposal? If not, what additional capital
                                                         54 Under the Board’s current standardized             permissible involvement of an FHC in its portfolio      requirements should be applied to
                                                      approach, merchant banking investments and               companies.                                              merchant banking investments


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                                                                            Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules                                                67229

                                                      generally? For example, is it appropriate               the covered physical commodity over                   permitted solely under section 4(o)
                                                      to continue to include merchant                         the previous 60-month period. If the                  grandfather authority; and (iii) Board
                                                      banking investments as ‘‘non-significant                market price of a covered physical                    estimates of the amount of physical
                                                      equity exposures’’ under the Board’s                    commodity (e.g., oil) varies based on                 commodity holdings of an FHC that
                                                      risk-based capital rules?                               type, grade, and/or classification, the               would be considered a covered physical
                                                                                                              FHC would calculate the average market                commodity under this proposal. This
                                                      2. Calculation of Exposure Amount for
                                                                                                              price for each classification as a distinct           estimate assumes that all physical
                                                      Covered Physical Commodities
                                                                                                              covered physical commodity. The Board                 commodities of FHCs would be covered
                                                         Under the proposal, the proposed risk                notes that FHCs should have                           physical commodities and therefore
                                                      weights would be multiplied by (1) the                  mechanisms in place to monitor the                    subject to the proposed additional risk
                                                      market value of all section 4(o)                        prices of the commodities held under                  weights.59
                                                      permissible commodities; (2) the                        complementary authority and                             The estimated increase in risk-
                                                      original cost basis of section 4(o)                     grandfather authority.58                              weighted assets resulting from the
                                                      infrastructure assets; (3) the market                                                                         proposal would be insignificant (0.7
                                                      value of section 4(k) permissible                       3. Impact Analysis of Proposed Capital
                                                                                                              Requirements                                          percent) relative to the total risk-
                                                      commodities; and (4) the carrying value                                                                       weighted assets among FHCs that
                                                      of an FHC’s equity investment in                           The proposal would not amend the                   engage in physical commodity
                                                      companies that engage in covered                        scope of application of the Board’s                   activities. The estimated increase
                                                      physical commodity activities to                        capital rules. Therefore, only FHCs                   relative to market-risk-weighted assets
                                                      determine an FHC’s risk-based capital                   conducting complementary, section 4(o)                of these FHCs (that is, risk-weighted
                                                      requirements for covered physical                       grandfather, or merchant banking                      assets attributed to trading business) is
                                                      commodity activities.                                   activities would be subject to the                    7.1 percent. This increase in risk
                                                         An FHC would be required to                          proposal. Foreign banking organizations               weighting would not cause any FHC to
                                                      calculate the market value of its covered               conducting such activities in the United              breach the minimum capital
                                                      physical commodities based on the                       States would be subject to the proposal               requirements, and FHCs could likely
                                                      quantity of each covered physical                       only to the extent the Board’s capital                absorb the increase in required capital at
                                                      commodity multiplied by the market                      rules apply to the organizations.                     the firm level if they determine that
                                                      price of the covered physical                              The Board conducted an analysis of
                                                                                                                                                                    physical commodity activities are
                                                      commodity.56 The proposed measure of                    the impact of the proposed capital
                                                                                                                                                                    important to the firm’s overall strategy.
                                                      exposure is designed to reflect an FHC’s                requirements on FHCs and physical
                                                                                                                                                                    However, if FHCs consider their
                                                      ongoing level of involvement in covered                 commodities markets. In doing so, the
                                                                                                                                                                    physical commodity trading on a
                                                      physical commodity activities, and to be                Board considered the extent of FHC
                                                                                                                                                                    standalone basis, the proposed increases
                                                      relatively stable in the face of market                 activity in the physical commodity
                                                                                                                                                                    in capital requirements could make this
                                                      price movements and individual                          markets, the share of exposure and
                                                                                                                                                                    activity significantly less attractive
                                                      holding amounts, as explained below.                    revenue that physical commodity
                                                                                                                                                                    based on its return on capital, and could
                                                      The quantity of a covered physical                      activities represent at FHCs, and the
                                                                                                                                                                    result in decreased activity. Such a
                                                      commodity would be measured as a                        impact of the proposed capital
                                                      daily average of the amount of each                     requirements on an FHC’s physical                     reduction in activity is not expected to
                                                      covered physical commodity held by an                   commodity activities relative to the                  have a material impact on the broader
                                                      FHC over the previous calendar                          existing risk-based capital requirements              physical commodity markets.
                                                                                                                                                                      Information on physical commodity
                                                      quarter.57 A measurement based on an                    applicable to FHCs.
                                                                                                                 The Board estimates that, across all               markets, in particular those covered by
                                                      average should reduce the potential for
                                                      variations in capital requirements that                 FHCs that engage in physical                          this proposal, is relatively scarce.
                                                      could result from using a point-in-time                 commodity activities, the proposed                    Nonetheless, it appears that the bulk of
                                                      measurement. Furthermore, use of a                      capital requirements could increase                   activity and inventory is conducted and
                                                      daily, as opposed to a weekly or                        risk-weighted assets as much as $34.0                 held by non-Board-regulated entities
                                                      monthly, average should mitigate                        billion. Assuming an average risk-based               (such as energy firms and end users of
                                                      fluctuations in the quantities of covered               capital ratio of 12 percent, the proposal             physical commodities) rather than
                                                      physical commodities held by an FHC                     could increase the amount of capital                  FHCs. Information available to the
                                                      that could misrepresent the FHC’s                       required to be held to meet regulatory                Board supports this view, with market
                                                      holdings over a longer period.                          requirements by FHCs that engage in                   participants asserting that, in general,
                                                         The calculation of the market price of               physical commodity activities under                   FHCs’ market shares in physical
                                                      a covered physical commodity would be                   any authority by approximately $4.1                   commodity markets are quite low and
                                                      determined as a rolling average of the                  billion in the aggregate. These figures               typically represent less than 1 percent of
                                                      month-end, end-of-day spot prices for                   are based on (i) FHC-provided                         the market.
                                                                                                              categorizations of their physical                       FHCs play a larger, but still limited,
                                                         56 An FHC that owns section 4(k) permissible
                                                                                                              commodity holdings; (ii) FHC-provided                 role in commodity derivatives trading,
                                                      commodities pursuant to section 4(o) grandfather
                                                                                                              estimates of their physical commodity                 and a significant portion of FHCs’
                                                      authority would also be required to calculate the                                                             physical commodity activity is related
                                                      market value of other physical commodities as part      holdings that are related to activities
                                                                                                                                                                    to their commodity derivative trading
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                                                      of the proposed section 4(k) cap parity amount.
                                                         57 To calculate the quantity of a covered physical      58 FHCs engaging in physical commodity trading     activity. Based on the CFTC Bank
                                                      commodity, an FHC would be required to apply the        currently must ensure the market value of             Participation Report, the market share of
                                                      appropriate unit of measurement customarily used        commodities held under complementary authority        U.S. banks in derivative contracts
                                                      for each covered physical commodity. Customary          does not exceed 5 percent of the FHC’s consolidated   involving physical commodities
                                                      units of measurement generally are reflected            tier 1 capital. FHCs engaging in activities under
                                                      through industry convention and the actions of          section 4(o) grandfather authority must ensure that   typically ranges from 2 percent to 15
                                                      market participants. For example, physical              attributed aggregate consolidated assets of the
                                                      commodity activities involving oil and oil products     companies held by the FHC pursuant to section 4(o)      59 The impact on capital would be less to the

                                                      typically use barrels as the unit of measurement;       grandfather authority are not more than 5 percent     extent that physical commodities of FHCs would
                                                      transactions involving liquid natural gas would         of the total consolidated assets of the FHC. 12       not be covered physical commodities under the
                                                      measure quantity in metric tons or gallons.             U.S.C. 1843(o)(2).                                    proposal.



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                                                      67230                 Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules

                                                      percent.60 Derivatives activity related to                Question 8. What are the operational                   FHCs’’—specifically, commodity
                                                      non-bank subsidiaries of FHCs is                        or practical challenges that                             derivatives activities, which are
                                                      estimated to be similar or slightly                     implementing the proposed                                permissible financial activities.
                                                      larger.61 Thus, any reduction in activity               formulations for calculating the capital                 Permissible financial commodity
                                                      related to financial contracts that may                 requirement would impose?                                derivatives trading activities involved
                                                      arise from the proposal should not                        Question 9. What, if any, alternative                  derivatives that the FHC could
                                                      materially impact the overall market for                methodologies for calculating the                        terminate, assign, or cash-settle without
                                                      financial commodity contracts.                          quantity of the covered physical                         taking delivery of the underlying
                                                         With respect to FHCs’ merchant                       commodity should the Board consider?                     physical commodity.64 Complementary
                                                      banking investment activities, the                        Question 10. Would the proposed                        physical commodity trading allows an
                                                      estimated impact of the proposed                        capital requirements provide foreign
                                                      increased capital requirements appears                                                                           FHC to physically settle the derivatives
                                                                                                              banking organizations engaging in                        contract.
                                                      insignificant. The aggregate value of                   physical commodity activities, to the
                                                      merchant banking investments among                      extend these organizations are not                          The Board found physical commodity
                                                      FHCs is approximately $29 billion.62                    already subject to the Board’s capital                   trading to be a complementary activity
                                                      More granular information regarding the                 rules, with a competitive advantage over                 to financial commodities derivatives
                                                      proportion of merchant banking                          FHCs organized in the United States                      trading for a number of reasons.
                                                      investment activity attributable to                     that engage in physical commodity                        Physical commodity trading activities
                                                      portfolio companies that engage in                      activities? If so, what are the nature and               would flow from existing commodity
                                                      physical commodity activities is not                    amount of the competitive advantages?                    derivatives activities. Physical
                                                      available. Nevertheless, given the small                  Question 11. What additional                           commodity trading would enhance the
                                                      market share of FHCs in the physical                    considerations or data should the Board                  ability of FHCs to efficiently provide a
                                                      commodity markets, the Board expects                    consider to calculate the estimated                      full range of commodity-related services
                                                      that the value of FHC equity                            impact of the proposal?                                  to their customers; enable FHCs to
                                                      investments in portfolio companies that
                                                                                                              D. The Scope of Permitted                                transact more efficiently with customers
                                                      engage in physical commodity activities
                                                      would be significantly less than the                    Complementary Commodity Activities                       in a wider variety of commodity markets
                                                      estimated $29 billion. Accordingly, the                                                                          and transaction formats; and enable
                                                                                                              1. Background                                            FHCs to acquire more experience in the
                                                      proposed increase in capital
                                                      requirements for an FHC’s merchant                         In addition to considering whether                    physical commodity markets and, in
                                                      banking investment activity would not                   conduct of the activities by an FHC                      turn, improve their understanding of,
                                                      be expected to have a material impact.                  poses a substantial risk to the safety and               and profitability in, the commodity
                                                         Question 5. Does the proposed                        soundness of depository institution                      derivatives markets. The Board also
                                                      definition of ‘‘covered physical                        subsidiaries of the FHC or the financial                 noted that diversified financial
                                                      commodity’’ sufficiently cover the                      system generally, in approving each                      companies that were not at that time
                                                      commodities that pose the greatest                      complementary commodity activity, the                    BHCs conducted physical commodity
                                                      legal, reputational, and financial risks                Board considered whether each activity                   trading in connection with their
                                                      to an FHC? If not, please describe those                is ‘‘meaningfully connected’’ to a                       commodity derivatives business. For
                                                      high-risk commodities that would fall                   financial activity such that it                          these reasons, the Board believed that
                                                      outside the scope of the definition.                    complements the financial activity.63                    physical commodity trading was
                                                         Question 6. What, if any, other criteria             Currently, twelve FHCs possess                           complementary to commodity
                                                      should the Board consider when                          authority to engage in physical
                                                                                                                                                                       derivatives activities.65
                                                      determining whether a physical                          commodity trading, and five of those
                                                      commodity poses a risk that the FHC                     FHCs also have authority to engage in                       The Board has not changed its view
                                                      would be liable for a catastrophe                       energy management services and energy                    on the complementarity of these trading
                                                      involving its physical commodity                        tolling. For the reasons described below,                activities. However, as discussed above,
                                                      activities?                                             the Board is proposing to rescind the                    the Board believes added limits are
                                                         Question 7. How appropriate are the                  authorization for FHCs to engage in                      appropriate to reduce potential risks to
                                                      proposed risk weights for covered                       energy tolling and energy management                     depository institution subsidiaries of
                                                      physical commodities owned as part of                   services.                                                FHCs or the financial system generally.
                                                      an FHC’s physical commodity trading
                                                                                                              a. Physical Commodity Trading                            b. Energy Management Services and
                                                      activities or held by FHCs conducting
                                                      activities solely permitted by section                     In 2003, the Board determined that                    Energy Tolling
                                                      4(o) grandfather authority and for                      physical commodity trading—the                             Following a number of changes to the
                                                      merchant banking portfolio companies                    purchasing and selling of physical
                                                                                                                                                                       energy industry, the Board determined
                                                      engaged in such activities? If not                      commodities in the spot market and the
                                                                                                                                                                       that certain activities involving power
                                                      appropriately calibrated, what are the                  taking and making delivery of physical
                                                                                                              commodities to settle derivatives that                   plants—energy management services
                                                      shortcomings of the capital requirement
                                                                                                              BHCs were authorized to trade                            and energy tolling—were
                                                      in capturing catastrophic risk and what
                                                                                                              (commodity derivatives)—was so                           complementary to a financial
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                                                      other factors should the Board consider
                                                      to calibrate the capital requirements?                  meaningfully connected to a financial
                                                                                                              activity that it complemented the                          64 See 12 CFR 225.28(b)(8)(ii)(B)(3)–(4); 2003 Citi
                                                        60 See Bank Participation Reports, available at       financial activity. The Board cited a                    Order.
                                                      www.cftc.gov/MarketReports/                             number of reasons for its determination.                   65 See 2003 Citi Order. Commenters to the ANPR
                                                      BankParticipationReports.                               The Board observed that physical                         also provided an additional example of the
                                                        61 See CFTC Commitments of Traders Report,                                                                     complementarity of physical commodity trading—
                                                      available at www.cftc.gov/Marketreports/
                                                                                                              commodity trading activities ‘‘flow from
                                                                                                                                                                       the ability to net physical and financial contracts
                                                      CommitmentsofTraders/index.htm.                         the existing financial activities of                     under the same master agreement and the ability to
                                                        62 Data obtained from top-tier domestic holding                                                                take physical delivery of futures to match financial
                                                      companies that file the FR Y–12 reporting form.           63 See,   e.g., 2003 Citi Order.                       options. SIFMA Comment Letter at 29–30.



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                                                                            Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules                                                    67231

                                                      activity.66 The Board permitted six                     FHC acts as an energy manager that                       structure of a tolling agreement reflects
                                                      FHCs to engage in one or both of these                  provides transactional, advisory and                     the FHC’s role as principal: The toller
                                                      activities between December 2007 and                    administrative services to a power plant                 pays the owner a fixed periodic
                                                      June 2010.67                                            owner.72 An energy manager may also                      payment in exchange for the right to all
                                                        In January 2014, the ANPR noted that                  provide financial intermediation                         or part of the plant’s power output and
                                                      three FHCs that engage in physical                      services. An energy manager performs                     provides the owner with a marginal
                                                      commodity activities had announced                      administrative tasks related to the sale                 payment based on the amount of energy
                                                      plans to decrease or discontinue their                  of power and the delivery of fuel to run                 produced to compensate for the costs of
                                                      involvement in the activities.68 These                  the plant, and may enter into fuel and                   running the plant.
                                                      developments, although potentially                      power contracts for the owner that
                                                      caused by a variety of factors,69 led the                                                                        2. Reconsideration of the Approval of
                                                                                                              satisfy the owner’s criteria, including by               Energy Management and Tolling as
                                                      Board to reconsider whether                             purchasing fuel from a third party in
                                                      complementary commodity activities                                                                               Complementary Activities
                                                                                                              order to resell it to the power plant
                                                      continued to be so meaningfully                         owner and by purchasing the energy                          The Board is reconsidering whether
                                                      connected to a financial activity so as to              output of the power plant for release in                 energy management services and energy
                                                      complement the financial activity.                      the market. An FHC, as energy manager,                   tolling activities are complementary to a
                                                      Subsequent to the ANPR, many of these                   also may enter into hedging transactions                 financial activity. Over time, these two
                                                      plans were realized and discontinuance                  with the owner to manage fuel costs and                  activities have not appeared to be as
                                                      of physical commodity activities                        energy prices. The energy manager                        directly or meaningfully connected to a
                                                      became more pronounced for FHCs                         generally is compensated based on a                      financial activity as is physical
                                                      engaging in energy tolling and energy                   percentage of the difference between the                 commodity trading.
                                                      management activities.70 Of the five                                                                                Physical commodity trading provides
                                                                                                              delivered fuel prices and the realized                   FHCs with an alternative method of
                                                      FHCs that currently have the authority                  power revenues (the ‘‘spark spread’’)
                                                      to engage in either energy management                                                                            settling BHC-permissible commodity
                                                                                                              with a guaranteed minimum                                derivatives.74 Unlike physical
                                                      services or energy tolling, at least four               compensation amount.
                                                      have discontinued these activities in the                                                                        commodity trading, energy management
                                                                                                                In seeking approval to conduct energy
                                                      U.S.71                                                                                                           services and energy tolling do not
                                                                                                              management services, FHCs argued that
                                                        Energy management services. Under                                                                              directly support and are not directly
                                                                                                              these services may help a power plant
                                                      an energy management agreement, an                                                                               related to engaging in otherwise BHC-
                                                                                                              owner develop and refine the power                       permissible commodity derivatives
                                                         66 The approvals to engage in these activities
                                                                                                              plant’s risk-management policies and                     activities or other financial activities.
                                                      occurred after Federal and state deregulation of the    optimize the plant owner’s decisions                        Moreover, the expected benefits of
                                                      energy industry, the energy crisis in the western       about when to operate, which are                         permitting these activities do not appear
                                                      United States, the growth of independent power          heavily influenced by fuel costs, power
                                                      producers, and the enactment of the Energy Policy                                                                to have been realized over time. For
                                                      Act of 2005, which encouraged investment in
                                                                                                              prices, and the financing available.                     example, it was originally expected that
                                                      electricity energy infrastructure. See Public Law       FHCs also argued that these activities                   allowing FHCs to conduct energy
                                                      109–58 (Aug. 8, 2005); Timothy P. Duane,                would improve the FHCs’                                  management services and energy tolling
                                                      Regulation’s Rationale: Learning from the California    understanding of energy markets and
                                                      Energy Crisis, 19 Yale J. on Reg. 471 (2002).                                                                    activities would allow FHCs to gain
                                                         67 Only five FHCs are currently permitted to         their ability to serve as an effective                   additional information to help manage
                                                      engage in energy management services or energy          competitor in the derivatives markets.                   commodity-related risks.75 It is not clear
                                                      tolling in the United States. One of the FHCs             Energy Tolling. The FHCs that                          that energy management services or
                                                      approved to engage in energy management services        currently engage in energy management
                                                      and energy tolling—Fortis—was acquired by                                                                        energy tolling significantly improve an
                                                      another FHC after the Board’s approvals. See Board      services also engage in energy tolling. A                FHC’s understanding of commodity
                                                      letter to Robert L. Tortoriello (Dec. 5, 2008).         primary difference between energy                        derivatives markets since—in order to
                                                         68 79 FR 3329, 3334 (Jan. 21, 2014).
                                                                                                              tolling and energy management is that                    engage in energy management services
                                                         69 See id.; SIFMA Comment Letter at 29.
                                                                                                              the former permits the ‘‘toller’’ to act as              or energy tolling—an FHC must already
                                                         70 See, e.g., Mercuria Closes Acquisition of J.P.

                                                      Morgan Chase Physical Commodities Business,
                                                                                                              principal for its own account rather than                have a thorough understanding of
                                                      Mercuria (March 10, 2014), available at http://         act as the agent, or otherwise for the                   commodity derivatives markets.
                                                      www.mercuria.com/media-room/business-news/              benefit, of the power plant owner.                       Moreover, FHCs that have divested their
                                                      mercuria-closes-acquisition-jp-morgan-chase-            Under both energy management and
                                                      physical-commodities-business; Morgan Stanley                                                                    physical commodity business lines
                                                      Completes Sale of Global Oil Merchanting Business       tolling, an FHC generally is responsible                 continue to engage in commodity
                                                      to Castleton Commodities International LLC,             for monitoring day-to-day market
                                                      Morgan Stanley (November 2, 2015), available at         conditions to determine when to operate                  the term of the agreement and the benefits of
                                                      https://www.morganstanley.com/press-releases/           the plant and when to provide the
                                                      21e458d2-0231-493b-a95a-5084c3b4c701.                                                                            ownership without the capital investment. See
                                                         71 See, e.g., Ron Bousson, Timeline: Deutsche        necessary fuel. Unlike the typical energy                Further Definition of ‘‘Swap,’’ ‘‘Security-Based
                                                                                                              management agreements, pursuant to a                     Swap,’’ and ‘‘Security-Based Swap Agreement’’;
                                                      Bank’s Commodities Operations, Reuters (December
                                                                                                                                                                       Mixed Swaps; Security-Based Swap Agreement
                                                      5, 2013), available at http://www.reuters.com/          tolling agreement, an FHC may direct—                    Recordkeeping, 77 FR 48207, 48242 (Aug. 13, 2012)
                                                      article/us-deutsche-commodities-timeline-               rather than advise—the owner to                          (citing the letter from Mary Anne Mason,
                                                      idUSBRE9B40UZ20131205?mod=related&
                                                      channelName=PersonalFinance; Sempra Energy,             operate the plant so that the toller—                    HoganLovells LLP on behalf of Southern California
                                                      RBS Complete Sale of Commodities Joint Venture          rather than the owner—may capture the                    Edison Company, Pacific Gas and Electric Company
                                                      North American Assets to JP Morgan Unit, Sempra                                                                  and San Diego Gas and Electric Company, dated
                                                                                                              spark spread.73 The compensation
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                                                      Energy (December 1, 2010), available at http://                                                                  July 22, 2011 (2011 CA Utilities Letter); Regulating
                                                      investor.shareholder.com/sre/releasedetail.cfm?                                                                  Financial Holding Companies and Physical
                                                      ReleaseID=534828; Martin Arnold & Daniel Schafer,
                                                                                                                72 These services are typically outlines in an         Commodities: Hearing Before the S. Subcomm. in
                                                      Barclays to Wind Down Commodities Trading,              energy management plan and risk-management               Fin. Insts. and Consumer Prot. (Jan. 15, 2014)
                                                      Financial Times (April 20, 2014), available at          policy that governs how the power plant should be        (testimony of Norman Bay, Director, Office of
                                                      http://www.ft.com/cms/s/0/5761ec06-c707-11e3-           operated. E.g., 2007 Fortis Order.                       Enforcement, Federal Energy Regulatory
                                                      aa73-00144feabdc0.html; Mercuria Closes                   73 The Board compared a tolling agreement to a         Commission at 15), available at http://
                                                      Acquisition of J.P. Morgan Chase Physical               call option with the strike price being the cost of      www.banking.senate.gov/public/index.cfm/2014/1/
                                                      Commodities Business, Mercuria (March 10, 2014),        producing that amount of power. See 2008 RBS             regulating-financial-holding-companies-and-
                                                      available at http://www.mercuria.com/media-room/        Order. A tolling agreement also has been compared        physical-commodities.
                                                                                                                                                                          74 See 2003 Citi Order.
                                                      business-news/mercuria-closes-acquisition-jp-           to an operating lease agreement because it allows
                                                      morgan-chase-physical-commodities-business.’’           the toller the exclusive right to use the plant during      75 See 2007 Fortis Order.




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                                                      67232                 Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules

                                                      derivatives trading and termination of                  activities may include providing                        appropriate conformance period for this
                                                      their energy management and energy                      inventory and project finance                           aspect of the proposal and why?
                                                      tolling activities is not expected to                   arrangements involving physical
                                                                                                                                                                      E. Reclassification of Copper as an
                                                      negatively impact their ability to                      commodities,78 financially- and
                                                                                                                                                                      Industrial Metal
                                                      provide commodity derivative services.                  physically-settled derivatives to hedge
                                                         The authorizations for energy                        fuel costs and energy prices,79 buying                     In 1997, the Board amended
                                                      management services and energy tolling                  and selling certain physical                            Regulation Y to provide that BHCs
                                                      also noted that unregulated financial                   commodities in the spot market,80 and                   could own and store copper, and engage
                                                      competitors of FHCs engaged in these                    derivatives advisory services.81                        in related incidental activities, as an
                                                      activities. However, it is unclear over                                                                         activity so closely related to banking as
                                                      time what, if any, advantages those                     3. Conformance Period                                   to be proper incident thereto.82 The
                                                      financial firms gain from conducting                       The proposal would provide FHCs                      Board has previously permitted BHCs to
                                                      energy management or energy tolling                     with a two-year transition period to                    buy, sell, and store gold, silver,
                                                      activities over FHCs in the conduct of                  conform their energy management                         platinum and palladium bullion, coins,
                                                      derivatives and other FHC-permissible                   services and energy tolling agreements                  bars and rounds for their own accounts
                                                      physical commodity activities.                          following the effective date of the final               and the accounts of others. The list of
                                                         Energy tolling was permitted in part                 rule if adopted. This conformance                       precious metals was expanded to
                                                      to allow an FHC to hedge its own, or to                 period is intended to reduce the                        include copper, a metal used in minting
                                                      assist its client to hedge, positions in                burdens associated with applying the                    coins, after trading in copper became
                                                      energy.76 However, there are other                      proposal to existing agreements. As                     permissible for national banks.83
                                                      effective ways for an FHC to hedge its                  noted, the Board invites comments on                       Over time, copper has become most
                                                      positions, and an FHC may assist clients                all aspects of the proposal, including                  commonly used as a base or industrial
                                                      to hedge their positions without the                    specific questions regarding the                        metal, and not as a store of value in the
                                                      FHC engaging in energy tolling.                         appropriate conformance period.                         same way as gold, silver, platinum and
                                                         The proposal would not appear to                                                                             palladium.84 While gold, silver,
                                                      eliminate the benefits commenters,                         Question 12. Are there reasons that
                                                                                                              support determining energy                              platinum and palladium have industrial
                                                      including energy companies, commonly                                                                            uses as well, these precious metals have
                                                      noted in letters responding to the                      management services or energy tolling
                                                                                                              are complementary to a financial                        traditionally been traded internationally
                                                      ANPR.77 The proposal would affect the                                                                           primarily for their exchange value rather
                                                      actual activity of only one firm and the                activity that are not discussed above? If
                                                                                                              so, what are those reasons?                             than for industrial uses.85 Copper, while
                                                      theoretical authority of five FHCs to                                                                           it has been used in coins, has never
                                                      engage in complementary commodity                          Question 13. Are there any potential
                                                                                                              effects on the safety and soundness of                  been traded as a precious metal and has
                                                      activities and would directly limit only                                                                        always been classified and traded as a
                                                      certain types of agreements (i.e., energy               FHCs engaged in energy management
                                                                                                              services and energy tolling of rescinding               ‘‘base’’ or ‘‘industrial’’ metal.86 The
                                                      tolling and energy management services
                                                      agreements) between FHCs and power                      such authorities? How would the                            82 62 FR 9290, 9336 (Feb. 28, 1997). The
                                                      plant owners. In addition, the proposal                 potential effects differ if only one or the             authorization also included ‘‘any other metal
                                                      would not affect the authority of FHCs                  other activity was rescinded?                           approved by the Board.’’ No other metals have been
                                                      to provide derivatives and related                         Question 14. What are the average                    approved by the Board under this authority.
                                                                                                                                                                         83 Id. at 9311.
                                                      financial products and services to power                lengths of an energy management                            84 PSI Report.
                                                      plants or engage in physical                            services agreement and an energy tolling                   85 PSI Report at 353.
                                                      commodities trading. Permissible                        agreement? Under what circumstances                        86 Id. The most common benchmark price for
                                                                                                              may such agreements be terminated                       copper is the copper futures price established on
                                                         76 Physical commodity trading also may be used
                                                                                                              early and what are the contractual                      the London Metals Exchange (LME), the largest
                                                      to hedge positions in energy of FHCs and their          consequences of doing so? Are there                     financial market for metals. PSI Report at 351. The
                                                      clients.                                                                                                        LME identifies four categories of metals; copper is
                                                         77 Commenters focused on the benefits of FHC         challenges other than termination of                    included in the ‘‘non-ferrous’’ or ‘‘base’’ metal
                                                      involvement in physical commodity trading               such agreements associated with                         category, which also includes aluminum, nickel,
                                                      activities, rather than the benefits of energy          conformance to the proposed rescission                  and zinc, rather than the ‘‘precious metals’’ category
                                                      management services or energy tolling. For              of energy management services and                       that includes gold, silver, platinum and palladium.
                                                      example, NRG Energy, Inc., a leading competitive                                                                Id. at 352. Since the publication of the PSI Report,
                                                      power company and major electricity provider,
                                                                                                              energy tolling orders? To what extent                   the LME has ceased certain activities with respect
                                                      noted a number of activities that would not appear      may a conformance period alleviate                      to gold and silver and has initiated activities with
                                                      to be affected by the proposed elimination of energy    those challenges? What is an                            respect to platinum and palladium. See https://
                                                      management services or energy tolling, including                                                                www.lme.com/metals/precious-metals/. COMEX, a
                                                      providing first-lien hedging arrangements, project        78 See, e.g., 12 CFR 225.28(b)(1); Chemical New
                                                                                                                                                                      division of the New York Mercantile Exchange, also
                                                      financing, market making, ‘‘customized hedging                                                                  classifies copper as a base metal and gold, silver,
                                                      and risk management solutions like working              York Corp., 59 Fed. Res. Bull. 698 (1973) (approving    platinum and palladium as precious metals. See,
                                                      capital/inventory intermediation facilities and         as a permissible lending activity for BHCs an           e.g., http://www.cmegroup.com/trading/metals/
                                                      volumetric production payment structures,’’ and         arrangement under which a BHC would finance a           base.html. Moreover, standardized copper futures
                                                      long-term physical commodity transactions. Letter       utility’s coal purchases by purchasing from a third     contracts involve large amounts of copper,
                                                      from NRG Energy, Inc. dated April 15, 2014. See         party, and taking title to, a quantity of coal on a     comparable to the amounts for futures contracts for
                                                      also Letter from American Gas Association et al.,       monthly basis at the direction of the utility           base metals such as aluminum, lead and zinc. See
                                                                                                              customer); Letter to Mr. Lustgarten dated May 15,
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                                                      dated March 31, 2014 (discussing the importance of                                                              https://www.lme.com/metals/non-ferrous/copper/
                                                      the ability of FHCs to physically-settle derivatives    2006 (finding certain commodity purchase and            contract-specifications/futures/ (LME copper
                                                      transactions); Letter from Electric Power Supply        forward sale transactions entered to finance            futures contract specification 25 metric tons);
                                                      Association dated April 16, 2014 (discussing the        commodity inventories of an FHC’s customers to be       https://www.lme.com/metals/non-ferrous/
                                                      importance of FHC’s ability to hedge physical           a permissible lending activity of the FHC); Letter to   aluminium/contract-specifications/futures/ (LME
                                                      power producers’ prices and revenues as well as         Ms. Davy dated May 15, 2006 (finding certain            aluminum futures contract specification 25 metric
                                                      engage in market making and credit intermediation       volumetric production payments to be a permissible      tons); https://www.lme.com/metals/non-ferrous/
                                                      activities); SIFMA Letter, Appendix G (discussing       lending activity).                                      lead/contract-specifications/futures/ (LME lead
                                                                                                                79 See 12 CFR 225.28(b)(8) and the Board’s
                                                      market making and the provision of market                                                                       futures contract specification 25 metric tons);
                                                      liquidity, efficient price formation, risk-             approvals to engage in physical commodity trading.      https://www.lme.com/metals/non-ferrous/lead/
                                                                                                                80 See, e.g., 2003 Citi Order.
                                                      management solutions, project finance, credit                                                                   contract-specifications/futures/; https://
                                                      extension, and greater competition).                      81 12 CFR 225.28(b)(6).                               www.lme.com/metals/non-ferrous/zinc/contract-



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                                                                             Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules                                        67233

                                                      most significant uses of copper are for                  list will ensure that the metals                     new Schedule HC–W, FHCs would be
                                                      industrial purposes, rather than as a                    specifically listed as financial assets for          required to report the total fair value of
                                                      store of value.87 Further, the OCC has                   purposes of derivatives trading activities           categories of physical commodities held
                                                      recently proposed a similar                              remain consistent with the metals                    in inventory as follows:
                                                      reclassification of copper under the                     permitted to be bought, sold and stored                 (1) Petroleum and petroleum
                                                      National Bank Act.88                                     by BHCs.89                                           products;
                                                         For these reasons, the Board proposes                    The proposal would take effect one                   (2) Natural gas;
                                                      to treat the purchase and sale of copper                 year after the rule is finalized to provide             (3) Natural gas liquids;
                                                      in the same manner as the purchase and                   BHCs time to conform to this change.                    (4) Fertilizer;
                                                      sale of other non-precious metals;                          Question 15. What is the cumulative                  (5) Propylene;
                                                      specifically, as an activity requiring                   impact on BHCs of the proposed                          (6) Coal and coal products;
                                                      FHC status and complementary                             limitation on physical copper trading                   (7) Uranium; uranium products;
                                                      authority and subject to the restrictions                authority combined with the proposed                    (8) Other covered physical
                                                      and limitations (including the 5 percent                 additional restrictions on                           commodities; and
                                                      of tier 1 capital cap) imposed on FHCs                   complementary physical commodities                      (9) All other physical commodities.
                                                      engaged in complementary commodity                       trading? What is the cumulative impact                  The sum of the total fair values of
                                                      activities. Under the proposal, copper                   of these proposals on copper markets?                commodities reported on Part A as
                                                      would be removed from the list of                           Question 16. Is a one-year transition             proposed would continue to be reported
                                                      metals BHCs are permitted to own and                     period during which BHCs currently                   as the gross fair value of physical
                                                      store without limit as an activity closely               engaged in buying, selling, and storing              commodities held in inventory in item
                                                      related to banking under section 4(c)(8)                 copper would be permitted to wind                    9 of Schedule HC–D.
                                                      of the BHC Act and Regulation Y.                         down their activities with respect to                   The categories of physical
                                                         The Board proposes not to authorize                   copper under this authority sufficient or            commodities listed in items (1)–(8)
                                                      services such as arranging for storage,                  appropriate? If not, what is the                     above are proposed to be defined in a
                                                      safe custody, assaying, and shipment of                  appropriate transition period and why?               manner consistent with the proposed
                                                      copper. The Board is also proposing to                   What is the appropriate scope of BHCs                definition of ‘‘covered physical
                                                      make a corresponding change in the                       that should benefit from such a                      commodities.’’ Categories (1)–(7)
                                                      language of section 225.28(b)(8)(ii)(B) of               transition period? Should the scope, for             generally include those covered
                                                      Regulation Y to remove copper from the                   example, be limited to BHCs that own                 substances under Federal environmental
                                                      list of metals on which a BHC may enter                  copper as of the date of this proposal or            law. The item ‘‘other covered physical
                                                      derivatives contracts that require taking                BHCs that do not have separate                       commodities’’ would include all other
                                                      delivery of the underlying metal as                      complementary authority to hold                      covered physical commodities held in
                                                      principal. Removing copper from this                     copper?                                              inventory that would not be included in
                                                                                                                                                                    items (1)–(7) described above and
                                                                                                               F. New Financial Reporting Data on                   therefore would reflect those covered
                                                      specifications/futures/ (LME zinc futures contract
                                                                                                               Physical Commodity Activities
                                                      specification 25 metric tons); http://                                                                        substances under relevant state
                                                      www.cmegroup.com/trading/metals/base/copper_                                                                  environmental law.
                                                      contractSpecs_futures.html (COMEX copper futures
                                                                                                               1. General
                                                      contract specification 25,000 pounds); http://              The Board is proposing to modify the                 Part B. On Part B of the proposed new
                                                      www.cmegroup.com/trading/metals/base/                    Consolidated Financial Statements for                Schedule HC–W, FHCs would be
                                                      aluminum-mw-us-transaction-premium-platts-
                                                                                                               Holding Companies (FR Y–9C) to (i)                   required to indicate affirmatively or
                                                      swap-futures_contractSpecs_futures.html (COMEX                                                                negatively whether they are engaged in
                                                      aluminum MW US transaction premium plats                 create a new Schedule HC–W, Physical
                                                      futures contract specification 25 metric tons).          Commodities and Related Activities,                  particular aspects of physical
                                                      Precious metals futures contracts, by contrast,          and (ii) add data items to Schedule HC–              commodity-related activities.
                                                      involve much smaller amounts. See, e.g., http://                                                              Specifically, FHCs would indicate
                                                      www.cmegroup.com/trading/metals/precious/gold_           R, Part II, Risk-Weighted Assets.
                                                      contractSpecs_futures.html (COMEX gold futures           Schedule HC–W would collect more                     whether they own any covered physical
                                                      contract specification 100 troy ounces); http://         specific information on the covered                  commodities, any section 4(o)
                                                      www.cmegroup.com/trading/metals/precious/                physical commodities holdings and                    infrastructure assets, or investments in
                                                      silver_contractSpecs_futures.html (COMEX silver                                                               covered commodity merchant banking
                                                      futures contract specification 5,000 troy ounces);       activities of FHCs, and the
                                                      http://www.cmegroup.com/trading/metals/                  modifications to HC–R, Part II would                 investments. FHCs also would indicate
                                                      precious/platinum_contractSpecs_futures.html             report the risk-weighted asset amounts               whether they are engaged in the
                                                      (COMEX platinum futures contract specification 50        associated with an FHC’s engagement in               exploration, extraction, production, or
                                                      troy ounces); http://www.cmegroup.com/trading/                                                                refining of physical commodities. FHCs
                                                      metals/precious/palladium_contractSpecs_                 activities that involve (1) covered
                                                                                                               physical commodities, (2) section 4(o)               also would indicate whether they own
                                                      futures.html (COMEX palladium futures contract
                                                      specification 100 troy ounces).                          infrastructure assets, or (3) investments            facilities, vessels or conveyances for the
                                                         87 See, e.g., http://minerals.usgs.gov/minerals/
                                                                                                               in covered commodity merchant                        storage or transportation of covered
                                                      pubs/commodity/copper/, ‘‘Copper Statistics and
                                                                                                               banking investments. The proposed                    physical commodities. Further, FHCs
                                                      Information,’’ (building construction is the single                                                           would be required to report (i) the total
                                                      largest market for copper, followed by electronics       reporting requirements would become
                                                      and electronic products, transportation, industrial      effective on the same date as the                    fair value of section 4(k) permissible
                                                      machinery, and consumer and general products),           proposed risk-weighted asset                         commodities and section 4(o)
                                                                                                                                                                    permissible commodities owned; (ii) the
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                                                      compare http://minerals.usgs.gov/minerals/pubs/
                                                      commodity/gold/, ‘‘Gold Statistics and
                                                                                                               requirements.
                                                                                                                                                                    original cost basis of any section 4(o)
                                                      Information,’’ (‘‘Although gold is important to          2. Schedule HC–W
                                                      industry and the arts, it also retains a unique status                                                        infrastructure assets owned; and (iii) the
                                                      among all commodities as a long-term store of               Part A. Currently, BHCs report the                carrying value of their investments in
                                                      value’’); http://minerals.usgs.gov/minerals/pubs/        gross (total) fair value of all physical             covered commodity merchant banking
                                                      commodity/silver/, ‘‘Silver Statistics and                                                                    investments.
                                                      Information,’’ (‘‘Silver has been used for thousands
                                                                                                               commodities on Schedule HC–D to the
                                                      of years as ornaments and utensils, for trade, and       FR Y–9C. On Part A of the proposed                   3. Schedule HC–R Modifications
                                                      as the basis for many monetary systems’’).
                                                         88 Available at http://occ.gov/news-issuances/          89 Copper would be treated as a non-financial         The Board is also proposing to modify
                                                      news-releases/2016/nr-occ-2016-108.html.                 asset for purposes of 12 CFR 225.28(b)(8)(ii)(B).    Schedule HC–R, Part II to include new


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                                                      67234                 Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules

                                                      items related to the proposed capital                   management practices. The Board                       physical commodity activities of FHCs
                                                      requirement described in this proposal                  believes that the information that would              and provide supporting data for
                                                      for a firm’s physical commodity                         be collected in Part A of proposed                    assessing the capital requirement?
                                                      activities conducted under any of the                   Schedule HR–W would provide the                          Question 18. How well do the
                                                      commodity authorities and that involve                  public with important information on                  proposed reporting requirements
                                                      covered physical commodities. New                       the degree to which FHCs are involved                 physical commodity activities (both Part
                                                      line items would be added to Column A                   in trading covered physical                           A and Part B) capture FHCs’ physical
                                                      of Schedule HC–R, Part II to report (1)                 commodities, improving market                         commodity activities? What other
                                                      the market value of an FHC’s covered                    discipline, and enhancing                             categorizations should the Board
                                                      physical commodity activities involving                 understanding of the role FHCs play in                consider for these proposed reporting
                                                      covered physical commodities                            these markets through their                           requirements?
                                                      (calculated as described in this                        nonfinancial activities. Public                          Question 19. What other information,
                                                      proposal) conducted under section                       disclosure of the new reporting items                 if any, should the Board consider
                                                      4(k)(1)(B) of the Bank Holding Company                  would also facilitate supervisory                     collecting from FHCs for public
                                                      Act or section 4(o) of the Bank Holding                 monitoring of commodity activities that               reporting purposes in order to enhance
                                                      Company Act (as applicable); (2) the                    present particular risks to safety and                market discipline and public
                                                      original cost basis of section 4(o)                     soundness, as discussed in this                       understanding of FHCs’ physical
                                                      infrastructure assets owned pursuant to                 proposal. The Board proposes to make                  commodities or merchant banking
                                                      section 4(o) of the Bank Holding                        the disclosures in Part B of the new                  activities?
                                                      Company Act; and (3) the carrying value                 proposed Schedule HC–W public for
                                                      of an FHC’s investments in covered                      similar reasons. Additionally, the Board              III. Regulatory Analysis
                                                      commodity merchant banking                              believes that public disclosure of the                A. Regulatory Flexibility Act Analysis
                                                      investments made under section                          information in Part B will provide
                                                                                                                                                                       The Board is providing an initial
                                                      4(k)(4)(H) of the BHC Act. Specifically,                market participants, end users, and
                                                                                                                                                                    regulatory flexibility analysis with
                                                      the following modifications are being                   supervisors with important information
                                                                                                                                                                    respect to this proposed rule. The
                                                      proposed:                                               that is not captured in inventory
                                                         • New line items would be added to                                                                         Regulatory Flexibility Act, 5 U.S.C. 601
                                                                                                              reporting about the nature and extent of
                                                      Column L to allocate a 300 percent risk                                                                       et seq. (RFA), generally requires an
                                                                                                              FHC presence in the physical
                                                      weight to (A) the market value of an                                                                          agency to assess the impact a rule is
                                                                                                              commodities markets over time. This
                                                      FHC’s physical commodity activities                                                                           expected to have on small entities. The
                                                                                                              information would provide additional
                                                      involving section 4(k) permissible                                                                            RFA requires an agency either to
                                                                                                              insight into the potential risks FHCs
                                                      commodities and (B) the carrying value                  may bear as part of their commodities                 provide an initial regulatory flexibility
                                                      of investments in covered commodity                     activities as well as a more complete                 analysis with a proposed rule for which
                                                      merchant banking investments that are                   picture of their role in the commodity                a general notice of proposed rulemaking
                                                      publicly traded commodity trading                       markets.                                              is required or to certify that the
                                                      portfolio companies to the 300 percent                     The proposed reporting requirements                proposed rule will not have a significant
                                                      risk weight category;                                   in Schedule HC–W, Part B and proposed                 impact on a substantial number of small
                                                         • New line items would be added to                   modifications to Schedule HC–R, Part II               entities. Based on its analysis and for
                                                      Column M to allocate a 400 percent risk                 are consistent with other public capital              the reasons stated below, the Board
                                                      weight to the carrying value of                         reporting requirements. The Board notes               believes that this proposed rule will not
                                                      investments in covered commodity                        that public disclosure of these proposed              have a significant economic impact on
                                                      merchant banking investments that are                   items would also be consistent with the               a substantial number of small entities. A
                                                      commodity trading portfolio companies                   international standards regarding public              final regulatory flexibility analysis will
                                                      and are not publicly traded to the 400                  disclosure of regulatory capital under                be conducted after comments received
                                                      percent risk weight category; and                       Pillar 3 of the Basel Accord. Such                    during the public comment period have
                                                         • New line items would be added to                   disclosure is designed to complement                  been considered.
                                                      Column Q to allocate a 1,250 percent                    the minimum capital requirements and                     Under regulations issued by the Small
                                                      risk weight to the (A) the market value                 the supervisory review process by                     Business Administration, a small entity
                                                      of physical commodity activities                        encouraging market discipline through                 includes a depository institution, bank
                                                      involving section 4(o) permissible                      enhanced and meaningful public                        holding company, or savings and loan
                                                      commodities (including section 4(k)                     disclosure.                                           holding company with total assets of
                                                      permissible commodities in excess of                       For the reasons discussed above, the               $550 million or less. As of June 30,
                                                      the section 4(k) cap parity amount); (B)                Board is proposing that the proposed                  2016, there were approximately 3,203
                                                      the original cost basis of section 4(o)                 new reporting requirements be released                small bank holding companies and
                                                      infrastructure assets owned pursuant to                 to the public. However, a reporting FHC               approximately 162 small savings and
                                                      section 4(o) of the BHC Act; and (C) the                may request confidential treatment for                loan holding companies. As described
                                                      carrying value of investments in covered                the proposed reporting items if the                   above, the Board is proposing to apply
                                                      commodity merchant banking                              company believes that, based on its                   risk-based capital and other regulatory
                                                      investments that are not commodity                      particular individual circumstances,                  requirements for certain physical
                                                      trading portfolio companies.                            disclosure of specific commercial or                  commodities and merchant banking
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                                                                                                              financial information in the report                   investment activities conducted by
                                                      4. Public Disclosure                                    would likely result in substantial harm               banking organizations. This proposed
                                                         The Board proposes to make the                       to its competitive position or that                   rule is expected only to apply to
                                                      information reported as described above                 disclosure of the submitted information               banking organizations that (i) conduct
                                                      available to the public. The Board has                  would result in unwarranted invasion of               physical commodity activities under
                                                      long supported meaningful public                        personal privacy.                                     complementary authority with the
                                                      disclosure by banking organizations                        Question 17. To what extent do the                 Board’s approval; (ii) conduct physical
                                                      with the objective of improving market                  proposed regulatory reporting                         commodity activities under section 4(o)
                                                      discipline and encouraging sound risk-                  requirements improve transparency of                  grandfather authority; or (iii) engage in


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                                                                            Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules                                        67235

                                                      merchant banking investment activities                  collections, including the validity of the            performance and conduct preinspection
                                                      related to physical commodities. Small                  methodology and assumptions used;                     analysis, to monitor and evaluate capital
                                                      entities generally will not fall into any                 (c) Ways to enhance the quality,                    adequacy, to evaluate holding company
                                                      of these categories. To date, the Board                 utility, and clarity of the information to            mergers and acquisitions, and to analyze
                                                      has granted approvals to 12 FHCs to                     be collected;                                         a holding company’s overall financial
                                                      conduct physical commodity activities                     (d) Ways to minimize the burden of                  condition to ensure the safety and
                                                      under complementary authority,                          the information collections on                        soundness of its operations. The FR Y–
                                                      meanwhile, there are two banking                        respondents, including through the use                9C serves as standardized financial
                                                      organizations that are presently                        of automated collection techniques or                 statements for the consolidated holding
                                                      conducting physical commodity                           other forms of information technology;                company. The FR Y–9LP, and FR Y 9SP
                                                      activities under section 4(o) grandfather               and                                                   serve as standardized financial
                                                      authority. In both cases, the banking                     (e) Estimates of capital or startup costs           statements for parent holding
                                                      organizations all hold total consolidated               and costs of operation, maintenance,                  companies; the FR Y–9ES is a financial
                                                      assets greater than $50 billion. Further,               and purchase of services to provide                   statement for holding companies that
                                                      of the approximately $29 billion in total               information.                                          are Employee Stock Ownership Plans
                                                      merchant banking investment activity                      All comments will become a matter of                (ESOPs). The Federal Reserve also has
                                                      engaged in by banking organizations,                    public record. Comments on aspects of                 the authority to use the FR Y–9CS (a
                                                      approximately 99 percent of this activity               this proposed rule that may affect                    free-form supplement) to collect
                                                      is conducted by banking organizations                   reporting, recordkeeping, or disclosure               additional information deemed to be (1)
                                                      with total consolidated assets greater                  requirements and burden estimates                     critical and (2) needed in an expedited
                                                      than $50 billion.                                       should be sent to Robert deV. Frierson,               manner.
                                                         The Board is aware of no other                       Secretary, Board of Governors of the                     Current Actions: To implement the
                                                      Federal rules that duplicate, overlap, or               Federal Reserve System, 20th Street and               reporting requirement set forth in
                                                      conflict with this proposal. The Board                  Constitution Avenue NW., Washington,                  section F, the Board proposes to revise
                                                      believes that this proposal will not have               DC 20551. A copy of the comments may                  the FR Y–9C to (1) create a new
                                                      a significant economic impact on small                  also be submitted to the OMB desk                     Schedule HC–W, Physical Commodities
                                                      banking organizations supervised by the                 officer by mail to the Office of                      and Related Activities, which would
                                                      Board and therefore believes that there                 Information and Regulatory Affairs, U.S.              collect more specific information on the
                                                      are no significant alternatives to this                 Office of Management and Budget, New                  covered physical commodities holdings
                                                      proposal that would reduce the                          Executive Office Building, Room 10235,                and activities of FHCs and (2) add data
                                                      economic impact on small banking                        725 17th Street NW., Washington, DC                   items to Schedule HC–R, Part II, Risk-
                                                      organizations supervised by the Board.                  20503 or by facsimile to 202–395–6974.                Weighted Assets, which would report
                                                                                                                                                                    the risk-weighted asset amounts
                                                      B. Paperwork Reduction Act                              Proposed Revision, Without Extension,                 associated with an FHC’s engagement in
                                                                                                              of the Following Information Collection               covered physical commodity activities.
                                                      Request for Comment on Proposed
                                                      Information Collection                                    Title of Information Collection:                    It is expected that 14 out of the 667
                                                                                                              Consolidated Financial Statements for                 current FR Y–9C respondents would file
                                                        In accordance with section 3512 of                    Holding Companies, Parent Company                     the new reporting requirements set forth
                                                      the Paperwork Reduction Act of 1995                     Only Financial Statements for Large                   in section F. The Board estimates that
                                                      (44 U.S.C. 3501–3521) (PRA), the Board                  Holding Companies, Parent Company                     proposed revisions to the FR Y–9C
                                                      may not conduct or sponsor, and a                       Only Financial Statements for Small                   would not materially increase the
                                                      respondent is not required to respond                   Holding Companies, Financial                          estimated average hours per response or
                                                      to, an information collection unless it                 Statement for Employee Stock                          total estimated annual burden. The
                                                      displays a currently valid Office of                    Ownership Plan Holding Companies,                     Board is not proposing to revise the FR
                                                      Management and Budget (OMB) control                     and the Supplemental to the                           Y–9LP, FR Y9–SP, FR Y–9ES, and FR
                                                      number. The Board reviewed the                          Consolidated Financial Statements for                 Y–9CS. The draft reporting forms and
                                                      proposed rule under the authority                       Holding Companies.                                    instructions are available on the Board’s
                                                      delegated to the Board by OMB.                            OMB Control Number: 7100–0128.                      public Web site at http://
                                                        The proposed rule contains                              Agency Form Number: FR Y–9C, FR                     www.federalreserve.gov/apps/
                                                      requirements subject to the PRA. The                    Y–9LP, FR Y–9SP, FR Y–9ES, and FR                     reportforms/review.aspx.
                                                      reporting requirements are found in                     Y–9CS.                                                   Estimated Burden per Response: FR
                                                      section II.F. To implement the reporting                  Frequency of Response: Quarterly,                   Y–9C (non advanced approaches
                                                      requirement set forth in F, the Board                   semiannually, and annually.                           holding companies): 50.17 hours; FR Y–
                                                      proposes to revise the Consolidated                       Affected Public: Businesses or other                9C (advanced approached holding
                                                      Financial Statements for Holding                        for-profit.                                           companies HCs): 51.42 hours; FR Y–
                                                      Companies (FR Y–9C; OMB No. 7100–                         Respondents: Bank holding                           9LP: 5.25 hours; FR Y–9SP: 5.40 hours;
                                                      0128) to create a new Schedule HC–W,                    companies (BHCs), savings and loan                    FR Y–9ES: 0.50 hours; FR Y–9CS: 0.50
                                                      Physical Commodities and Related                        holding companies (SLHCs), securities                 hours.
                                                      Activities and to add data items to                     holding companies (SHCs), and U.S.                       Number of Respondents: FR Y–9C
                                                      Schedule HC–R, Part II, Risk-Weighted                   Intermediate Holding Companies (IHCs)                 (non advanced approaches holding
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                                                      Assets.                                                 (collectively, holding companies (HCs)).              companies): 654; FR Y–9C (advanced
                                                        Comments are invited on:                                Abstract: The FR Y–9 family of                      approached holding companies): 13; FR
                                                        (a) Whether the proposed collections                  reporting forms continues to be the                   Y–9LP: 792; FR Y–9SP: 4,122; FR Y–
                                                      of information are necessary for the                    primary source of financial data on                   9ES: 88; FR Y–9CS: 236.
                                                      proper performance of the Board’s                       holding companies that examiners rely                    Total Estimated Annual Burden: FR
                                                      functions, including whether the                        on in the intervals between on-site                   Y–9C (non advanced approaches
                                                      information has practical utility;                      inspections. Financial data from these                holding companies): 131,245 hours; FR
                                                        (b) The accuracy of the estimates of                  reporting forms are used to detect                    Y–9C (advanced approached holding
                                                      the burden of the proposed information                  emerging financial problems, to review                companies): 2,674 hours; FR Y–9LP:


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                                                      67236                 Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules

                                                      16,632 hours; FR Y–9SP: 44,518 hours;                   ■  (b) Adding the definition of                       unauthorized release; provided that,
                                                      FR Y–9ES: 44 hours; FR Y–9CS: 472                       ‘‘Approved physical commodity’’ and                   with respect to paragraph (5) of this
                                                      hours.                                                  ‘‘Covered physical commodity’’.                       definition, the Board-regulated
                                                                                                              ■ (c) Revising the definition of                      institution owned the commodity in the
                                                      C. Solicitation of Comments on Use of
                                                                                                              ‘‘Standardized total risk-weighted                    state that promulgated the law imposing
                                                      Plain Language
                                                                                                              assets’’.                                             such liability during the last reporting
                                                        Section 722 of the Gramm-Leach-                          The revisions and additions are set                period.
                                                      Bliley Act requires the agencies to use                 forth below:                                          *       *    *      *    *
                                                      plain language in all proposed and final                                                                         Standardized total risk-weighted
                                                      rules published after January 1, 2000.                  § 217.2   Definitions
                                                                                                                                                                    assets means:
                                                      The agencies invite comment on how to                   *       *    *      *     *                              (1) The sum of:
                                                      make this interim final rule easier to                     Advanced approaches total risk-                       (i) Total risk-weighted assets for
                                                      understand. For example:                                weighted assets means                                 general credit risk as calculated under
                                                        • Have the agencies organized the                        (1) The sum of:                                    § 217.31;
                                                      material to suit your needs? If not, how                   (i) Credit-risk weighted assets;                      (ii) Total risk-weighted assets for
                                                      could the rule be more clearly stated?                     (ii) Credit valuation adjustment (CVA)             cleared transactions and default fund
                                                        • Are the requirements in the rule                    risk-weighted assets;                                 contributions as calculated under
                                                      clearly stated? If not, how could the rule                 (iii) Risk-weighted assets for                     § 217.35;
                                                      be more clearly stated?                                 operational risk;                                        (iii) Total risk-weighted assets for
                                                        • Does the rule contain technical                        (iv) For a market risk Board-regulated             unsettled transactions as calculated
                                                      language or jargon that is not clear? If                institution only, advanced market risk-               under § 217.38;
                                                      so, what language requires clarification?               weighted assets; and                                     (iv) Total risk-weighted assets for
                                                        • Would a different format (grouping                     (v) Risk-weighted assets for covered               covered physical commodity activities
                                                      and order of sections, use of headings,                 physical commodity activities as                      as calculated under §§ 217.39 through
                                                      paragraphing) make the rule easier to                   calculated under §§ 217.39 through                    217.40;
                                                      understand? If so, what changes would                   217.40; minus                                            (v) Total risk-weighted assets for
                                                      make the rule easier to understand?                        (2) Excess eligible credit reserves not            securitization exposures as calculated
                                                        • Would more, but shorter, sections                   included in the Board-regulated                       under § 217.42;
                                                      be better? If so, which sections should                 institution’s tier 2 capital.                            (vi) Total risk-weighted assets for
                                                      be changed?                                                                                                   equity exposures as calculated under
                                                        • What else could the agencies do to                  *       *    *      *     *
                                                                                                                 Approved physical commodity means                  §§ 217.52 and 217.53; and
                                                      make the rule easier to understand?                                                                              (vii) For a market risk Board-regulated
                                                                                                              a physical commodity for which a
                                                      List of Subjects                                        derivative contract has been authorized               institution only, standardized market
                                                                                                              for trading on a U.S. futures exchange                risk-weighted assets; minus
                                                      12 CFR Part 217                                                                                                  (2) Any amount of the Board-
                                                                                                              by the Commodity Futures Trading
                                                        Administrative practice and                           Commission (unless specifically                       regulated institution’s allowance for
                                                      procedure; Banks, banking; Capital;                     excluded by the Board) or other                       loan and lease losses that is not
                                                      Federal Reserve System; Holding                         commodities that have been specifically               included in tier 2 capital and any
                                                      companies; Reporting and                                authorized by the Board under section                 amount of allocated transfer risk
                                                      recordkeeping requirements; Securities.                 4(k)(1)(B) of the Bank Holding Company                reserves.
                                                      12 CFR Part 225                                         Act 12 (12 U.S.C. 1843(k)(1)(B)).                     *       *    *      *    *
                                                                                                              *       *    *      *     *                           ■ 3. Section 217.30 is amended by
                                                        Administrative practice and                                                                                 revising paragraph (b) as follows:
                                                      procedure, Banks, Banking, Federal                         Covered physical commodity means
                                                      Reserve System, Holding companies,                      any physical commodity that is, or a                  § 217.30   Applicability.
                                                      Reporting and recordkeeping                             component of which is, specifically
                                                                                                                                                                    *      *    *     *     *
                                                      requirements, Securities.                               named:                                                   (b) Notwithstanding paragraph (a) of
                                                                                                                 (1) As a ‘‘hazardous substance’’ under             this section, a market risk Board-
                                                      Authority and Issuance                                  section 104 of the Comprehensive                      regulated institution must exclude from
                                                        For the reasons set forth in the                      Environmental Response,                               its calculation of risk-weighted assets
                                                      preamble, the Board proposes to amend                   Compensation, and Liability Act (42                   under this subpart the risk-weighted
                                                      12 CFR parts 217 and 225 to as follows:                 U.S.C. 9601);                                         asset amounts of all covered positions,
                                                                                                                 (2) As ‘‘oil’’ under section 1001 of the           as defined in subpart F of this part
                                                      PART 217—CAPITAL ADEQUACY OF                            Oil Pollution Act of 1990 (33 U.S.C.                  (except foreign exchange positions that
                                                      BANK HOLDING COMPANIES,                                 2701) or section 311 of the Clean Water               are not trading positions, OTC
                                                      SAVINGS AND LOAN HOLDING                                Act (33 U.S.C. 1321);                                 derivative positions, cleared
                                                      COMPANIES, AND STATE MEMBER                                (3) As a ‘‘hazardous air pollutant’’               transactions, unsettled transactions, and
                                                      BANKS (REGULATION Q)                                    under section 112 of the Clean Air Act                covered physical commodities).
                                                                                                              (42 U.S.C. 7412);                                     ■ 4. Section 217.31 is revised to read as
                                                      ■ 1. The authority citation for part 217                   (4) In regulations interpreting the
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                                                      continues to read as follows:                                                                                 follows:
                                                                                                              foregoing terms under the
                                                        Authority: 12 U.S.C. 248(a), 321–338a,                corresponding statute; or                             § 217.31 Mechanics for calculating risk-
                                                      481–486, 1462a, 1467a, 1818, 1828, 1831n,                  (5) In a state statute, or regulation              weighted assets for general credit risk.
                                                      1831o, 1831p–l, 1831w, 1835, 1844(b), 1851,             promulgated thereunder, that makes a                    (a) General risk-weighting
                                                      3904, 3906–3909, 4808, 5365, 5368, 5371.                party other than a governmental entity                requirements. A Board-regulated
                                                      ■ 2. Section 217.2 is amended by:                       or fund responsible for removal or                    institution must apply risk weights to its
                                                      ■ (a) Revising the definition of                        remediation efforts related to the                    exposures as follows:
                                                      ‘‘Advanced approaches total risk-                       unauthorized release of the substance or                (1) A Board-regulated institution must
                                                      weighted assets’’.                                      for costs incurred as a result of the                 determine the exposure amount of each


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                                                                            Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules                                         67237

                                                      on-balance sheet exposure, each OTC                     paragraph (d) of this section, multiplied             4(k) permissible commodity quantity
                                                      derivative contract, and each off-balance               by the simple average of the covered                  and the section 4(o) permissible
                                                      sheet commitment, trade and                             physical commodity’s month-end, end-                  commodity quantity of each covered
                                                      transaction-related contingency,                        of-day spot prices over the previous 60               physical commodity the Board-
                                                      guarantee, repo-style transaction,                      months.                                               regulated institution owns pursuant to
                                                      financial standby letter of credit,                        (2) The exposure amount for a section              section 4(k)(1)(B) or section 4(o) of the
                                                      forward agreement, or other similar                     4(o) permissible commodity equals the                 Bank Holding Company Act (12 U.S.C.
                                                      transaction that is not:                                section 4(o) permissible commodity                    1843(k)(1)(B) or (o)).
                                                         (i) An unsettled transaction subject to              quantity, as determined under                            (2) For a covered physical commodity
                                                      § 217.38;                                               paragraph (d) of this section, multiplied             that the Board-regulated institution
                                                         (ii) A cleared transaction subject to                by the simple average of the covered                  owns pursuant to section 4(o) of the
                                                      § 217.35;                                               physical commodity’s month-end, end-                  Bank Holding Company Act (12 U.S.C.
                                                         (iii) A default fund contribution                    of-day spot prices over the previous 60               1843(o)):
                                                      subject to § 217.35;                                    months.                                                  (i) The section 4(o) permissible
                                                         (iv) A covered physical commodity, a                    (3)(i) If the section 4(k) cap parity              commodity quantity of a covered
                                                      section 4(o) infrastructure asset, or a                 amount of the Board-regulated                         physical commodity equals the average
                                                      covered commodity merchant banking                      institution exceeds 5 percent of the tier             of the amounts of the covered physical
                                                      investment subject to §§ 217.39 through                 1 capital of the Board-regulated                      commodity owned by the Board-
                                                      217.40;                                                 institution, then such excess (up to the              regulated institution recorded as of the
                                                         (v) A securitization exposure subject                sum of the exposure amounts for each                  close of business on each day of the
                                                      to §§ 217.41 through 217.45; or                         section 4(k) permissible commodity                    previous calendar quarter minus any
                                                         (vi) An equity exposure (other than an               owned by the Board-regulated                          section 4(k) permissible commodity
                                                      equity OTC derivative contract) subject                 institution pursuant to section 4(o) of               quantity;
                                                      to §§ 217.51 through 217.53.                            the Bank Holding Company Act (12                         (ii) If the covered physical commodity
                                                         (2) The Board-regulated institution                  U.S.C. 1843(o))) must be risk weighted                is an approved physical commodity, the
                                                      must multiply each exposure amount by                   at 1,250 percent.                                     section 4(k) permissible commodity
                                                      the risk weight appropriate to the                         (ii) For purposes of paragraph (c)(3) of           quantity of the covered physical
                                                      exposure based on the exposure type or                  this section, section 4(k) cap parity                 commodity equals the average of the
                                                      counterparty, eligible guarantor, or                    amount equals:                                        amounts of the covered physical
                                                      financial collateral to determine the                      (A) The sum of the exposure amounts
                                                                                                                                                                    commodity owned by the Board-
                                                      risk-weighted asset amount for each                     for each section 4(k) permissible
                                                                                                                                                                    regulated institution as of the close of
                                                      exposure.                                               commodity that is owned by the Board-
                                                                                                                                                                    business on each day of the previous
                                                         (b) Total risk-weighted assets for                   regulated institution pursuant to section
                                                                                                                                                                    calendar quarter, if the daily quantity of
                                                      general credit risk equals the sum of the               4(o) of the Bank Holding Company Act
                                                                                                                                                                    the covered physical commodity:
                                                      risk-weighted asset amounts calculated                  (12 U.S.C. 1843(o)); plus
                                                                                                                 (B) The sum of the market value of                    (A) Was purchased by the Board-
                                                      under this section.                                                                                           regulated institution in the spot market
                                                      ■ 5. Section 217.39 is added to read as                 each physical commodity (calculated as
                                                                                                              the average of the amounts of the                     or is owned for the purpose of the
                                                      follows:                                                                                                      Board-regulated institution taking or
                                                                                                              physical commodity owned by the
                                                      § 217.39 Covered Physical Commodity                     Board-regulated institution recorded as               making physical delivery of the
                                                      Activities.                                             of the close of business on each day of               commodity to settle a forward contract,
                                                         (a) General. A Board-regulated                       the previous calendar quarter multiplied              option, future, option on future, swap,
                                                      institution’s total risk-weighted assets                by the simple average of the physical                 or a similar contract in which a Board-
                                                      for covered physical commodity                          commodity’s month-end, end-of-day                     regulated institution is authorized to
                                                      activities equals the sum of the risk-                  spot prices over the previous 60                      engage under section 225.28(b)(8)(ii) of
                                                      weighted asset amounts for each of its                  months) that is owned by the Board-                   the Board’s Regulation Y (12 CFR
                                                      covered physical commodities, each of                   regulated institution pursuant to:                    225.28(b)(8)(ii)); and
                                                      its equity exposures to covered                            (1) Any authority other than sections                 (B) Was stored, extracted, produced,
                                                      commodities merchant banking                            4(c)(2), 4(k)(4)(H), 4(k)(4)(I), and 4(o) of          transported, or altered (including by
                                                      investments, and each of its 4(o)                       the Bank Holding Company Act (12                      processing or refining) only by
                                                      infrastructure assets, each as determined               U.S.C. 1843(c)(2), (k)(4)(H), (k)(4)(I), and          reputable, third-party facilities during
                                                      under this section and § 217.40.                        (o)); or                                              that day; and
                                                         (b) Risk-weighted asset amount for                      (2) Section 4(o) of the Bank Holding                  (iii) If the covered physical
                                                      covered physical commodities. The risk-                 Company Act (12 U.S.C. 1843(o)), but                  commodity is not an approved physical
                                                      weighted asset amount for a covered                     only with respect to a physical                       commodity, the section 4(k) permissible
                                                      physical commodity equals:                              commodity that is not a covered                       commodity quantity of the covered
                                                         (1) The exposure amount for a section                physical commodity.                                   physical commodity equals zero.
                                                      4(k) permissible commodity multiplied                      (iii) A Board-regulated institution that              (3) For a covered physical commodity
                                                      by 300 percent, subject to the limitation               owns one or more covered physical                     that the Board-regulated institution
                                                      in paragraph (c)(3) of this section, plus               commodities pursuant to section 4(o) of               owns pursuant to section 4(k)(1)(B) of
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                                                         (2) The exposure amount for a section                the Bank Holding Company Act (12                      the Bank Holding Company Act (12
                                                      4(o) permissible commodity multiplied                   U.S.C. 1843(o)) must determine the                    U.S.C. 1843(k)(1)(B)):
                                                      by 1,250 percent.                                       market value of each covered physical                    (i) The section 4(o) permissible
                                                         (c) Exposure amounts for covered                     commodity described in paragraph                      commodity quantity equals zero; and
                                                      physical commodities.                                   (c)(ii)(B) of this section pursuant to the               (ii) The section 4(k) permissible
                                                         (1) The exposure amount for a section                calculation method described therein.                 commodity quantity equals the average
                                                      4(k) permissible commodity equals the                      (d) Quantity of a covered physical                 of the amounts of the covered physical
                                                      section 4(k) permissible commodity                      commodity. (1) A Board-regulated                      commodity owned by the Board-
                                                      quantity, as determined under                           institution must determine the section                regulated institution recorded as of the


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                                                      67238                 Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules

                                                      close of business on each day of the                    activities that are only the purchasing               217.100    [Amended]
                                                      previous calendar quarter.                              and selling of one or more covered                    ■ 8. Section 217.100(b)(3) is revised to
                                                         (e) Covered commodity merchant                       physical commodities (each of which is
                                                                                                                                                                    read as follows:
                                                      banking investments risk weights. (1)                   an approved physical commodity) in the
                                                      The risk-weighted asset amount for a                    spot market and the taking and making                 *      *    *     *    *
                                                      covered commodity merchant banking                      physical delivery of one or more                         (b) * * *
                                                      investment, as the term is defined in                   covered physical commodities (each of                    (3) A market risk Board-regulated
                                                      § 217.40, is the exposure amount for the                which is an approved physical                         institution must exclude from its
                                                      investment multiplied by the                            commodity) to settle forward contracts,
                                                                                                                                                                    calculation of risk-weighted assets
                                                      appropriate risk weight, each as                        options, futures, options on futures,
                                                      calculated according to this section.                                                                         under this subpart the risk-weighted
                                                                                                              swaps, or similar contracts.
                                                         (2) A Board-regulated institution must                  (b) Covered physical commodity                     asset amounts of all covered positions,
                                                      assign a 1,250 percent risk weight to an                activities. For purposes of this section,             as defined in subpart F of this part
                                                      exposure amount for a covered                           covered physical commodity activities                 (except foreign exchange positions that
                                                      commodity merchant banking                              include, but are not limited to,                      are not trading positions, over-the-
                                                      investment except as provided in                           (1) Storing, producing, transporting,              counter derivative positions, cleared
                                                      paragraphs (e)(3) and (e)(4) of this                    or altering (including by processing or               transactions, unsettled transactions, and
                                                      section.                                                refining) a covered physical commodity;               covered physical commodities).
                                                         (3) A Board-regulated institution must                  (2) Buying or selling a covered                    *      *    *     *    *
                                                      assign a 300 percent risk weight to an                  physical commodity in the spot market;
                                                                                                                 (3) Taking or making physical                      ■ 9. Section 217.131 is amended by
                                                      exposure amount for a covered
                                                      commodity merchant banking                              delivery of a covered physical                        revising the section heading and
                                                      investment that is a publicly traded                    commodity to settle a contract; and                   revising paragraph (e)(3)(vii) to read as
                                                      commodity trading portfolio company,                       (4) Owning or operating a facility or              follows:
                                                      as the term is defined in § 217.40.                     vessel that holds or uses a covered
                                                                                                                                                                    § 217.131 Introduction and exposure
                                                         (4) A Board-regulated institution must               physical commodity.
                                                                                                                                                                    measurement.
                                                      assign a 400 percent risk weight to an                     (c) End-user exception.
                                                      exposure amount for a covered                           Notwithstanding paragraph (b) of this                 *      *     *     *     *
                                                      commodity merchant investment that is                   section, covered physical commodity                      (e) * * *
                                                      a commodity trading portfolio company,                  activities do not include
                                                                                                                 (1) Owning or operating an end-user                   (3) * * *
                                                      as the term is defined in § 217.40, that
                                                                                                              facility or vessel; or                                   (vii). The risk-weighted asset amount
                                                      is not publicly traded.
                                                         (f) 4(o) infrastructure assets risk                     (2) Buying, owning or storing a                    for any other on-balance-sheet asset that
                                                      weights. (1) The risk-weighted asset                    covered physical commodity solely for                 does not meet the definition of a
                                                      amount for a 4(o) infrastructure asset                  purposes of powering or supporting an                 wholesale, retail, securitization, IMM,
                                                      equals the original cost basis (cost basis              end-user facility or vessel that is owned             equity exposure, covered commodity
                                                      gross of accumulated depreciation and                   or operated by the portfolio company.                 merchant banking investment, cleared
                                                      asset impairment) of the 4(o)                              (d) Definition of end-user facility or             transaction, or default fund contribution
                                                      infrastructure asset multiplied by 1,250                vessel. For purposes of paragraph (c)(2)              and is not subject to deduction under
                                                      percent.                                                of this section, end-user facility or                 § 217.22(a), (c), or (d) equals the
                                                         (2) For purposes of this section, a 4(o)             vessel means a facility or vessel that                carrying value of the asset.
                                                      infrastructure asset is an on-balance                   does not store, produce, transport, or
                                                                                                              alter a covered physical commodity                    *      *     *     *     *
                                                      sheet exposure owned pursuant to
                                                                                                              except as necessary to power or support               ■ 10. Section 217.151(a)(1) is revised to
                                                      section 4(o) of the Bank Holding
                                                                                                              the facility or vessel. An end-user                   read as follows:
                                                      Company Act that is not a physical
                                                      commodity.                                              facility or vessel does not include a
                                                                                                                                                                    § 217.151 Introduction and exposure
                                                      ■ 6. Section 217.40 is added to read as
                                                                                                              power plant.
                                                                                                                                                                    measurement.
                                                      follows:                                                217.51    [Amended]
                                                                                                                                                                      (a) General. (1) To calculate its risk-
                                                      § 217.40 Covered Commodity Merchant                     ■ 7. Section 217.51(a)(1) is revised to               weighted asset amounts for equity
                                                      Banking Investments.                                    read as follows:                                      exposures that are not equity exposures
                                                        (a) Definition of covered commodity                     (a) General. (1) To calculate its risk-
                                                                                                                                                                    to an investment fund or a covered
                                                      merchant banking investment and                         weighted asset amounts for equity
                                                                                                                                                                    commodity merchant banking
                                                      commodity trading portfolio company.                    exposures that are not equity exposures
                                                                                                                                                                    investment, as defined in § 217.40, a
                                                      For purposes of this part,                              to an investment fund, a covered
                                                                                                              commodity merchant banking                            Board-regulated institution may apply
                                                        (1) A covered commodity merchant                                                                            either the Simple Risk-Weight Approach
                                                      banking investment is a company                         investment, as defined in § 217.40, a
                                                                                                              Board-regulated institution must use the              (SRWA) provided in § 217.152 or, if it
                                                        (i) The shares, assets, or ownership                                                                        qualifies to do so, the Internal Models
                                                      interests of which are owned or                         Simple Risk-Weight Approach (SRWA)
                                                                                                              provided in § 217.52. A Board-regulated               Approach (IMA) in § 217.153. A Board-
                                                      controlled by the Board-regulated
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                                                                                                              institution must use the look-through                 regulated institution must use the look-
                                                      institution pursuant to section 4(k)(4)(H)
                                                                                                              approaches provided in § 217.53 to                    through approaches provided in
                                                      of the Bank Holding Company Act (12
                                                                                                              calculate its risk-weighted asset                     § 217.154 to calculate its risk-weighted
                                                      U.S.C. 1843(k)(4)(H)); and
                                                        (ii) Is engaged in covered physical                   amounts for equity exposures to                       asset amounts for equity funds and use
                                                      commodity activities.                                   investment funds and use the approach                 the approach provided in §§ 217.39
                                                        (2) A commodity trading portfolio                     provided in §§ 217.39 and 217.40 for                  through 217.40 for equity exposures to
                                                      company is a covered commodity                          equity exposures to covered commodity                 covered commodity merchant banking
                                                      merchant banking investment that                        merchant banking investments.                         investments.
                                                      engages in covered physical commodity                   *     *     *     *    *                              *     *     *     *     *


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                                                                            Federal Register / Vol. 81, No. 190 / Friday, September 30, 2016 / Proposed Rules                                         67239

                                                      PART 225—BANK HOLDING                                   or vessels for the extraction,                        CCAR. The qualitative assessment of the
                                                      COMPANIES AND CHANGE IN BANK                            transportation, storage, or distribution of           capital plans of large and noncomplex
                                                      CONTROL (REGULATION Y)                                  physical commodities pursuant to                      firms instead would be conducted
                                                                                                              section 4(k)(1)(B) of the Bank Holding                outside of CCAR through the
                                                      ■ 11. The authority citation to part 225                Company Act (12 U.S.C. 1843(k)(1)(B)).                supervisory review process. For
                                                      continues to read as follows:                              (e) For purposes of paragraph (d) of               purposes of the proposal, a bank
                                                        Authority: 12 U.S.C. 1817(j)(13), 1818,               this section, the term operate includes               holding company or U.S. intermediate
                                                      1828(o), 1831i, 1831p–1, 1843(c)(8), 1844(b),              (1) Participation in the day-to-day                holding company with total
                                                      1972(1), 3106, 3108, 3310, 3331–3351, 3906,             management or operations of the                       consolidated assets of $50 billion or
                                                      3907, and 3909; 15 U.S.C. 1681s, 1681w,                 facility;
                                                      6801 and 6805.                                                                                                greater but less than $250 billion, on-
                                                                                                                 (2) Participation in management and                balance sheet foreign exposure of less
                                                      § 225.28   [Amended]                                    operational decisions that occur in the               than $10 billion, and nonbank assets of
                                                      ■ 12. § 225.28 is amended by removing                   ordinary course of the business of the                less than $75 billion would be
                                                      the term ‘‘copper’’ from paragraphs                     facility; and                                         considered a large and noncomplex
                                                      (b)(8)(ii)(B) and (b)(8)(iii).                             (3) Managing, directing, conducting,               firm. The proposal would also modify
                                                      ■ 13. Section 225.95 is added to read as                or providing advice regarding                         reporting requirements for large and
                                                      follows:                                                operations having to do with the leakage              noncomplex firms to reduce burdens by
                                                                                                              or disposal of a physical commodity or                raising materiality thresholds, reducing
                                                      § 225.95 What are some of the                           hazardous waste or decisions about the                the scope of the data collection on these
                                                      requirements to engage in complementary                 facility’s compliance with
                                                      activities?                                                                                                   firms’ stress test results, and reducing
                                                                                                              environmental statutes or regulations,                supporting documentation
                                                         (a) Paragraphs (b)–(e) of this section               including any law or regulation                       requirements. For all bank holding
                                                      apply to financial holding companies                    referenced in the definition of covered
                                                      that the Board has approved to purchase                                                                       companies subject to the capital plan
                                                                                                              physical commodity in section 217.2 of                rule, the proposal would simplify the
                                                      and sell physical commodities in the                    the Board’s Regulation Q (12 CFR
                                                      spot market and to take and make                                                                              initial applicability provisions for the
                                                                                                              217.2).                                               capital plan and stress test rules, reduce
                                                      delivery of physical commodities to
                                                      settle contracts identified in section
                                                                                                                By order of the Board of Governors of the           the amount of additional capital
                                                                                                              Federal Reserve System, September 23, 2016.           distributions that a bank holding
                                                      225.28(b)(8)(B) of this part (12 CFR
                                                                                                              Robert deV. Frierson,                                 company may make during a capital
                                                      225.28(b)(8)(B)) as an activity that is
                                                      complementary to a financial activity                   Secretary of the Board.                               plan cycle without seeking the Board’s
                                                      under section 4(k)(1)(B) of the BHC Act                 [FR Doc. 2016–23349 Filed 9–29–16; 8:45 am]           prior approval, and extend the range of
                                                      (12 U.S.C. 1843(k)(1)(B)).                              BILLING CODE P                                        potential as-of dates for the trading and
                                                         (b) A financial holding company may                                                                        counterparty scenario component used
                                                      not purchase or sell physical                                                                                 in the stress test rules. The proposal
                                                      commodities in the spot market or take                  FEDERAL RESERVE SYSTEM                                would also amend the Parent Company
                                                      or make delivery of physical                                                                                  Only Financial Statements for Large
                                                                                                              12 CFR Parts 225 and 252                              Holding Companies (FR Y–9LP) to
                                                      commodities pursuant to sections
                                                      4(c)(8) or 4(k)(1)(B) of the Bank Holding               [Regulations Y and YY; Docket No. R–1548;             include new line item 17 of PC–B
                                                      Company Act (12 U.S.C. 1843(c)(8),                      RIN 7100 AE–59]                                       Memoranda (Total nonbank assets of a
                                                      (k)(1)(B)) if the market value of physical                                                                    holding company that is subject to the
                                                      commodities owned by the financial                      Amendments to the Capital Plan and                    Federal Reserve Board’s capital plan
                                                      holding company and its subsidiaries                    Stress Test Rules                                     rule) for purposes of identifying the
                                                      (other than through ownership or                        AGENCY: Board of Governors of the                     large and noncomplex firms. All other
                                                      control of assets or subsidiaries                       Federal Reserve System (Board).                       bank holding companies subject to the
                                                      pursuant to sections 4(c)(2), 4(k)(4)(H),                                                                     capital plan rule that are not large and
                                                                                                              ACTION: Notice of proposed rulemaking
                                                      or 4(k)(4)(I) of the Bank Holding                                                                             noncomplex firms would remain subject
                                                                                                              with request for comment.                             to objection to their capital plan based
                                                      Company Act (12 U.S.C. 1843(c)(2),
                                                      (k)(4)(H), (k)(4)(I))) exceeds 5 percent of             SUMMARY:   The Board is inviting                      on qualitative deficiencies under the
                                                      the consolidated tier 1 capital of the                  comment on a notice of proposed                       rule.
                                                      financial holding company, as                           rulemaking to revise the capital plan                    The proposal would not apply to bank
                                                      determined under the Board’s                            and stress test rules for bank holding                holding companies with total
                                                      Regulation Q (12 CFR part 217).                         companies with $50 billion or more in                 consolidated assets of less than $50
                                                         (c) A financial holding company must                 total consolidated assets and U.S.                    billion or to any state member bank or
                                                      notify the Board if the aggregate market                intermediate holding companies of                     savings and loan holding company.
                                                      value of physical commodities owned                     foreign banks. Under the proposal, large              DATES: Comments must be received by
                                                      by the financial holding company and                    and noncomplex firms, defined below,                  November 25, 2016.
                                                      its subsidiaries (other than through                    would no longer be subject to the                     ADDRESSES: You may submit comments,
                                                      ownership or control of assets or                       provisions of the Board’s capital plan                identified by Docket No. R–1548 and
                                                      subsidiaries pursuant to sections 4(c)(2),              rule whereby the Board may object to a                RIN 7100 AE–59 by any of the following
asabaliauskas on DSK3SPTVN1PROD with PROPOSALS




                                                      4(k)(4)(H) or 4(k)(4)(I) of the Bank                    capital plan on the basis of qualitative              methods:
                                                      Holding Company Act (12 U.S.C.                          deficiencies in the firm’s capital                       • Agency Web site: http://
                                                      1843(c)(2), (k)(4)(H), (k)(4)(I))) exceeds 4            planning process. In connection with                  www.federalreserve.gov. Follow the
                                                      percent of the consolidated tier 1 capital              this modification, large and noncomplex               instructions for submitting comments at
                                                      of the financial holding company, as                    firms would no longer be subject to the               http://www.federalreserve.gov/
                                                      determined under the Board’s                            qualitative assessment in                             generalinfo/foia/ProposedRegs.aspx.
                                                      Regulation Q (12 CFR part 217).                         Comprehensive Capital Analysis and                       • Federal eRulemaking Portal: http://
                                                         (d) A financial holding company may                  Review (CCAR), but would remain                       www.regulations.gov. Follow the
                                                      not own operate, or invest in facilities                subject to a quantitative assessment in               instructions for submitting comments.


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Document Created: 2018-02-09 13:33:28
Document Modified: 2018-02-09 13:33:28
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionProposed Rules
ActionNotice of proposed rulemaking.
DatesComments must be received on or before December 22, 2016.
ContactBoard: Constance M. Horsley, Assistant Director, (202) 452-5239, Elizabeth MacDonald, Manager, (202) 475-6316, Kevin Tran, Supervisory Financial Analyst, (202) 452-2309, or Vanessa Davis, Supervisory Financial Analyst, (202) 475-6674, Division of Banking Supervision and Regulation; or Laurie Schaffer, Associate General Counsel, (202) 452-2277, Michael Waldron, Special Counsel, (202) 452-2798, Will Giles, Counsel, (202) 452-3351, or Mary Watkins, Attorney, (202) 452-3722, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FR Citation81 FR 67220 
RIN Number7100 AE58
CFR Citation12 CFR 217
12 CFR 225
CFR AssociatedAdministrative Practice and Procedure; Banks; Banking; Capital; Federal Reserve System; Holding Companies; Reporting and Recordkeeping Requirements; Securities; Administrative Practice and Procedure; Banks; Banking; Federal Reserve System; Holding Companies; Reporting and Recordkeeping Requirements and Securities

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